The Supreme Court concluded that this was indeed the case, basing its reasoning on the fraus legis doctrine (abuse of law). In short, this doctrine entails that tax benefits are refused when a structure is not contrary to the letter of the law, but – because it was set up solely to achieve tax savings – is contrary to the intent and purpose of that law. This doctrine can therefore be applied even if the statutory provision of article 10a CITA does not apply, because the taxpayer has been able to demonstrate, in accordance with the rebuttal provision included in that article, that the loans were not artificially diverted without a commercial basis.
Case: private equity acquisition and shareholder loan structure
The case concerned the acquisition of a Dutch retail chain by two private equity firms in 2011. For this purpose, a Dutch holding company (X BV) was incorporated, which, together with its subsidiaries, acted as the bidding vehicle. The acquisition price of approximately €248 million was partly financed externally and partly through a shareholder loan of €57 million provided by the Luxembourg parent company. That company had raised the funds through the issuance of so-called Preferred Equity Certificates (“PEC’s”) to various funds and limited partnerships (CVs) of the two private equity firms. The 10% interest on the shareholder loan was deducted in the Netherlands, without a corresponding levy on the recipients.
From District Court to Supreme Court: procedural history and outcome
The District Court and the Court of Appeal of The Hague initially ruled that article 10a CITA did indeed prevent interest deduction. However, in cassation, the Supreme Court decided otherwise in 2022. The funds had not been diverted, since the PEC holders individually did not qualify as related entities of the taxpayer. The case was referred to the Amsterdam Court of Appeal, which ruled that part of the interest was excessive and not at arm’s length, and that the remainder was non-deductible due to fraus legis. This judgement has now been confirmed by the Supreme Court in cassation.
The ruling builds on earlier decisions and provides further clarity on the relationship between article 10a CITA and the fraus legis doctrine. In this respect, the judgement is in line with prior Supreme Court rulings on interest deduction in private equity structures, such as the under tax specialists well-known Hunkemöller case.
In addition, with this new ruling, the Supreme Court introduces an important nuance to the earlier so-called key function case (spilfunctie-arrest). That case must be understood to mean that the application of the rebuttal provision does not always provide protection against fraus legis, but only where the lender plays a financial key function within the taxpayer’s group. With this judgement, the Supreme Court once again emphasizes that the Dutch tax authorities may invoke fraus legis, even apart from specific statutory interest deduction limitations. This is not confined to acquisition financing but may also have broader implications for how financing structures in general will be assessed by the tax authorities. Taxpayers are therefore well advised to always base their financing structures on clear commercial grounds and to carefully document these motives.
Practical relevance and key takeaways: implications for financing structures and tax planning
The Supreme Court’s confirmation makes clear that reliance on article 10a CITA rebuttals does not guarantee deductibility when the tax authorities can demonstrate abuse of law. Proper structuring, substantiated by genuine commercial considerations, remains essential for both acquisition and broader financing structures.
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