The typical structure of a Swiss target company acquired through an acquisition vehicle with subsequent merger and debt push-down is subject to income tax limitations set by the Swiss tax authorities. The authorities often take the view that interest expenses incurred after such merger cannot be deducted from taxable income. This newsletter outlines structuring options to minimize disadvantages resulting from the strict practice of the tax authorities.


1.1 Introduction

One of the factors of the success of M&A transactions is an appropriate acquisition and financing structure. Using maximum leverage in an acquisition, in which the return on assets exceeds the interest expenses, leads to a substantially higher return on equity. For this reason, investors (for instance in an LBO or MBO) wish to obtain maximum debt financing, also considering an increased risk of insolvency and strategically reduced business opportunities due to lower financial flexibility.

1.2 Debt Push-Down Structure

The basic acquisition structure for a debt push-down is implemented as follows: The investor as a first step incorporates an acquisition vehicle in the form of a separate legal entity. The investor contributes the equity necessary to finance the acquisition and grants the vehicle additional shareholder loans, if required. Furthermore, the acquisition vehicle usually borrows funds from banks to finance the acquisition. Such funded acquisition vehicle acquires the shares of the target company. This structure in principle excludes any liability risk for the investors, as funding is non-recourse.

Now the financial means needed for repayment of the funding and interest payments must be generated by the target company, which - contrary to the acquisition company - conducts an operating business.

Ideally, the acquisition company and the target company merge following the acquisition whereby the operating cash flow of the target company may be used for interest payments and repayments of funding received by the acquisition vehicle. From a Swiss corporate income tax point of view the question arises whether the Swiss tax authorities allow such interest deduction by the merged company as an income tax deductible item.



2.1 Tax Effect of Interest Deduction before Debt Push-Down

Interest expenses incurred by the acquisition vehicle are generally tax-deductible. Some hurdles, however, are embodied in the Swiss thin capitalization rules. Interest on the part of a related partner’s debt that is qualified as hidden equity under the published practice of the tax authorities is not deductible for corporate income tax purposes and is subject to withholding tax.

Regardless of the thin capitalization rules, a deduction of interest expenses by the acquisition vehicle in most cases has no tax effect. This is based on the fact that such company meets the requirements for the participation relief with regard to qualifying dividends and capital gains for federal as well as for cantonal tax purposes. In addition, such company usually benefits from the holding company privilege and hence is exempt from any cantonal income taxes. Investors often try to solve this ineffective interest expense by merging the acquisition vehicle with the target company.

2.2 Tax Consequences of a Merger with Debt Push-Down

A merger is a transaction whereby all assets and liabilities of a company are absorbed by another company and, as a result, the absorbed company ceases to exist. Under corporate law, the target company’s requirements in case of such an upstream merger are not strict. Generally the merger neither results in a share-for-share exchange nor in compensation payments for existing shareholders.

Under Swiss tax law, a merger of the acquisition company with the target company can generally be done in a tax-neutral way, provided

  • the assets and liabilities remain liable for the same Swiss income taxation; and
  • the tax values are assumed by the absorbing entity (here the acquisition vehicle).

In most cases, these requirements are met. Other transaction- specific prerequisites are not required. In addition, the acquisition company may claim unused tax-loss carry-forwards of the target company and offset such losses with future profits.

In addition, in the course of such absorption a merger gain or loss may arise if the tax value of target company shares on the books of the acquisition company does not match the net asset value of the target company as reported in its own books.

The absorption of the target company after being acquired typically results in a merger loss for the acquisition company. This is based on the fact that the price paid for the target company is usually higher than its net asset value. In most cases, such merger loss is referred to as "unreal", as it is compensated by the goodwill of the target company and other hidden reserves not shown in its balance sheet. Although from a commercial law perspective such unreal merger loss at the level of the acquisition vehicle qualifies as goodwill which can be amortized, the authorities will not accept such amortization for income tax purposes. Hence, the tax balance sheet is amended accordingly.  

Regarding deductibility of interest expenses, the statements made in section 2.1 should also hold true after the merger. Also, any borrowing costs should then be qualified as justified business expenses to the extent that the merged company is not thinly capitalized. However, the vast majority of the cantonal tax authorities deny the deduction of interest expenses after a merger in cases where the acquisition vehicle has been specifically incorporated for the purpose of acquiring the target company. Some cantons refuse a tax deduction entirely until the debt required for the acquisition has been paid off. Other cantons deny tax-effective interest deductions for a period of five years following the merger. The cantonal tax authorities all base their argument against deductibility of the interest expenses on the concept of tax avoidance.

