Allocation of acquisition debt: economic rationale is key!


In today’s tax world, having a strong economic rationale to support an entity’s leverage is key.

In our recent experience, the tax authorities look at a company’s gearing in 3 ways:

  1. Business purpose test: what is the motivation for each entity taking a loan?
  2. TP principles:
    • Is the interest rate at arm’s length considering the entity’s credit rating?
    • Is the company’s leverage at arm’s length compared to industry standards and considering the entity’s financial position?
    • Are the terms and conditions backed up with a strong economic rationale?
  3. General or specific anti-abuse rules: is the debt push down operation itself supported by more than just tax reasons?

Not meeting some of these criteria could impact the tax deductibility of interest. In a leveraged acquisition context, this can have an important impact on the financial return of your investment.

It is hence key that all these aspects are carefully looked at when considering the allocation of an acquisition debt; and if your current financing structure isn’t yet fully aligned with the underlying operational & economic reasoning, it’s not too late – but seeing the recent BEPS release, it’s time to look into the question.

For more insights on financing-related items requiring special attention in an acquisition context, read our entire contribution here and follow our next publications on BEPS in M&A, which will each focus on a more detailed aspect of the Transactions continuum.