Swiss Federal Supreme Court rules on non-deductibility of interest in debt push-down structures

Introduction

Leveraged buyouts (LBOs) typically involve a newly incorporated acquisition vehicle (BidCo) that raises a combination of equity or equity-like instruments (such as preferred shares or shareholder subordinated debt) and third-party debt to finance the acquisition of a target company (TargetCo).

Given the absence of corporate income group taxation in Switzerland, interest expenses incurred at the level of BidCo cannot be offset against the TargetCo's taxable operating income. To align financing costs and operating income, practitioners work with (i) profit push-up or (ii) debt push-down mechanisms.

The Swiss Federal Supreme Court examined one such debt push-down mechanism in its decision 9C_606/2025 of 24 February 2026. The case concerned an immediate post-transaction downstream merger in which BidCo merged into TargetCo, transferring its acquisition debt to TargetCo.

Cantonal tax authorities have historically closely scrutinized debt push-down measures, in particular in the context of third-party transactions. Such measures have regularly been challenged in practice, mainly on the grounds of the tax avoidance doctrine. However, the Swiss Federal Supreme Court has not previously addressed the issue.

Therefore, the significance of the decision lies less in its outcome, which aligns with existing practice, than in its reasoning. The Federal Supreme Court denied deductibility on the basis of the lack of commercially justified expenses under the Federal Direct Tax Act (FDTA), without relying on the traditional tax avoidance doctrine.

Facts and legal considerations

The case concerned a Swiss company (TargetCo) owning and operating a residential real estate asset, the income of which consisted primarily of rental income.

In 2008, an individual agreed to acquire the shares in TargetCo. Prior to completion, the purchaser assigned the acquisition agreement to a newly incorporated BidCo, which ultimately acquired the shares for approx. CHF 8.4m.

The acquisition as well as renovation works carried out on the residential property were financed through a loan of approx. USD 9.5m granted by a third-party lender. The third-party loan thus consisted of two components (i) an acquisition tranche of approximately 76% (i.e. approx. USD 7.2m), corresponding to a portion of the purchase price paid to the former shareholders, and (ii) an operational tranche of approximately 24% (i.e. approx. USD 2.3 million), relating to the financing of renovation works carried out on the residential property owned by TargetCo.

In April 2009, BidCo merged into TargetCo with retroactive effect as of 1 January 2009 (downstream merger), resulting in the transfer of the full loan balance to TargetCo. Following the merger, TargetCo claimed a deduction for the interest expenses on the entire loan. The tax authorities denied the deductibility of the interest attributable to the acquisition tranche but accepted the deduction of interest relating to the renovation component.

The Federal Supreme Court examined the deductibility of such interest expenses under the FDTA and the provisions of cantonal tax law. It structured its reasoning around two key principles: (i) commercial justification of the interest expenses and (ii) the principle of periodicity.

Under art. 58(1)(b) FDTA a contrario, expenses recorded in the profit and loss statement that are not commercially justified are not corporate income tax deductible. According to settled case law, an expense is commercially justified, i.e. qualifies as business-related expense, where it bears a direct and immediate relationship with the income generated. The tax authorities may not assess the appropriateness of a business decision or whether the expense was necessary or profit-maximizing; the relevant test is whether an objective causal link exists between the expense and the company’s economic purpose.

The Court found that the acquisition tranche financed the purchase price paid to the former shareholders. It did not relate to TargetCo’s own activity, which consisted of owning and operating a residential property generating rental income. In the absence of an objective link between the acquisition financing and TargetCo’s income-generating activity, the corresponding interest expense was not commercially justified at TargetCo level. By contrast, interest on the renovation tranche of the loan was directly connected to TargetCo’s activity and remained deductible.

Under Swiss tax law, the principle of periodicity (art. 79 FDTA in conjunction with art. 58 FDTA), constitutes a substantive principle of tax law not merely a technical rule governing tax collection. It requires that income and expenses be allocated to the fiscal period to which they economically relate.

The Court emphasized that the deductibility of the interest expenses had to be assessed for the fiscal years following the merger (2011–2013), i.e. at the level of TargetCo. It rejected the taxpayer’s argument that the deductibility should be analyzed globally, taking into account the situation prior to the merger at the level of BidCo. Such an approach is incompatible with the principle of periodicity, which mandates independent assessment of each tax period.

The fact that the interest may have been deductible at the level of BidCo prior to the merger is therefore irrelevant for the assessment at the level of TargetCo after the merger. In the absence of an explicit statutory exception, there is no mechanism allowing for an automatic carry-over of the tax treatment of expenses following a merger. The principle of periodicity therefore precludes any form of “automatism” whereby interest expenses previously deductible at the level of the acquisition vehicle would remain deductible after the merger at the level of the target company, notwithstanding the principle of universal succession under corporate law.

Having denied the deduction on these grounds, the Court expressly refrained from examining whether the structure could also constitute tax avoidance. The absence of commercially justified expenses was in itself sufficient to deny the interest deductibility.

Practical implications

This leading case on a debt push-down through a downstream merger applies to all open tax periods. Existing structures may therefore be subject to reassessment or adaptation, potentially with a transitional period. It remains to be seen how this will affect current practices of the tax authorities, in particular where a debt push-down was allowed under certain conditions (e.g., after a five-year holding period).

Any debt push-down measure must correspond to an economically justified, business-related expense at the level of TargetCo, assessed on a standalone basis for each fiscal year under the periodicity principle. Interest deductibility requires a direct nexus between the financing and TargetCo's activity. Without that nexus, the tax authorities can deny the deduction directly under Art. 58(1)(b) FDTA (and the corresponding cantonal provisions), without resorting to the tax avoidance doctrine.

From a practical standpoint, this reinforces the importance of seeking advance tax rulings on the principle and scope of interest deductibility in a given structure, including, where appropriate, on a partial deductibility or on the duration of any limitation.