15/July/2022

NL Tax Alert: New jurisprudence on interest deduction rules

Today, the Dutch Supreme Court issued two rulings regarding interest deductions on debts in a private equity funded acquisition structure.

Key findings include:

The anti-base erosion rule (article 10a) only applies to an intercompany debt which finances an external acquisition, if the funds have been rerouted (onzakelijke omleiding). Rerouting does not exist if the funds originate from a non-related party (interest of <1/3), even if the person is a minority shareholder. Per 2017, article 10a changed so that entities “acting together” (e.g. in fund structures) also qualify as related parties.
Interest deductions which are not denied based on article 10a, may still be denied based on the general concept of abuse of law (fraus legis).
A non-businesslike loan has a debtor’s risk a third party would not be willing to take, as a result of which (in short) value mutations are non-deductible. The Supreme Court clarifies how an unpaid interest balance on a non-businesslike loan is treated. The creditor should report the interest at fair market value (and not at the potentially higher nominal value). The debtor reports the interest at nominal value (except if it is clear that the interest needn’t be repaid).