“Abuse of the law? The SAC says: Not always! Bonds can be a legitimate way”

After a long period of time, a positive ruling on the issue of tax law abuse was issued by the Supreme Administrative Court (hereinafter referred to as SAC) under file number 22 Afs 137/2025-79 on 10 November 2025. In this judgment, the SAC dealt with whether the taxpayer (hereinafter “the Company”) abused the right to issue CZK bonds, which it used to purchase shares in companies owned by two exclusive shareholders of the Company and their brother.

The company issued CZK bonds with a fixed interest rate of 12% per annum and a 20-year maturity. It did not offer the bonds publicly and did not apply for their admission to trading on a regulated or other securities market. The bonds were subscribed by three brothers, two of whom were the sole shareholders of the Company. The payment of the issue price was made on the same day by offsetting the receivables. All three brothers had claims against the Company on grounds of the unpaid purchase price for the transfer of shares in their own companies. In the following year, a merger took place whereby the companies originally owned by the brothers, or purchased by the Company from the brothers, as well as other companies not purchased, ceased to exist when they were merged into the existing successor Company. The Company included interest on bonds in its tax-deductible costs.

Both the tax administrator and the municipal court concluded that the bond issue lacked a rationally justified economic purpose – securing an external source of financing aimed at acquiring an external ownership interest. In fact, the merger could have taken place even without a prior buyout of the ownership interests. The bond issue and the related transactions thus constituted an abuse of law aimed at obtaining a tax advantage in the form of “artificial” interest costs.

How did the SAC decide?

Purchase of shares from shareholders of the Company

In relation to the two brothers (shareholders of the Company), the Supreme Administrative Court confirmed the abuse of rights, i.e., it did not consider the sequence of operations to be economically rational. The Supreme Administrative Court considered the sale of shares by the two brothers to the Company (wholly owned by these two brothers) to be an acquisition of shares “from oneself” (i.e., economically irrational) and its consequences (subsequent financing of bond issues) to be an abuse of law. Moreover, the Supreme Administrative Court held that the merger could have been achieved – in view of the exclusive ownership of the Company by the two brothers – without the “artificial” sale of shares and the issue of bonds.

Purchase of shares from a person other than a shareholder of the Company

However, this does not apply to the third brother, who was not a shareholder of the Company at the time of the sale of the shares and subscription of bonds. However, both the tax administrator and the municipal court also found abuse of rights in his case, justifying this by the connection between the parties involved (all the brothers and the Company), but without further detailed argumentation. The SAC disagreed with this assessment.

The essential point was that at the time of the bond issue, he was not a shareholder of the Company, i.e., he did not directly or indirectly own the Company. He only became a shareholder after the merger was completed. By issuing the bonds, the Company obtained economically rational financing for the purchase of a business interest from a third brother in a company owned by him, which was not previously part of the Group. There was thus a de facto change in the ownership of the share, unlike the situation of his two brothers as described above.

The cost of financing such a share therefore made clear economic sense, and the SAC found that it was external financing. In this case, the tax authorities did not convincingly justify why the purchase of the ownership interest in the third brother’s company constituted an abuse of rights. If they believed that the interest on the bonds was set excessively high in view of the family relationship, they could have proceeded in accordance with the rules for limiting tax effectiveness on the grounds of low capitalization. The SAC also rejected that the amount of interest could be sufficient in itself to conclude that the law had been abused.

The Supreme Administrative Court found the cassation complaint to be well-founded, annulled the judgment of the municipal court and at the same time annulled the decision of the tax administrator in its entirety and returned the case to the tax administrator for further proceedings.   

Conclusion

The economic rationale for issuing bonds cannot be linked solely to situations where additional capital was actually obtained from an unrelated person “from outside”, i.e. through a public bond issue. An external source of capital may certainly also be represented by a related party.

The key is that the capital requirement is real and not created artificially and for its own sake (here the acquisition of ownership interest from a person outside the group), especially with a view to achieving the related tax advantage.

This ruling deviates from the rather negative case law to date and may have a major impact on the perception of the boundaries of abuse of law, especially in the context of family transactions.