Business case
A European gas distributor was audited by the national tax authorities who challenged the character of certain financial aspects of the business. In particular, the deductibility of interest on subordinated intragroup loans was contested, arguing that such loans should have been treated as equity.
The fact that a company has used all its available collateral does not automatically mean that its borrowing capacity is exhausted. To assess that capacity, it is necessary to examine the borrower’s ability to repay the debt, the level of credit risk at the time the debt is granted, and the resulting leverage. These factors are essential to determine whether an intragroup financing transaction meets the arm’s‑length principle and should be treated as debt.
We assisted the distributor and its tax advisors, demonstrating that the intragroup loans constituted debt rather than equity by evidencing the company’s ability to repay the debt, the existence of a market for subordinated debt, and the reasonableness of the company’s leverage ratio compared to its competitors. Our analysis played an important role in the court final decision.