Can a SCI deduct the interest charge relating to the buyback of its own shares?

A SCI has been ordered to buy back the shares of one of its shareholders and the tax administration considers that the loan interests relating to that buyback are not deductible from real-estate income since they were not born in consideration to the acquisition or preservation of income.

In several decisions of 9 June 2020, the Conseil d’Etat has however considered that such interests may be deductible when the loan is necessary for preservation of the company’s income.

The shares buyback imposed by the judge allowed in the circumstances to avoid the sale of the company building, although the restriction relating to the compulsory nature of the buyback of the shares is questionable.

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

A more flexible solution would seem legitimate, specifically considering the absence of significant economic or tax difference between the situation examined and the hypothetical scenario of a buyback of the same shares by the other shareholders in proportion to their shareholdings, which would allow the transferees to deduct the interest incurred.

No motive would therefore lead to consider that the increase in the income of the remaining shareholders following the buyback of shares should lead to a less favourable treatment. Nevertheless, the solution as drafted by the Conseil d’Etat makes it advisable to recommend that SCIs and their shareholders consider that alternative.

Key points:

Buyback of the shares by the company’s other shareholders may prove to be a preferable alternative.