Simplified outline of the case

The case at hand concerned a third-party acquisition by a Dutch company. The acquisition was financed by means of a group loan from the group’s treasury company. The treasury company availed of (foreign) tax losses to offset the taxable financing income.

The Dutch Tax Authorities denied the interest deduction on the loan.

Specific interest deduction limitation rules to prevent base erosion

The Netherlands has a specific interest deduction limitation that restricts the deduction of intragroup financing costs in certain ‘abusive’ situations. According to article 10a of the Corporate Income Tax Act (CITA), interest on related party debt is in principle non-deductible if, inter alia, the loan is taken up to finance the acquisition or equity funding of a subsidiary. If a loan is within scope of article 10a CITA, the interest can still be deducted if the taxpayer demonstrates that business reasons underlie the loan as well as the related transaction (business reasons rebuttal). The business reasons rebuttal with respect to the loan is generally met if the means to fund the transaction have not been artificially re-routed within a group.

In the case at hand, the lower courts and Advocate General considered that the taxpayer had to prove the origin of the treasury’s funding in order to demonstrate the business reasons for the loan.

Pivotal treasury function

The Supreme Court ruled that a debt is predominantly based on business reasons if the creditor performs a pivotal treasury function within the group. Further, the Supreme Court set forth the circumstances under which a related entity performs a pivotal financial function with its financing activities. Fundamental considerations are whether the creditor has an active financing function within the group. The treasury must be primarily engaged in conducting financial transactions on behalf of the group, such as borrowing and lending funds and managing redundant group resources. In addition, the treasury will have to be independent in day-to-day operations, including the management of the outstanding funds, and to that end must have sufficient and competent staff and, if it is an independent operating division, its own administration. If the treasury is bound by a centrally determined group strategy, this mere circumstance does not impede its independence.

Notwithstanding the above, a loan can still be considered non-businesslike if the creditor acts as ‘conduit’ in the granting of loans.

Application of the general abuse of law doctrine

In addition, the Supreme Court ruled that if the business reasons rebuttal applies, the general abuse of law doctrine (fraus legis) cannot be applied in respect of article 10a CITA. 


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