TPcases

The case concerned interest payments of €15,636,270 on loans granted to finance the acquisition of shares in X-Group. In its corporate income tax return for FY2011, “Holding B.V.” had deducted an interest expense of €2,478,638 from its taxable profit, considering that the remaining part of its interest expenses were excluded from tax deductions under the interest limitation rule in Article 10a of the Corporate Income Tax Act.

The tax authority disallowed tax deductions for the full amount refering to both local interest limitation rules and general anti-avoidance principles. It found that the main motive of the complex financial arrangement that had been set up to finance the acquisition of shares in the X-Group was to obtain tax benefits.

An appeal was filed in which “Holding B.V.” now argued that the full amount of interest on the loans could be deducted from its taxable profits. It also argued that a loan fee could be deducted from its taxable profits in a lump sum.

The District Court and the Court of Appeal largely ruled in favour of the tax authorities.

An appeal and cross-appeal was then filed with the Supreme Court.

Judgement of the Supreme Court.

The Supreme Court found the principal appeal by “Holding B.V.” well-founded and partially reversed the judgment of the Court of Appeal.

Excerpts in English
“4.3.3
Article 10a(1) opening words and (c) of the Act aims to prevent the Dutch tax base from being eroded by the deduction of interest due on a debt incurred arbitrarily and without business reasons. This is the case if, within a group of affiliated entities, the method of financing a business-based transaction is prompted to such an extent by tax motives – erosion of the Dutch tax base – that it includes legal acts that are not necessary for the realisation of those business-based objectives and that would not have been carried out without those tax motives (profit drain).
4.3.4
In the genesis history of section 10a of the Act, it has been noted that the scope of this section is limited to cases of group profit drainage. Here, it must be assumed that an entity does not belong to the taxpayer’s group if that entity is not considered to be an associated entity under section 10a(4) of the Act.8
This means that Article 10a(1) chapeau and (c) of the Act lacks application in the case where, although the debt incurred by the taxpayer is related to the acquisition or expansion of an interest in an entity subsequently related to him (the taxpayer), that debt was incurred with another entity not related to him (the taxpayer). This is therefore the case even if this other entity has a direct or indirect interest in the taxpayer, or if this other entity is otherwise related to the taxpayer. This applies even if, in that case, the debt is not predominantly based on business considerations. As a rule, this situation does not fall within the scope of Section 10a(1) opening words and (c) of the Act.
4.3.5
The circumstance that, in the case referred to above in 4.3.4, Article 10a(1) opening words and (c) of the Act does not, as a rule, prevent interest from being eligible for deduction when determining profit, does not, however, mean that such deduction can then be accepted in all cases. Deduction of interest, as far as relevant here, cannot be accepted if (a) the incurring of the debt with the entity not related to the taxpayer is part of a set of legal transactions between affiliated entities, and (b) this set of legal transactions has been brought about with the decisive purpose of thwarting affiliation within the meaning of Section 10a(4) of the Act. Having regard to what has been considered above in 4.3.3 and 4.3.4 regarding the purpose of Section 10a(1) opening words and (c) of the Act, the purpose and purport of that provision would be thwarted if such a combination of legal acts could result in the deduction of that interest not being able to be refused under that provision when determining profits.
4.4
With regard to part A of plea II, the following is considered.
4.4.1
Also in view of what has been set out above in 4.3.1 to 4.3.5, the circumstances relevant in this case can be summarised as follows.
(i) The loans referred to above in 2.5.3 are in connection with the acquisition of an interest in an entity that is subsequently a related entity to the interested party (the top holder).
(ii) Sub-Fund I is a related entity to interested party within the meaning of section 10a(4) of the Act (see above in 2.3.1).
(iii) Sub-Fund V is not such a related entity (see above in 2.3.2 and 2.3.5).
(iv) All investors who participate as limited partners in LP 1 also and only participate as limited partners in LP 1A, so that sub-fund I and sub-fund V are indirectly held by the same group of investors.
(v) In relation to both sub-funds I and V, the Court held – uncontested in cassation – that they are subject to corporation tax in Guernsey at a rate of nil.
4.4.2
The circumstances described above in 4.4.1 mean that the part of each of the loans granted by sub-fund V to the interested party does not, in principle, fall within the scope of section 10a(1)(c) of the Act.
However, based on the same circumstances, no other inference is possible than that, if this part of each of the loans had been provided by sub-fund I and not by sub-fund V, this part would unquestionably fall within the purview of Section 10a(1)(c) of the Act, and the interested party would not have been able to successfully invoke the rebuttal mechanism of Section 10a(3)(b) of the Act in respect of the interest payable in respect of that part.
4.4.3
As reflected above in 3.2.2, the Court held that, in view of the contrived insertion of LP 1A into the structure, the overriding motive for the allocation of the loans among sub-funds II, III, IV and V was to avoid affiliation within the meaning of Section 10a(4) of the Act. Therein lies the judgment of the Court that, in any event, the creation of LP 1A and sub-fund V and the subsequent provision of loans by sub-fund V are part of a set of legal acts between affiliated bodies as referred to above in 4.3.5, carried out with the overriding motive of avoiding such affiliation.
In view of what has been considered above in 4.4.2, this judgment does not show an error of law. Nor is it incomprehensible, considering that this set of legal acts resulted in subfund V and not subfund I granting loans as referred to above in 2.5.3 to the interested party.
4.4.4
It follows from what has been considered above in 4.4.3 that the considerations underlying the part of each of the loans taken by the interested party with subfund V are not substantially in rem, so that any reliance on the rebuttal rule of Section 10a(3) opening words and (a) of the Act cannot succeed in this case. It has already been established above in 4.4.2 that a reliance on the rebuttal rule of letter b of that provision cannot succeed either.
4.4.5
What has been considered above in 4.4.1 to 4.4.4 entails that the purpose and purport of Article 10a, paragraph 1 opening words and letter c of the Act would be thwarted as referred to above in 4.3.5, if the combination of legal acts referred to above in 4.4.3 could result in the fact that, when determining the profit of the interested party, deduction of the interest on the part of each of the loans granted by subfund V could not be refused on the basis of that statutory provision.
4.4.6
The judgment given above in 4.4.5 does not apply to the interest in respect of the parts of the loans, which were provided by sub-funds II, III and IV. This is because these sub-funds are not related to the interested party within the meaning of Section 10a(4) of the Act. Further, neither in its judgment reproduced above in 3.2.2 nor in its appended judgment reproduced above in 3.2.3 did the Court express the view that those parts of the loans are part of a set of legal acts brought about with the overriding purpose of thwarting affiliation within the meaning of Section 10a(4) of the Act. The judgment of the Court and the documents in the case do not permit any other inference than that these parts of the loans are not part of such a conspiracy. Then, in view of what has been considered above in 4.3.4, the purpose and purport of Section 10a(1)(c) of the Act are not frustrated if deduction of interest on those parts of the loans is not denied under this provision.
4.5.1
On the basis of what has been considered above in 4.4.5, the Court rightly held, with respect to the part of each of the loans taken out with sub-fund V, that it is contrary to the object and purport of Section 10a of the Act to allow the interest thereon to be deducted from the interested party, whatever may be the grounds used by the Court for that purpose. Part A of plea II fails in that respect.
4.5.2
In view of what has been considered above in 4.4.6, part A of plea II fails for the remainder, i.e. insofar as the opinion of the Court of Appeal reproduced above in 3.4.1 relates to the application of Article 10a of the Act and concerns the parts of the loans taken out with subfunds II, III and IV. To that extent, that judgment of the Court of Appeal constitutes an error of law.”

