Tax

What you need to know

• Greater scrutiny of acquisition financing: Interest limitation, anti-hybrid, transfer pricing and purpose-based rules restricting interest deductions are well-established features of the global tax landscape. What has changed is how rigorously tax authorities now apply them, in combination, to acquisition and shareholder debt. From the UK's unallowable purpose rule to Germany's debt-capacity tests, tax authorities are looking past pricing to the purpose and substance of financing structures.
• Wider tax net on exits: Non-resident sellers of land-rich entities face growing exposure to source country taxation, as seen in Australia's expanded real property definition and the recent UK-Luxembourg treaty. Treaty entitlement and substance are ever more important in exit planning.
• AI-equipped tax authorities: AI and better information exchange mean structures are tested at scale and speed, making early, cross-border tax planning, and contemporaneous documentation, increasingly valuable.
  

Introduction

Cross-border M&A is taking place in a tax environment that is more demanding and less predictable than at any time in recent memory. Tax authorities around the world are scrutinising transactions, and questioning arrangements that were once regarded as routine features of deal architecture.

In particular, the deductibility of acquisition financing; debt pushdowns, intra-group loans, hybrid instruments and funding routed through low-tax or otherwise unusual jurisdictions are being tested against a growing body of interest limitation, anti-hybrid and purpose-based rules. In addition, a growing number of jurisdictions are extending their taxing rights over gains realised by non-resident sellers, covering e.g. indirect transfers, property-rich holding structures and other disposals that historically fell outside the local tax net.

This is influenced by a number of factors. The OECD's BEPS Project continues to shape the international consensus on what is viewed as acceptable tax planning, leading to increased domestic anti-avoidance rules and global minimum standards. The automatic exchange of information between tax authorities has greatly improved their visibility of cross-border structures. And underpinning all of this are the fiscal pressures facing governments worldwide, making it a greater priority than ever to protect the domestic tax base and challenge positions perceived as aggressive.

The combination of greater transparency and AI-driven analysis also creates a markedly more challenging environment for taxpayers and their advisers. Tax authorities equipped with these tools can identify patterns, inconsistencies and potential risk areas, and analyse transactions at a scale and speed that was previously impractical. Dealing effectively with AI-equipped tax authorities, in turn, requires advisers to have significant AI capabilities of their own. We have seen this reflected in our own practice: we have received a number of instructions on tax disputes previously handled by other advisers, specifically because of our expertise and capabilities in this area.

It is crucial, therefore, that tax structuring is considered at the outset and not as an afterthought. Whether interest relief is available and whether a seller faces a local tax charge on exit can affect valuation, deal protections and, at times, whether a transaction proceeds at all. With rules diverging across jurisdictions, these risks need to be assessed early and on a coordinated, cross-border basis.

Increasingly restricted deductions for acquisition financing

United States

A primary limitation on deducting acquisition interest here is Section 163(j) of the Internal Revenue Code of 1986, as amended. Section 163(j) generally caps deductible business interest at the borrower’s business interest income plus 30% of its adjusted taxable income (ATI), and any excess carries forward indefinitely.

Legislation enacted in July 2025 (referred to as the One Big Beautiful Bill Act) made the cap more generous for tax years beginning after December 31, 2024, by permanently restoring the add-back of depreciation, amortization and depletion when calculating ATI. For tax years beginning after December 31, 2025, however, the same legislation excludes income inclusions from controlled foreign corporations from ATI and subjects most capitalized interest (e.g., interest that is capitalized into the cost basis of an asset) to the cap, which may reduce interest capacity for US multinational buyers.

Section 163(j)’s restrictions therefore still matter, especially in highly leveraged transactions. Buyers using debt financing in an acquisition transaction should consider modeling how much acquisition interest will actually be deductible under Section 163(j), and when. That depends on the level of leverage, which entity in the group carries the acquisition debt, and how any carried forward interest can be used, including any limitation under Section 382 on the target’s existing interest carryforwards following the acquisition.

