Important Insight From Dutch Supreme Court on Interest Deduction

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Martine Moor Johan  Swagers

Martine Moor and Johan Swagers Meijburg & Co, Amsterdam

Martine Moor is a Tax Partner and Johan Swagers is a Senior Tax Manager at Meijburg & Co, Amsterdam

On April 21, 2017, the Dutch Supreme Court issued four rulings in a total of 10 cases which evolved around tax planning structures with acquired profit companies. The cases provide important insights and clarification on the abuse of law doctrine, the application of the counterproof provisions in Article 10a of the Corporate Income Tax Act and the possibilities of imposing penalties or of criminal prosecution in (aggressive) tax planning structures.

The rulings concern various structured finance deals initiated by an international banking group during years 2005 through 2008. The deals have in common that tax capacity is acquired from third parties which is then offset against intercompany interest expenses. Although the decisions relate to tax years of a decade or so ago, and several legislative changes have taken place in the meantime, the decisions may still have an impact for similar tax capacity set-ups and intercompany financing.


In the cases at hand the tax capacity was acquired through the acquisition of shares in third party companies that had just disposed of their business or assets against considerable profits. The acquired companies thus held a corporate tax liability and cash or receivables. Within the same year of disposal these companies were being sold to a Dutch group company of the banking group who included the companies in a fiscal unity. Subsequently the acquired companies were provided with intercompany loans via the London financing branch of the group. The financing branch in turn financed these loans with funds obtained on the market. The acquired companies used the funds so received for various purposes, amongst which the acquisition of and capital contribution in group companies which in turn provided loans to a UK group entity. The end result is that within the fiscal unity the tax deductible interest expenses incurred on the intercompany loans erase the corporate tax liability in the acquired companies. Any income received by the acquired companies from their (acquired) subsidiaries are on the other hand not taxable under the Dutch participation exemption. The transaction creates a benefit for both the seller and acquirer of the companies: the seller accepts a discount on the sales price of the shares which is lower than the corporate tax liability of the company and the buyer benefits as he is able to acquire the company with a discount for a tax liability that he is able erase or significantly reduce.

Supreme Court Decisions

The key decision of the rulings is the denial by the Supreme Court of the full interest deduction on the intercompany payables of the acquired companies by stating that the transactions are not in conformity with the spirit and intent of the law.

Although structured finance deals as these are nowadays less commonly applied—in particular due to new regulations targeting these structures and a changed view on tax planning structures—the rulings are still of great of importance as the Dutch Supreme Court provides further explanation on the Dutch abuse of law-doctrine, on the application of counterproof within the Dutch anti-base erosion rules and the (im-)possibilities for the Dutch tax authorities to impose penalties in tax planning structures that may be regarded as aggressive.

Abuse of Law

Under the Dutch abuse of law doctrine (fraus legis), a transaction may be considered as abusive and may for Dutch tax purposes be treated differently from its chosen legal form if the following requirements are met:

  •  the taxpayer engages in a tax saving transaction or a combination of connected tax saving transactions as a result of which tax, which would have been levied had the transaction(s) not taken place, cannot in whole or in part be levied;
  •  tax avoidance is the (primary) motive for the taxpayer to enter into the transaction or the combination of transactions; and
  •  the transaction is structured in such a way that the intended outcome conflicts with the spirit and intent of the tax law.

The Supreme Court decided that the companies were deliberately using the possibility to create large flows of money in the form of intercompany loans (an amount of 4,600 million euros is mentioned in the facts of the case) as a result of which substantial interest expenses could be created arbitrarily. Further, the companies had the main purpose of applying such interest expenses to erase the tax charge on the capital gain upon the previous disposal of their business or assets, which was realized under previous ownership. In the view of the Supreme Court, this set up was contrary to the spirit and intent of the law and the result of the transaction therefore needed to be corrected on the basis of the abuse of law doctrine.

The Supreme Court states that the system of the law generally allows the deduction of interest connected to the financing of participations exempt under the participation exemption (commonly known as the Bosal-gap, following the Bosal case of the European Court of Justice, dated September 18, 2003, C-168/01). This mismatch of deductible expenses against exempt income falls within the spirit and intent of the law. The Supreme Court concludes, however, that such interest deduction should be denied to the extent tax capacity was acquired in a tax avoidance scheme, since in that case the deduction of interest exceeds an acceptable level. Important to note is that the Supreme Court allows that intercompany interest is being deducted against “other” profits generated by the acquired companies (as opposed to acquired profits). This is relevant as in one of the cases the acquired company had not yet sold its business/assets. As such this company had a future tax liability which crystallized at the moment the business was sold during the new ownership period. In this case the fraus legis argument was not applied by the Supreme Court and the intercompany interest remained deductible.

