Netherlands: Interest deduction denied in acquisition structure (Dutch Supreme Court)
The Supreme Court agreed with the Amsterdam Court of Appeals that the interest was non-deductible.
The Supreme Court agreed with the Amsterdam Court of Appeals
The Supreme Court (Hoge Raad), in a case concerning a taxpayer’s claimed deduction of interest on a loan to finance an acquisition by an investment fund, agreed with the Amsterdam Court of Appeals that the interest was non-deductible.
The case identifying information is: ECLI:NL:HR:2021:1152 (16 July 2021).
At issue was an acquisition structure whereby capital was raised by an investment fund.
- The investment fund divided the equity contributed by investors among UK limited partnerships (LPs) and French fonds communs de placement à risques (FCPRs), and then subsequently contributed it into, and (via convertibles) lent it out to, a Dutch acquisition holding company (originally a cooperative, later converted into a private limited liability company (besloten vennootschap; BV)).
- From a French perspective, the FCPRs were transparent entities; however, from a Dutch perspective, they were non‑transparent.
- The BV—the taxpayer in the proceedings—was incorporated with the acquisition in mind. By entering into a fiscal unity with the acquired companies after the acquisition of the group, the acquisition holding company aimed to provide that the interest payable by it to the FCPRs was directly deducted from the result of the acquired group.
- The Amsterdam Court of Appeals had held that the fraus legis doctrine (law evasion) prevented the interest deduction.
- The Supreme Court dismissed the appeal by the taxpayer.
The Supreme Court apparently considered it important that the capital available as equity in the FCPRs was partly made available to the taxpayer as debt, in the form of convertible instruments—which meant that (as a result of entering into a fiscal unity) the interest payable was set off against the profit of the acquired group.
Furthermore, the Supreme Court apparently considered it was important that—because the FCPRs were regarded as transparent entities in France—there was no compensatory tax in France. According to the Supreme Court, the Amsterdam Court of Appeals was able to find that in the given circumstances, the motive requirement for applying fraus legis was met, despite the fact there was a business‑motivated external acquisition. The Court of Appeals substantiated this by finding that with the interposition of Dutch intermediate holding companies and the creation of a (other than on tax grounds) pointless loan relationship—and to that extent in an artificial way—the acquisition was implemented in a tax-driven manner.
Allowing the interest expenses to be deducted would be contrary to the spirit and intent of the Corporate Income Tax Act 1969, because that would preclude the levying of corporate income tax, on the one hand, by bringing together the profit of a company whereas on the other hand, artificially created interest expenses (profit shifting) would be thwarted in an arbitrary and continuous manner. The freedom of financing that taxpayers in principle are allowed has limits, which were found to have been exceeded here.
Tax professionals have noted this is the second judgment in a series of proceedings about similar cases. Several of those cases are still pending before the Supreme Court, and it is expected that one or more judgments about similar disputes would follow in the course of 2021. Those judgments may provide more insight into the limits of the freedom of financing or the delineation of the non-business motivated diversion of funds.
Read a July 2021 report prepared by the KPMG member firm in the Netherlands
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