In addition, buyers should consider whether shareholder or other related-party debt could be treated as equity, whether any anti-hybrid rules could deny deductions for interest paid to related parties under hybrid instruments or through hybrid entities, and, for large multinational groups, whether intercompany interest paid to foreign affiliates increases exposure to the base erosion and anti-abuse tax. Interest paid to foreign lenders, particularly related-party lenders in jurisdictions without a favorable income tax treaty with the United States, may also be subject to US withholding tax.

The pricing of cross-border intercompany debt under Section 482 is a further area of uncertainty.

In December 2023, the IRS Office of Chief Counsel issued Advice Memorandum AM 2023-008. It took the position that the implicit support a subsidiary receives from belonging to a wider group should be considered when setting an arm’s-length interest rate, which can reduce the rate, and so the deduction, the subsidiary can justify. The existing Section 482 regulations do not expressly address implicit support in pricing intercompany loans, and the memorandum is not binding precedent. However, the IRS has pressed the approach in the Tax Court in Eaton Corp. v. Commissioner, which was tried in late 2025. There the IRS relied on implicit support to reduce deductions for interest and guarantee fees on intercompany financing connected with Eaton’s 2012 acquisition of Cooper Industries. A decision is awaited.

In M&A transactions involving acquisition debt, post-acquisition reorganizations or intragroup refinancing, groups should assess the borrower’s creditworthiness in the context of the wider group, document the basis for intercompany interest rates and guarantee fees, and consider the risk of Section 482 adjustments.

Australia

Australia has a number of (common) regimes that can operate to deny interest deductions, including substance-based debt/equity rules, transfer pricing requirements on cross-border debt, anti-hybrid rules, and thin capitalisation rules which have been the subject of recent reforms.

Australia's thin capitalisation reforms have made the deductibility of acquisition financing more complex, with material risks of non-deductibility. For most non-financial multinational groups, the rules applying to income years commencing on or after 1 July 2023 replaced asset-based limits with a default cap on net debt deductions of 30% of tax EBITDA, subject to alternative group ratio and third party debt tests. Debt deduction creation rules were also introduced as part of the reforms, applying from income years commencing on or after 1 July 2024, which target certain related party arrangements. For acquisitions in asset-heavy sectors, particularly infrastructure and real estate, the earnings-based limits may not accommodate commercially supportable borrowing, especially during development and early operation.

Accordingly, many taxpayers would prefer to apply the third party debt test, provided the relevant conditions are satisfied. However, its restrictive statutory conditions, compounded by the Australian Taxation Office’s narrow interpretation of key requirements, can exclude genuine external financing. Examples of common issues that give rise to likely non-deductibility of interest include finance that is supported by offshore credit support, acquisitions of Australian groups with direct or indirect offshore footprints, and project-level financing by way of a special purpose vehicle that on-lends funds within the group. Early consideration of funding structures, security packages and the use of borrowed funds is critical to ensuring interest deductions are available. The Board of Taxation is due to report to the Australian Government on the reforms by 1 February 2027. Its review provides an opportunity for targeted legislative changes to address these practical difficulties.

France

French tax law provides for a wide spectrum of limitations on interest deductions, which apply to both intra-group and third-party debts. These include a cap on the deductibility of interest on shareholder loans and related-party loans (i.e., loans from entities controlling the borrowing entity or under common control as well as non-related shareholders (i.e., minority shareholders) for fiscal years ending on 31 December 2025). The cap is the higher of (i) the average effective floating rate on bank loans with a minimum maturity of two years, currently 4.33% for financial years ending between 30 June and 29 September 2026 (article 39-1-3° of the French Tax Code ("FTC")), and (ii) the rate that independent lenders would grant on similar terms (the "Market Rate") (article 212, I, a, of the FTC).

