COBALT advised its client in obtaining another positive advance tax ruling on a debt push-down acquisition structure. The new ruling further develops the emerging practice in Estonia and provides additional guidance on when acquisition debt transferred to the target company following a post-acquisition merger may be regarded as acceptable for Estonian corporate income tax purposes.
While the first positive advance tax ruling advised by COBALT confirmed that a commercially justified debt push-down structure does not, in itself, constitute an unlawful tax advantage, the new ruling clarifies several important principles.
First, the Estonian Tax and Customs Board concluded that its debt push-down guidance is not limited to traditional acquisition structures involving a special purpose vehicle (SPV). The guidance may also apply where one operating company acquires another operating company and the acquisition debt is transferred to the target company following the merger.
Second, the ruling demonstrates that the tax authority is placing increasing emphasis on assessing the measurable economic benefit to the target company. Where the target company assumes responsibility for servicing acquisition debt after the merger, taxpayers should be prepared to demonstrate that the economic benefits accruing to the target exceed the costs associated with the acquisition financing.
The transaction formed part of the client’s broader strategy to streamline its corporate structure and create a more efficient operating model
As part of the ruling procedure, the client, with COBALT’s advice drawing on its experience with debt push-down structures, prepared a detailed financial model comparing the measurable economic benefits generated for the target company through the post-acquisition merger with the costs of the acquisition financing. The Estonian Tax and Customs Board agreed that the measurable economic benefit to the target company exceeded the financing costs and therefore did not consider the structure to constitute an arrangement aimed at obtaining an unlawful tax advantage or an artificial arrangement.
Following the positive ruling, the merger was completed and registered. COBALT advised the client throughout the project, including the advance tax ruling procedure and the implementation of the merger, which involved, among other matters, the transfer of employees and the restructuring of commercial pledges.
The project was led by Managing Associate Tõnu Kolts. The team also included Associate Kerstin Tang.
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