2.3 Tax Avoidance

According to established case law of the Swiss Federal Supreme Court, there is generally tax avoidance if

  • the structure chosen by the taxpayer is uncommon, inappropriate or strange (if the structure does not make sense from an economical point of view);
  • it appears that the structure has been chosen only in order to save taxes which would normally be due; and
  • the structure would result in a substantial tax saving if accepted by the tax authorities.

If all three conditions are met, according to settled federal case law the taxpayer is taxed based on the structure that should have been adopted, i.e. the structure that corresponds to their economic goals. The concept of tax avoidance is based on the prohibition of abuse of rights. Considering its open description which conflicts with the principles of legality and legal certainty, tax avoidance can apply only in extraordinary cases. Such cases must contravene the sense of fairness.

In many cases, an acquisition followed by a merger of the acquisition vehicle with debt push-down is not tax-driven at all. The primary reason for the use of a new acquisition vehicle is without doubt the isolation of the liability for the total investment. A comparison of acquisition financing on an international scale reveals that a direct financing without using means of the target is highly unusual. Once the acquisition is completed, the acquisition company is no longer of use. To limit the liability of the investor it is sufficient that the target company remains a separate legal entity. It is therefore obvious to merge the acquisition vehicle with the target company.

By merging the acquisition company with the target company, costs for maintaining the acquisition company can be saved. Furthermore, a simplification of corporate governance can be achieved. The investor is closer to the operating cash flow. Finally – and this is also an important reason for a merger – the so-called structural subordination is eliminated, i.e. the fact that according to applicable capital protection provisions stated in Swiss corporate law, the creditors of the acquisition company are no longer subordinated to the creditors of the target company. The merger therefore eliminates any financial assistance issues which arise if the creditors of the acquisition company receive securities from the target company.

2.4 Tax Consequences for the Seller

The tax consequences of the acquisition for the seller can of course not be neglected in a transaction either. Especially in cases where the seller had held the shares in the target company in his personal property, an indirect partial liquidation provision must be observed. A merger of the acquisition company with the target company within five years after the acquisition of the target company may trigger income taxes for the seller. This is the reason why share purchase agreements often limit a debt push-down to cases where it does not lead to an indirect partial liquidation taxation of the seller.


It appears that the Swiss Federal Supreme Court has never decided on debt push-down structures. This can be explained by the long duration of court case proceedings. Tax advisors have developed several viable alternatives which – depending on the specific starting point – allow at least a partial tax deduction of interest expenses. The most common structural alternatives are the following:

3.1 Cascade Purchase

The structuring alternative of a cascade purchase can be applied in cases where the target consists of several companies. In such instance, acquisition debt can be allocated to the different companies acquired during the cascade acquisition, whereby one company buys another of the target’s companies. This has the effect that interest payments at the level of the acquired companies which in turn have acquired further companies are tax deductible. If necessary, a target company may even be split prior to the cascade acquisition in order to achieve an optimal structure.

3.2 Equity Debt Swaps

Alternatively, the target company is not merged but reduces its capital whereby the acquisition company converts its claim, resulting from the repayment of reduced share capital, in an interest-bearing loan. The same result can be achieved by means of a dividend distribution with a subsequent conversion of the dividend claim into a loan. Subsequent interest, resulting from such new debt and paid by the target company to the acquisition company, is income tax-deductible as long as the companies are at arm’s length and the target company is not thinly capitalized. The acquisition company receives taxable interest income which at least for cantonal corporate income tax purposes is not taxable if the acquisition company still qualifies as a holding company.

3.3 Transfer of Assets to the Acquisition Company

(Asset Push-Up)

Depending on the initial situation, further structuring alternatives may be considered. It is for example possible to transfer income-generating assets from the target company to the acquisition company by means of a tax-neutral intragroup transfer (also called asset push-up). It must be noted, however, that in certain cases the tax authorities have not only qualified such transaction structure as tax avoidance but also refused the deduction of interest expenses for tax purposes.


These alternative structures are helpful, but usually do not lead to a complete tax-effective interest deduction. Therefore it is important to determine all non-tax purposes leading to a debt push-down in a merger of the acquisition company with the target company. Such determination allows discussions with the tax authorities to demonstrate that the case at hand does not qualify as a tax avoidance.