Weekly tax updates 31-03-23

Corporate Tax Thursday – The Netherlands – Recent court case on anti-base erosion rule and abuse of law doctrine

The Dutch Supreme Court recently provided an interesting judgment on the Dutch anti-base erosion rule in connection with the abuse of law doctrine.

In The Netherlands, interest expenses due on loans from affiliated parties are in principle not deductible if such a loan relates to one of the following “tainted transactions”:

a) distribution of profit or a repayment of

b) a contribution to the equity of an affiliated
    entity; or

c) the acquisition of (additional) shares in an
    entity that is affiliated or becomes affiliated        
    after that acquisition.

The interest expenses are however still deductible if the company substantiates that i.a. both the loan and the transaction are mainly motivated by business reasons.

The loan is generally considered to be motivated by business reasons if the funds are not artificially rerouted within the Group.

In its judgment, the Dutch Supreme Court ruled that there is no artificial rerouting in case the tainted transaction is funded by an entity that has a pivotal treasury function within the group.

According to the Court, an entity i.a. has such a function if:

  • it fulfills an active financing function within the Group;
  • it is primarily engaged in conducting financial transactions (such as the borrowing and lending of funds and managing of excess cash); and
  • it is (more or less) independent in its day-to-day activities and therefore has sufficient and competent personnel and its own administration.

In case the creditor is merely a conduit of the funds, the qualification of an artificial reroute may still apply.

Abuse of law
The Court further determined that if the loan and the transaction are motivated by business reasons (following the mentioned rules), the general abuse of law doctrine (“Fraus legis”) cannot be applied in respect of this provision.

To do
Multinational companies should review whether their financing structures are still tax efficient following the above rules.

If you have any questions, please contact:

[email protected]

[email protected]