The French tax authorities ("FTA") are currently paying particular attention to taxpayers' compliance with these provisions. In practice, tax audits and litigation focus on the borrower's proof of the Market Rate, which relies on comparables, such as loans obtained from independent financial institutions by the taxpayer or by another company with a similar risk profile, or realistic alternative transactions with comparable economic characteristics. Written bank opinions or attestations are often used to corroborate a transfer pricing analysis. The FTA's recently published position is that the borrowing company should obtain such comparables before setting up the intra-group loan (BOI-IS-BASE-35-20-20260715, no. 80). Any excess interest added back to taxable income is treated as a deemed distribution and, where the lender is not resident in France, may be subject to French dividend withholding tax. Interest that remains deductible after the rate limitation is then subject to the general 30% EBITDA cap, and anti-hybrid restrictions.

Germany

Germany has no statutory debt-to-equity ratio, but tax auditors are increasingly attacking acquisition and shareholder financing from several directions at once. The most frequent line of attack is that shareholder debt is in substance equity: deep subordination, interest that is only accrued or paid at exit, no security or covenants, repayment linked to the shareholder's exit and leverage far beyond what a third-party lender would accept. Since 2024, this approach has a statutory footing. Interest on cross-border intra-group debt is only deductible to the extent the borrower can show that it could have serviced the debt from the outset for its full term, that the funds were economically needed and used for the business, and that the rate does not exceed what the group rating would support. The Federal Ministry of Finance applied these tests to loans that were already in place before 2024 and continue beyond 31 December 2024, so legacy LBO structures are now being reviewed under the new standard. Where the tests fail, the result is a disallowance of unsupported interest and, in the equity case, a hidden profit distribution with withholding tax, and potentially penalties.

A second and more procedural challenge is § 160 AO. Where interest is paid to a foreign lender that is not the ultimate recipient (debt funds, Luxembourg vehicles, securitisation or orphan SPVs, syndicated loans sold on in the secondary market), auditors demand that the borrower name the person who actually receives the interest. If the recipient is not disclosed, the deduction is denied in full, irrespective of arm's length terms. This is now routinely raised where lenders are not banks.

Further pressure points are the interest barrier (30% of tax EBITDA, with a broadened definition of interest and a tightened escape clause since 2024) and the anti-hybrid rules, on which the Federal Ministry of Finance issued its final circular in December 2024. Tax authorities require the taxpayer to provide detailed and specific documentation on the actual taxation of payments up the chain and, where information is not proved or available, the tax authorities may draw negative conclusions. Accordingly, loan terms, debt capacity analyses and lender information should be documented at signing rather than reconstructed in the audit.

Italy

Although Italian tax law no longer provides for a maximum debt-to-equity ratio aimed at counteracting thin capitalisation, the Italian tax authorities have recently challenged the deductibility of interest expenses in (i) portfolio companies showing negligible levels of equity and unsustainable debt; (ii) certain merger leveraged buy-out (MLBO) structures only used to increase indebtedness and not resulting in a change of control; and (iii) structures where shareholder financing bear features very similar to equity (e.g. payment subordination, exclusion from financial covenants and restrictions equivalent to those applicable to equity distributions) and yet is treated as debt.

In such cases, there is a risk that the interest expenses may be disallowed and the financing recharacterised as equity, with the consequent assessment of additional corporate income tax (IRES), WHTs, penalties and interest.

Accordingly, particular care should be taken in drafting the terms of shareholder loans and in structuring the group indebtedness.

Spain

As a general rule, the financing of the acquisition of shares in Spanish companies can be structured using several sources (equity, external debt, internal debt or, usually a mixed of those). Although there is no maximum prescribed debt-to equity ratio applicable under the current legislation, Spain limits the deduction of interest for Corporate Income Tax (CIT). A Spanish company can deduct net financial expenses up to 30% of its operating profit (figure close to EBITDA) for the taxable period. Net financial expenses up to €1 million a year are always deductible, whatever the operating profit. Any expense that is not deductible can be carried forward without time limit. If a company uses less than its 30% limit, the unused capacity can be carried forward for five years. Special rules apply for LBO transactions: interest on debt used to buy shares is capped at 30% of the acquiring company's own operating profit, without counting the target's profits once the two join a tax group or merge unless (i) acquisition debt (at the time of the acquisition) does not exceed 70% of the purchase price and (ii) such acquisition debt is paid down to 30% over eight years (on a linear basis).