Anti-base Erosion Rules

Dutch tax law contains a number of provisions that deny the deduction of interest on intercompany loans. One of these provisions, Article 10a of the Dutch Corporate Income Tax Act (“CITA”) aims to deny interest on intercompany loans which erode the Dutch tax base. This is considered the case if the intercompany loan is taken up to fund certain tainted transactions, for example the acquisition of a company or a capital contribution in a group company. In the cases now decided, the acquired companies had taken up group loans to acquire (existing) group companies and make capital contributions, so Article 10a would basically apply. In a situation where Article 10a applies, counterproof may be available if the taxpayer can demonstrate that either the interest is subject to sufficient taxation at the level of the recipient or that business reasons underlie both the loan and transaction. As of 2008, the first counterproof possibility was further restricted by adding that the counterproof cannot be applied if the tax inspector can demonstrate that the loan has been initiated to utilize current and future year tax losses or that both loan and transaction are not supported by business reasons. Business reasons are considered present where the intercompany loan is in turn financed with third party financing, provided the conditions of the intercompany loans and the external financing are almost exactly parallel.

The application of Article 10a of the CITA played an important role in the cases at hand. The Supreme Court rules that although an intercompany loan falls within the scope of Article 10a of the CITA, the interest can nevertheless be deducted since the fact that such loan is effectively funded with third party financing, is considered sufficient business reason to qualify as counterproof. The Supreme Courts requires a less stringent parallel between the intercompany loan and third party financing. From the ruling of the Supreme Court it now follows that the required parallel can also be demonstrated if some conditions are not exactly mirrored (in this case the term, repayment schedule and loan volume), as long as it is evident that there is a direct connection between the intercompany loan and the third party financing.

Possibility to Impose Penalties

The Supreme Court rules that there is no possibility to impose penalties to the taxpayer in relation to the positions taken in their tax returns. Under Dutch tax law, a penalty can only be imposed if the taxpayer has deliberately included wrong information or withheld information that is crucial for the tax administration in determining its tax liability. If a taxpayer takes a plausible tax position in his tax return, which is based on objective criteria, there is no room for a penalty, nor for criminal prosecution in tax cases. The fact that the taxpayers in the cases at hand had implemented a structure that could be regarded as “aggressive” was in itself not an argument that the positions taken in the return were from an objective perspective not plausible. This is important guidance for tax practice in the Netherlands.

Practical Importance

As mentioned, the type of structures that were the subject of these cases are not very common anymore in today's practice. In 2011 specific legislation has been implemented to avoid that taxable profits of acquired companies can be offset by losses incurred in the same year under new ownership. This legislation would make most of the transactions in the decided cases invalid under today's legislation. The cases further provide some important insights and clarification on the abuse of law doctrine, the application of the counterproof provisions in Article 10a and the possibilities of imposing penalties or of criminal prosecution in (aggressive) tax planning structures.

The guidance provided on the counterproof possibilities under Article 10a of the CITA could be short-lived, depending on how the Netherlands is going to implement the contents of the European Anti-Tax Avoidance Directive (“ATAD”). It will be particularly interesting to see whether the Netherlands will decide to abandon existing interest measures (including Article 10a of the CITA) when it implements the generic earnings stripping rule as contained in the ATAD. At the present time, there are no indications yet on whether and how the Netherlands will continue to apply interest limitation measures after implementing the ATAD.

The guidance provided on the abuse of law doctrine may also be short-lived as the ATAD would require the Netherlands to codify the abuse of law concept, as currently developed in case law, in conformity with the rules developed by the CJEU (EU GAAR). More guidance on the implementation of the ATAD in the Netherlands is expected in the second half of 2017 and will be preceded by a public consultation.

For More Information

Martine Moor is a Tax Partner and Johan Swagers is a Senior Tax Manager at Meijburg & Co., a member of the KPMG network. The authors can be contacted at and

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