Simplified outline of the case

The case at hand concerned an international private equity structure which acquired a retail business headquartered in the Netherlands. Four French investment entities together held all the shares of a Dutch holding entity (HoldCo) which acquired all the shares of the Dutch retail group. To finance the acquisition, the French investment entities funded HoldCo with a mix of equity and shareholder loans.

Post-closing, HoldCo formed a Dutch fiscal unity with the acquired group. As a result, interest payments on the shareholder loans granted to HoldCo could be offset against profits realised by the acquired operating group. The Dutch tax authorities, however, denied deduction of the interest payments to the French investment entities.

Specific interest deduction limitation rules to prevent base erosion

According to article 10a of the Corporate Income Tax Act (CITA), interest payments are non-deductible if the loans are taken up from related parties and the relevant debt is connected with, inter alia, a third-party acquisition. Two entities are related, inter alia, if one entity holds an (indirect) interest of at least one-third in the other entity. None of the French investment entities, as lenders, however, held an interest of at least 33.3% in HoldCo, as borrower. Hence, article 10a CITA is not applicable. Please note that in the relevant year 2011 the definition of related entity in article 10a CITA did not include the co-operative group.

The tax authorities took the position that this investment structure was predominantly motivated to circumvent the related party definition of article 10a CITA and that the abuse of law doctrine should apply.

Application general abuse of law doctrine

The Supreme Court ruled that the deduction of interest payments must be denied on the basis of the abuse of law doctrine (fraus legis).

It considered that (i) equity at the level of the funds was converted into debt funding of HoldCo, (ii) the interest on that debt was offset against the profits of the acquired company, (iii) the interest that was due by HoldCo was not (reasonably) taxed at the level of the funds and (iv) the conversion of equity into debt by providing a loan to HoldCo did not result in any substantial change in the financial position of the funds.

The Dutch Supreme Court ruled that in the case at hand, interest deduction would be against the object and purpose of the CITA as interest costs are offset against the profits of the acquired companies. Moreover, unnecessary legal acts were used with the predominant motive to realise the tax benefit of interest deduction in the Netherlands.

Freedom to fund with debt or equity

Based on established case law taxpayers are in principle free to choose to finance their acquisition with either debt or equity even if that choice is motivated by achieving a deduction of interest in the Netherlands. Recently, in its ruling of 9 July 2021, the Dutch Supreme Court ruled that the abuse of law doctrine was not applicable in a case without offsetting interest against acquired profits (e.g. within a fiscal unity). This ruling of 16 July 2021 confirms that this freedom is not unlimited.

We recommend reviewing existing financing structures in light of these new developments.


We will keep you updated on further developments. Should you have queries, please contact your trusted adviser at Loyens & Loeff.