No Interest Deduction for Acquisition Financing: Federal Supreme Court Clarifies Tax Practice Regarding Debt Push-Down

Key Points

Inits ruling 9C_606/2025, the Federal Supreme Court ruled that interest expenses incurred in financing an acquisition are not deductible for income tax purposes if they are economically intended to facilitate the acquisition of a company by new shareholders and are not related to the company’s operational activities. The decisive factor is an assessment, specifically tailored to the tax period, of whether the expenses are commercially justified (commercial justification within the meaning of Art. 58(1)(b) DBG).

In the event of a merger, the tax treatment of interest expenses is not automatically carried over unchanged. Rather, it must be determined for each tax period whether there is an objective connection between the expense and the business activity. The Federal Supreme Court’s decision thus sets clear limits on the tax recognition of so-called debt push-down structures.

This is the legal background

TheFederal Supreme Court’s rulingof February 24, 2026, concerns the tax treatment of interest expenses in connection with a leveraged buyout followed by a merger and a so-called debt push-down. 

The focus is on the application of Art. 58(1)(b) of the Federal Tax Act (DBG) and the question of what criteria should be used to assess the business-related justification of expenses following a restructuring. 

Here is the current situation

In thisspecific case, it had to be determined whether interest on a loan—part of which was used to finance the acquisition of a company—was deductible as a business-related expense for the acquiring company. The taxpayer company owned a property that constituted its primary asset and from which it derived income. In 2008, it was acquired by a newly established acquisition company. The acquisition, which was largely financed with debt, took place as part of a so-called leveraged buyout.

The loan taken out for financing purposes was transferred to the target company following the acquisition as part of a merger (a so-called “debt push-down”). The target company subsequently reported the interest expenses from this loan in its income statements and claimed a tax deduction for them.

Part of the loan was used for investments in the property, but the majority was used to finance the new shareholders’ acquisition of the company. The tax authorities allowed only the interest attributable to the investments to be deducted, while they deemed the remaining interest expenses to be non-business-related and added them to taxable income.

These are the Federal Supreme Court's considerations

TheFederal Supreme Court first reaffirms the relevant principles for determining taxable income under Articles 57 and 58 of the Federal Income Tax Act (FITA). According to these principles, expenses that are not business-related are included in taxable income. An expense is considered business-related if it has an objective connection to the generation of income. The burden of proof in this regard rests with the taxpayer.

In the present case, the Federal Supreme Court clarifies that the assessment of the deductibility of interest expenses must always be made on a period-by-period basis (principle of periodicity). The decisive factor is whether the expense has an objective connection to the specific economic activity carried out by the taxpayer company during the relevant tax period. Following the merger, the situation of the acquiring company is the sole determining factor. While the merger results in what is known as universal succession under civil law, this does not mean, for tax purposes, that the interest expenses are accepted without modification. Rather, it must be examined independently for each tax period whether the requirements of Art. 58(1)(b) of the Federal Tax Act (DBG) are met. 

Against this backdrop, the Federal Supreme Court rejected the taxpayer company’s argument that the interest should remain deductible because it had originally been justified for business reasons at the level of the acquiring company. Such an approach would undermine the principle of periodicity and circumvent the required review at the level of the target company.

The Federal Supreme Court notes that the company’s actual business activity during the relevant periods consisted of property management. There was no evidence of holdings in other companies or corresponding operational activities. The disputed interest expenses were primarily related to the financing of the company’s acquisition by its new shareholders and thus had no direct connection to the company’s operational activities.

This is what the Federal Supreme Court ruled

TheFederal Supreme Court has recognized the interest on that portion of the loan as commercially justified, insofar as it was related to investments in the property. However, the portion exceeding that amount lacks an objective connection to the business activity.

The Federal Supreme Court further clarified that the tax-neutral treatment of mergers under Art. 61 of the Federal Tax Act applies only to the transfer of hidden reserves and does not address the issue of the deductibility of expenses. Nor can it be inferred from the provisions on loss carryforwards in the present case that the principle of periodicity may be disregarded.

The only decisive factor, therefore, is whether there is an objective connection between the interest expenses and the company’s specific economic activity. If the financing primarily serves the purpose of the company’s acquisition by its shareholders rather than its operating activities, such a connection is lacking.‍

Here are the implications for tax practice

‍Until now, many tax authorities have denied interest deductions for debt-push-down structures, citing the possibility of tax avoidance. Others have justified the denial by arguing that the interest expenses in question are not business-related expenses. In practice, many tax authorities limit the denial of tax recognition of interest expenses to a period of five years.

In this ruling, the Federal Supreme Court has now clarified that the lack of deductibility must primarily be assessed from the perspective of non-business-related expenses. The decisive factor is whether there is an objective connection between the interest expenses and the specific economic activity of the taxpayer company.

In practice, this means that, in the case of debt push-down structures, it will be necessary in the future to examine even more closely the extent to which the assumed financing actually serves the target company’s operating activities. Financing that primarily serves the purpose of enabling shareholders to acquire an equity interest does not establish such a connection—even if the structure appears economically sound from the investor’s perspective or if the financing was originally raised at the level of another company.

Conclusion

TheFederal Supreme Court’s decisionclarifies the requirements for the deductibility of interest expenses in connection with debt-financed acquisitions and subsequent mergers. At the same time, it emphasizes that the assessment must be made strictly on a period-by-period basis and exclusively at the level of the taxpayer company. The business justification for an expense cannot be derived from the history of the transaction.

It remains to be seen, however, what impact this decision will have on the current practice of many tax offices, which limit the denial of interest deductions to a period of five years. The Federal Supreme Court’s reasoning suggests that the deductibility should be assessed on a period-by-period basis without a fixed time limit.