“II Real Estate Loan B.V.” had deducted 10% interest on loans from its shareholder in its taxable income.
The tax authorities found that the 10% interest rate was not at arm’s length. Furthermore, according to the tax authorities the loans were “non-businesslike” and the deductibility of the interest was therefore limited.
The district court upheld the assessment.
Not satisfied, “II Real Estate Loan B.V.” appealed to the Court of Appeal.
Judgment
The Court of Appeal ruled largely in favour of the tax authorities, concluding that a significant portion of the interest was not deductible and was therefore deemed to be a dividend to the shareholders.
The court reduced the interest rate on the loans from 10% to 2.43%.
Excerpts in English
5.3.6.13. Since no (non profit-sharing) arm’s length interest rate can be found in the market, and the AHL thus qualifies as a so-called non-business loan for all years, in accordance with the non-business loan jurisprudence, an interest rate must then be determined as if the AHL had been provided by a third party under surety (cf. HR 25 November 2011, ECLI:NL:HR:2011:BN3442, BNB 2012/37, r.o. 3.3.4:
“() The default risk assumed by a company in granting an imprudent loan is comparable to the risk assumed by a company that stands surety for a loan taken directly from a third party under similar conditions by an associated company. In view of this, in the case of an imprudent loan, the company’s taxable profit will have to be determined, as far as possible, in the same way as if it had guaranteed a loan taken by an associated company directly from a third party under comparable conditions.
In view of the foregoing and partly for reasons of simplicity, the rule of thumb is that the interest on the imprudent loan is set at the interest that the associated company would have to pay if it borrowed from a third party with the guarantee of the group company under otherwise identical conditions. This will also prevent a difference in the earnings of the affiliated company with respect to the interest expense depending on whether it borrows under a guarantee from a third party or directly from the group company.”)
On the basis of the so-called guarantee analogy included in the aforementioned judgment, the inspector determined the interest rate for the present case at a maximum of 2.38%. In doing so, he assumed the AHL but without taking into account the default risk. Furthermore, in connection with the escrow analogy, the inspector pointed to the credit rating of [name 4] Ltd. as the holding company of its three subsidiaries that are shareholders/creditors in the interested party with a total interest of 99.26% (see section 2 of the court ruling). [Name 4] Ltd. could therefore be a guarantor in this regard, according to the inspector, if the AHL were sourced from an independent third party.
5.3.6.14. The Court considers that the inspector correctly used the escrow analogy as a starting point to determine the interest payment. The Court considered that in that regard, it had been made plausible by the inspector that [name 4] Ltd. would qualify as a guarantor. However, in the opinion of the Court, neither party has made the interest rate to be taken into account sufficiently plausible. For instance, the inspector indicated under his primary argument that given the term of the loan there is reason to take into account a somewhat higher interest rate, while in the opinion of the Court he wrongfully completely ignores this when applying the surety analogy. The interested party also did not make the interest rate it defended plausible since in the reports and analyses on which that rate was based, the AHL was not taken as a starting point without default risk.
Therefore, taking all things into consideration, the Court, applying the surety analogy in good justice, will set the interest rate on the AHL at 2.43%.
5.3.6.15. What has been considered above with respect to the renegotiated interest rate under application of the guarantee analogy, has the effect for the interested party as debtor that, in principle (see below at 5.3.6.16 and 5.3.6.17), it cannot deduct an amount in excess of the renegotiated interest payment; whatever more has been deducted from profits is considered a deduction.
5.3.6.16. Interested party further disputed that the AHL qualifies as an impaired loan within the meaning of the Supreme Court’s impaired loan jurisprudence because the affiliation requirement formulated in that jurisprudence was not met. To this end, the interested party first argues that, at least as the Court understands the interested party’s contention, more than 90% of the AHL was essentially provided to it by private pensioners and policyholders; in other words, the pension insurers are transparent. To this end, it points to the opinions it submitted (see 5.2.7). According to the interested party, there are therefore no creditors affiliated with the interested party to this extent. Secondly, the interested party pointed to Mr. [Person 4]’s shareholding of 0.74%. Therefore, since there is no affiliation within the meaning of the impaired loan jurisprudence, there cannot be an impaired loan granted by [Person 4] .
5.3.6.17. The Court considered as follows. The application of the non-business loan jurisprudence requires that the acceptance of the default risk is based on the shareholder relationship between the debtor and the creditor. There may also be an impracticable loan in the event of a disposal as referred to in Section 3.92 of the IB Act 2001 and situations in which a debtor risk that an independent third party would not have taken is accepted on the basis of personal relationships between natural persons (cf. HR 18 December 2015, ECLI:NL:HR:2015:3599, BNB 2016/38) or in cases where a company has accepted this debtor risk with the intention of serving the interest of its shareholder (cf. HR 20 March 2015, ECLI:NL:HR:2015:645). The inspector argued, without dispute, that the (pension) insurers who are parties to the AHL as creditors are, in any case, legal owners of the shares in the interested party and are also entitled to vote. For that reason alone, they are affiliated with the interested party. With what the inspector has put forward in this respect, the Court considers it plausible that with regard to the (pension) insurers there is affiliation in the sense of the non-business lending case law, so that there is no reason to consider the non-business lending case law not applicable to the (pension) insurers because of the alleged lack of affiliation.
The Court of Appeal considered that only with regard to the shareholder natural person, [Person 4] , it has not been made plausible that with regard to the loan granted by him there is affiliation as referred to in the non-business loan jurisprudence, nor with regard to the loan granted by him can it be argued that there is a disposal as referred to in Section 3.92 of the IB 2001 Act. Therefore, the loan provided by shareholder [Person 4] cannot be regarded as an imprudent loan and Section 8b of the Vpb Act does not apply to it either. The Court of Appeal has taken into account that it has neither stated nor appeared that there are personal relationships on the basis of which the non-business loan jurisprudence (or section 8b Vpb Act) would be applicable to the loan provided by him to the interested party.”
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