On 25 November 2011, the Supreme Court has issued its rulings concerning the so-called ‘non-businesslike loan’ (“onzakelijke geldlening”) The main aspects of the Supreme Court decisions are that (i) next to an upstream non-businesslike loan, a downstream non-businesslike loan is possible, (ii) a non-businesslike loan is not re-qualified to fiscal equity, (iii) a write-off on a downstream non-businesslike loan may ultimately be deductible upon liquidation of the debtor-participation.

In the rulings of 25 November 2011 the Supreme Court elaborates on its decision of 9 May 2008. In 2008 the Supreme Court ruled that a write-off on a loan is not tax deductible to the extent that a company provides funds for the benefit of its shareholder under such conditions and circumstances that it runs a credit risk that independent parties would not have accepted. The 2008 ruling created controversy in fiscal literature and has resulted in ambiguous jurisprudence of lower courts. This has caused several uncertainties to arise, some of which the Supreme Court addresses in its rulings of 25 November 2011:

The Supreme Court has ruled that a loan provided by a shareholder to its subsidiary can also qualify as a non-businesslike loan.

The Supreme Court has ruled that a non businesslike loan is not treated as equity for fiscal purposes but that the credit risk on the loan has been contracted in the capacity of shareholder and not as a creditor. As a consequence any write-off of the loan is a non tax deductible item.

The Supreme Court has ruled that it should be determined whether the interest rate is at arm’s length or can be adjusted to an arm’s length rate (not being profit participating). In determining this, the other conditions, terms and circumstances of the agreement remain intact. If an arm’s length interest rate cannot be determined (because a independent third party wouldn’t be prepared to provide a loan under the circumstances at hand), the entire provision of funds is qualified as a non-businesslike loan. This should be reviewed at the time of providing the funds. However, during its term a businesslike loan can become a non-businesslike loan due to a non-businesslike act of the creditor.

The Supreme Court has ruled that in determining the fiscal profit of the creditor and debtor, the interest rate on a non-businesslike loan is set at the rate that the debtor would have paid if it had attracted the loan from an independent third party under guarantee of the actual creditor. The Supreme Court has further ruled that the credit risk on accrued (unpaid) interest on a non-businesslike loan is also non-businesslike.

In practice the decision of the Supreme Court implies that documents substantiating the arm’s length character of a loan are needed to support the deductibility of write-offs on loans to related parties. The interest on a non-businesslike loan is set at a ‘guaranteed’ interest rate. Since a loan can only be non-businesslike as a whole, a combination of a senior and (more) junior loans may be preferable over a single loan.

Should you require any further information, please contact your tax adviser at Loyens & Loeff.