“On the question of whether the arrangement fee amount may be charged to the profit in one lump sum, the Supreme Court considers as follows.
6.3.2
Having regard to what has been considered above in 4.10.4, the issue is whether the arrangement fee is in essence – according to the intention of the parties involved in the Senior Facility Agreement – not exclusively a remuneration for one-off services provided by the bank syndicate’s “Arrangers” (referred to in paragraph 2.6.1 of the Court’s judgment), but also an amount of prepaid interest. The arrangements made between the parties to the credit facility regarding the arrangement fee and interest rates of the credit, as set out in the Court’s judgment, give no reason to assume the existence of such an intention.
In these circumstances, it was up to the Inspector to establish facts and, in the event of a dispute, to make it plausible that the arrangement fee was only a one-off payment for arranging the credit facility, whereas in reality, the parties involved intended to bring about an advance payment of the interest charge on the credit. To this end, the Inspector’s mere assertion that there is generally a trade-off between a higher arrangement fee and a lower future interest rate is not sufficient.
6.3.3
The documents in the proceedings do not permit any conclusion other than that additional or different facts have not been alleged by the Inspector. The State Secretary, in his response to the Advocate General’s opinion referred to above in 1.2, stated in this regard that a further factual investigation into the nature of the arrangement fee is not necessary because it will not provide any new facts. In view of this one and all, the interested party can charge the arrangement fee in the present year in one lump sum against the profit.”

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