Interest charge

Can an SCI deduct the interest expense related to the redemption of its own shares?

An SCI has been ordered to buy back the shares of one of its associates and the tax authorities consider that the loan interest relating to this buy-back is not deductible from real estate income as long as it did not arise in return for earning or maintaining income.

In several decisions of June 9, 2020, the Council of State however considered that this interest could be deductible when the loan is necessary to preserve the company’s income.

The repurchase of shares imposed by the judge made it possible in the circumstances to avoid the sale of the building of the company, even if the restriction relating to the compulsory nature of the repurchase of shares is debatable.

Does the decision imply the need to establish the absence of an alternative? Or would it be enough to demonstrate that another option would prove less beneficial or could have excessively harmful consequences?

A more flexible solution would seem legitimate, taking into account in particular the absence of significant economic or tax difference between the situation examined and the hypothesis of a repurchase of the same shares by the other shareholders in proportion to their participation, which would allow the transferees to deduct interest incurred.

There is therefore no reason to consider that the increase in the income of the remaining shareholders following the repurchase of shares should lead to less favorable treatment. Nevertheless, the solution as drawn up by the Council of State recommends that SCIs and their shareholders consider this alternative.

Key points:

The repurchase of the shares by the other shareholders of the company can prove to be a preferable alternative.