For related-party debt, the terms of the facility must meet transfer pricing regulations and both the volume of the debt and the interest rate must be at arm's length.

Special tax treatment applies in the following cases:

• Intra-group share acquisitions: interest on intra-group loans used to buy shares from other group companies, or to inject capital into them, is not deductible unless there are valid business reasons for those transactions.
• Intra-group profit participating loans: returns on these loans are treated as dividends (non-deductible) rather than interest (deductible).
• Other rules: anti-hybrid rules and the general anti-abuse rules also apply.

The general 19% withholding tax rate is applicable to interest paid by Spanish borrowers to non-Spanish lenders, but certain exceptions may apply for lenders resident in a treaty country or, broadly, lenders resident within the European Union. However, those exemptions or reduced rates are subject to the lender meeting requirements in relation to tax residency (evidenced through the corresponding certificate of tax residency), substance and beneficial ownership over the Spanish source interest.

Challenging the beneficial ownership is currently one of the main focuses of the Spanish tax authorities when reviewing international financing structures.

UK

The UK rules on interest deductibility have been in place for some time; what has changed is how they are applied.

The UK still has no statutory debt-to-equity ratio and no safe harbours. Related-party and acquisition debt is tested under the transfer pricing rules in Part 4 of the Taxation (International and Other Provisions) Act 2010 (“TIOPA”) which look both at whether the amount of debt is one that an independent lender would have advanced and at whether the interest rate is arm’s length. HMRC actively scrutinises with, we understand, the benefit of AI tools, the transfer pricing methodology adopted by borrowers, including the debt capacity analysis, the credit rating attributed to the borrower (and the extent to which implicit group support is taken into account) and the comparables used to support the interest rate. Advance Thin Capitalisation Agreements can give certainty, but they take time to agree and rarely fit an M&A timetable.

The corporate interest restriction (“CIR”) (Part 10 of TIOPA), which broadly caps net interest deductions at 30% of tax-EBITDA above a £2 million de minimis, is now an established feature of UK deal modelling, and its mechanics should be familiar to most buyers. The practical difficulties come from how it interacts with other rules. These include group ratio elections, the effect of acquisitions and disposals on the worldwide group, the anti-hybrid rules in Part 6A of TIOPA, and, for larger groups, the Pillar Two minimum tax rules. Disallowed amounts can be carried forward indefinitely and unused interest capacity can be carried forward for five years, and so the restriction tends to defer relief rather than remove it. In a leveraged structure, however, that deferral can be long (or indefinite), and buyers should model it rather than treat it as a technicality.

The most significant trend is HMRC’s success with the unallowable purpose rule (section 441 of the Corporation Tax Act 2009). Even where the debt is arm’s length and within the CIR, interest is denied to the extent it is attributable, on a just and reasonable basis, to a main purpose of securing a tax advantage. HMRC has won a run of cases on acquisition and intra-group financing. In BlackRock HoldCo 5 LLC v HMRC, the Court of Appeal disallowed all of the interest on intra-group debt used to fund a genuinely commercial US acquisition. In Kwik-Fit Group Ltd v HMRC, it confirmed that a tax purpose can arise when existing intra-group loans are moved around a group to use losses. And in JTI Acquisition Company (2011) Ltd v HMRC, the Court of Appeal denied relief on acquisition debt where the UK borrower had been inserted into the structure. Taken together, these decisions show that a sound commercial rationale for the deal as a whole will not protect the financing if the choice of a UK borrower was driven by tax. HMRC now routinely asks for board papers, steps plans and adviser correspondence in its enquiries and frequently raises unallowable purpose issues in the course of their enquiries into potential interest disallowances. As a result, buyers should: (i) document the commercial reasons for each borrowing entity and debt tranche at the time of the deal; (ii) consider whether the UK debt would still have been put in place without the deduction; and (iii) treat interest deductibility as a diligence and pricing issue, including when deciding what to take from a seller’s historic structure.

