We would like to draw your attention to the judgment of the Supreme Administrative Court (SAC), Ref. No. 10 Afs 185/2025-96, dated 30 April 2026, which concerns the application of thin capitalisation rules under Section 25(1)(w) of the Income Taxes Act (the “ITA”). The judgment may have a significant impact on the assessment of the tax deductibility of interest expenses arising from financing provided by shareholders or other creditors.
A positive aspect is that the SAC confirmed that compliance with thin capitalisation conditions must be assessed separately for each taxable period.
In the judgment, the SAC addressed the issue of direct and indirect participation in the management and control of a taxpayer within the meaning of the definition of otherwise related parties under Section 23(7)(b)(1) of the ITA. In doing so, the SAC adopted a relatively broad interpretation of this provision and effectively expanded the definition of related parties beyond the existing statutory framework.
Specifically, the SAC concluded that even shareholders holding a credit instrument, whose share in the registered capital and voting rights is less than 25%, may be considered otherwise related parties for the purposes of thin capitalisation. According to the SAC, the concept of “participation in control” must be interpreted more broadly, namely as the ability to exercise control over the tax-relevant conduct of another person, with even a hypothetical possibility of control being sufficient. Participation in control is distinct from participation in management. This understanding of participation in control complements the interpretation of the concept of participation in management as set out by the extended chamber of the SAC in its judgment of 7 November 2007, Ref. No. 2 Afs 165/2006-114, No. 1487/2008 Coll. SAC, in the Mikrotechna case.
The judgment thus significantly expands the range of entities whose financing may be subject to thin capitalisation rules. We therefore recommend paying increased attention, in particular, to financing structures between a company and its shareholders or investors, including in cases where the capital linkage does not reach the statutory thresholds of 25% participation. We will be happy to assist you in this matter. Please do not hesitate to contact us.
This text was translated by AI.
