When the Estonian Tax and Customs Board (ETCB) published its guideline on the taxation of debt and equity push down structures in December 2024, it marked the beginning of a new era in the taxation of acquisition transactions. The guideline summarized several years of discussion on when an acquisition loan can be transferred to the target company level so that, following a merger, the servicing of loan and interest payments by the target does not trigger income tax liability.
The author represented the taxpayer who received the first positive binding advance ruling on a debt push down structure following the publication of the 2024 guideline.
What is a Debt Push Down?
A debt push down structure refers to a situation where a loan taken to acquire a company is transferred to the target level after the acquisition, so that loan and interest payments are serviced from the target’s own operating cash flows. This means that the target company does not need to distribute dividends (which would be subject to income tax) in order for the acquirer to service the loan.
In international practice, debt push down structures are common. In Estonia, they have also been used, but the tax authority has traditionally taken a cautious view, often treating such structures as artificial. The ETCB’s 2024 guideline introduced new rules of the game: while investment funds were effectively granted a green light due to the nature of their activity, ordinary corporate groups were met with a more cautious message.
The guideline emphasized that a debt push down is permissible only if the transaction has economic substance and a genuine business purpose and does not create a tax mismatch. However, it did not provide practical examples or clarify how and when these conditions would be deemed fulfilled.
The First Binding Ruling
The ETCB has now issued the first positive binding advance tax ruling addressing an acquisition structure where the acquisition loan was transferred to the target company level following a merger, with the target company subsequently servicing the loan and related interest payments.
This ruling is significant, as it confirms that such a structure may also be acceptable outside the fund context, provided it is based on genuine business and financing needs.
The ETCB’s assessment focused on four key aspects: business purpose, economic substance, genuine financing need, and legal justification. It should be emphasized, however, that each acquisition structure is unique — even when a debt push down mechanism is used — and no single ruling can serve as a universal precedent.
Business Purpose
In a debt push down structure, it must be demonstrated that the transaction has a clear business rationale and is not primarily aimed at achieving a tax advantage.
The use of such a structure must stem from an actual business need — for instance, the consolidation of activities or more efficient organization of operations within a group.
A general strategic statement is not enough. The business rationale must be supported by concrete arguments and documented analysis showing how the chosen structure contributes to the company’s or group’s long-term business goals.
The justification must also be measurable and traceable, not merely declarative — for example, supported by business plans, integration scenarios, or financial forecasts demonstrating that the transaction creates real value, not just a tax benefit.
Economic Substance
To qualify as acceptable, a debt push down must have demonstrable economic substance. The transaction must create real added value for the parties — in terms of operations, cash flows, and management.
Economic substance may manifest through cost savings, process efficiencies, consolidation of activities, or synergies achieved via shared support functions. However, such effects must be substantiated through financial and business analysis showing the long-term impact of the transaction.
In practice, this means that economic substance must be quantitatively supported and documented — for instance, through cash flow analyses or projections confirming that the structure generates real value rather than merely a tax advantage.
Genuine Financing Need
A central element of a debt push down structure is the justification of financing — the transfer of the acquisition loan to the target company level must be a logical and necessary part of the transaction’s financing structure, not a tool for obtaining a tax advantage.
In practice, the taxpayer must be able to demonstrate why the chosen financing model is commercially justified and the only feasible solution under market conditions. Such justification may include evidence such as financing offer terms, debt servicing capacity, or lender-imposed restrictions.
Legal Justification
The legal setup of a debt push down must also be justified — it must derive from statutory restrictions or the transaction’s structure rather than the pursuit of a tax benefit.
In many cases, a special purpose vehicle (SPV) is used to execute the acquisition and subsequent merger. The use of such an SPV must be necessary and legally grounded — for example, where existing legislation prevents the target company from borrowing directly to finance the acquisition.
If the legal structure follows objective constraints and the practical logic of the transaction rather than a tax-driven motive, it should not be regarded as an artificial arrangement.
Conclusion: A New Framework for Businesses
The first positive binding ruling confirms that debt push down structures are not automatically prohibited or taxable in Estonia. Their acceptability depends on substantive justification and transparency — above all, on whether the transaction has business logic, economic substance, a genuine financing need, and a legally justified structure.
The ruling represents a significant step in the evolution of Estonia’s tax environment, providing greater legal certainty for transaction planning. However, each structure must still be assessed on its own merits, based on its specific circumstances and supporting evidence.
Debt push down transactions in Estonia now have a clearer framework — but their successful implementation will continue to require thorough analysis and well-founded reasoning.