Broader CGT base for foreign investment

Australia

Australia recently amended its non-resident capital gains tax (CGT) rules, which significantly broaden the CGT tax base for foreign investment.

Broadly, the Australian non-resident CGT rules capture disposals of assets which are "taxable Australian real property" and certain membership interests in entities whose assets consist principally of taxable Australian real property (being non-portfolio, i.e. 10% or greater, interests in an entity where more than 50% of the entity's asset value is attributable to taxable Australian real property). The new definition of real property and taxable Australian real property goes beyond the term's technical meaning and now includes any interest in or rights over land located in Australia, including personal rights, options, licences and contractual rights, things fixed or installed on land and leases, licences or contractual rights over things fixed or installed on land. Legislation has also been enacted which override double tax treaties and align the treaty definition of real property, land and immovable property with Australia's new domestic law definition.

These changes are likely to have the greatest impact on sectors such as energy, renewables, resources and infrastructure, where the prior technical definition of real property has, following recent court decisions, failed to capture asset classes that, in the Government's opinion, should fall within the Australian CGT base. In addition, the principal asset test no longer applies as a point in time test, but instead looks across a 365 day look back period. Foreign sellers who previously expected the exemption to apply should revisit that position.

France

Capital gains realised by non-residents on the disposal of shares in French companies (other than real estate rich companies, as described below) are generally exempt from French tax, except for substantial shareholdings. Gains derived by a non-resident holding more than 25% of the economic rights in a French company (threshold assessed through direct or indirect holding at any time during the five years preceding the sale) may be subject to a 25% withholding tax (article 244 bis B of the FTC). The rate is increased to 75%, where the seller is established in a non-cooperative jurisdiction. The FTA consider that the withholding tax ("WHT") applies both to sales of shares and share for share exchanges.

While most double tax treaties signed by France reserve the taxation of such gains to the seller's state of residence whereby the WHT is cancelled, certain tax treaties do not (e.g. Spain, Italy, Sweden, China, Norway, etc) and the French WHT may still apply in that instance. Companies established in treaty jurisdictions may then claim a refund of the part of the WHT exceeding the tax they would have borne had they been French resident companies (i.e. in excess of a 3% effective tax rate) if they comply with the conditions applicable to the French participation exemption (Supreme Court AVM International Holding decision, 14 October 2020, no. 421524). Finally, non-residents may also benefit from the same deferral regimes under the same conditions as residents for exchanges and contributions of shares. Substantial shareholdings, treaty protection and refund conditions should therefore be reviewed carefully before any sale or contribution.

Moreover, subject to applicable double tax treaties, capital gains realised by non-French companies on the sale or contribution of shares in companies (French or foreign) that qualify as real estate rich companies are subject to a 25% withholding tax (article 244 bis A of the FTC). The test is whether, at the closing of the three financial years preceding the disposal, more than 50% of the fair market value of the company's worldwide assets consists of French real estate or shares in real estate rich companies. Property allocated to the company's own industrial or commercial operations is excluded. Most French tax treaties allow France to tax such gains.

Germany

For non-resident sellers, German capital gains tax on share deals is, in practice, a real estate issue. A non-resident is taxable on the sale of shares in a German-resident corporation only where it held at least 1% within the last five years and, since 2019, on the sale of shares in any corporation, German or foreign, whose value was derived directly or indirectly more than 50% from German real estate at any time in the 365 days before the sale (§ 49 (1) no. 2 lit. e EStG). Corporate sellers are largely protected: the participation exemption of § 8b KStG applies, and the Federal Tax Court has confirmed that the 5% add-back does not apply to non-resident corporate sellers without a German permanent establishment. The exposure therefore sits with individuals, transparent fund and partnership structures, and sellers of interests in German trading partnerships, whose gains are taxed as permanent establishment income including trade tax.

The second filter is the double tax treaty. Most German treaties allocate share gains exclusively to the seller's state of residence, so Germany can only tax land-rich disposals where the treaty contains a real estate clause. Newer treaties (e.g. Luxembourg, the Netherlands, the UK, the United States) do contain this, but with thresholds and look-back periods that differ from domestic law. Older treaties often do not reach indirect holdings.

Audits now focus on whether the 50% test was met at any point in the look-back year, on indirect holdings through foreign holding chains, and on whether the selling entity has sufficient substance to claim treaty residence.

Italy

In recent years, the Italian tax authorities have focused on assessing the tax treatment applied to capital gains realised upon the exit from investment structures. Although the concept of "beneficial owner" does not appear in Article 13 of the OECD Model Tax Convention on Income and on Capital, the Italian tax authorities have developed and applied this concept as a general anti-avoidance condition for cross-border payments, including capital gains, especially where the recipient is held by investors that would not be entitled to the benefits of the relevant double taxation treaty (e.g. collective investment undertakings). Accordingly, there is a risk that the treaty or domestic exemption claimed on the exit may be challenged, with the consequent assessment of the Italian tax due, together with penalties and interest.

Such challenges are normally addressed either by: (i) appealing the tax assessment before the tax courts, demonstrating that the recipient had adequate substance and did not constitute a wholly artificial arrangement, or (ii) entering into an out-of-court settlement with the Italian tax authorities (e.g. accertamento con adesione) based on a look-through approach to the ultimate investors (e.g. the investors in the collective investment undertakings, with the possible application of a blended tax rate), which may prove beneficial given that most double taxation treaties grant the exclusive taxing right on capital gains to the investor’s State of residence.

Spain

As a general rule, any capital gain made by a non-resident entity that sells shares in a Spanish company will be subject to Non-Resident Income Tax at 19% with no withholding by the buyer. The seller normally must file and pay the tax itself. However, two main reliefs are available:

• EU/European Economic Area ("EEA") exemption: capital gains on the transfer of shares obtained by residents in the EU or EEA, and not acting through a tax haven, are exempt, unless (i) the main asset of the transferred company is, directly or indirectly, real estate located in Spain or (ii) for corporate sellers, where the shareholding does not meet certain requirements of the Spanish participation exemption.
• Tax treaties: most of Spain's double tax treaties give the taxing right to the seller's country of residence. The main exceptions cover the transfer of real estate rich companies and, in some treaties, substantial shareholdings.

Careful structuring at the time of implementation can optimise the flow of Spanish source income / capital gains.

UK

The UK is a clear example of the wider trend of countries taxing non-residents on gains from land. Since April 2019, non-residents have been within the scope of UK tax on direct disposals of UK land and on indirect disposals of interests in “property rich” entities, whether UK or foreign. Broadly, an entity is property rich where at least 75% of its gross asset value derives from UK land, and the seller (together with connected persons) holds, or has held at any time in the two years preceding the disposal, together with connected persons, a 25% or greater interest. An exemption is available where the land is used in a qualifying trade both before and after the disposal, and certain exemptions and elections are available for collective investment vehicles and qualifying institutional investors. Generally property held as part of a trade held by a trading company is disregarded by these rules but issues arise for some businesses where the boundary between trading activity and passive investment is less clear.

The UK still does not tax non-residents on gains realised on disposals of shares in UK companies that are not property rich, regardless of the size of the shareholding, which remains an advantage for investors compared with some other jurisdictions. However, treaty protection is critical in property rich structures. While many of the UK’s double tax treaties already allow the UK to tax gains on shares deriving their value principally from UK immovable property, a number of older treaties did not. HMRC is addressing this through treaty renegotiation and the adoption of the property rich provisions of the OECD Multilateral Instrument. The most significant example of this is the new UK-Luxembourg double tax treaty, which has applied since 2024 and permits the UK to tax gains on indirect disposals of UK property rich companies. The UK’s domestic rules also contain an anti-forestalling rule targeting arrangements designed to exploit treaty protection. Treaty entitlement, the 75% property richness test (including through holding chains) and the availability of the trading exemption should therefore be reviewed carefully before any sale.