Netherlands vs “Owner B.V.”, July 2022, District Court, Case No. ECLI:NL:RBNHO:2022:6584

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Owner B.V. was set up by a number of investors to acquire a Belgian entity with Dutch subsidiaries. After the acquisition the Dutch subsidiaries were merged into a fiscal unity with Owner B.V.

Interest in an amount of EUR 1.7 million due on the debt related to the acquisition was considered by the court not deductible under section 10a of the Vpb Act.

In addition, Owner B.V.’s profit had been reduced by EUR 6.0 million by interest on shareholder loans. The court deemed that 4.5 million of this amount was not deductible by virtue of fraus legis. The court further ruled that part of the costs charged to the Dutch company qualified as financing costs and could be deducted.


“5.8. The defendant has argued that under Section 8b of the Vpb Act, a full recharacterisation of the loans can and should take place, which the claimant disputes. According to the claimant, only an interest adjustment can be made under Section 8b of the Income Tax Act. In support of the view that the loan should be reclassified under Section 8b of the Vpb Act, the defendant has put forward essentially the same arguments as when arguing that there is an exception to the civil law form (the sham loan, participation loan or bottomless well loan). The court has already rejected these arguments above for the reasons stated there. The court does not see in the text of Section 8b of the Vpb Act, nor in the underlying provisions of the OECD Guidelines, a ground for creating a fourth exception on the basis of which a tax recharacterisation of the civil law loan can take place. The court finds confirmation for this opinion in the Supreme Court’s ruling of 25 November 2011 (ECLI:NL:HR:2011:BN3442, at paragraphs 3.3.1 to 3.3.3). In that judgment, it was ruled that in a case where the form of the loan is a loan and none of the three exceptions mentioned above applies, it is not in keeping with the legal system to assume that equity capital has been provided for the purposes of tax calculation. It also follows from that judgment that in determining an at arm’s length interest rate – except for the interest rate – it will have to be based on what the parties have agreed and that in doing so, the character of that agreement may not be affected. If an at arm’s length interest rate cannot be determined without essentially making the loan profit-sharing, the loan should not be classified as capital for tax purposes, but as an imprudent loan. That the interest rate should be adjusted under the arm’s length principle to the extent that it constitutes an imprudent loan has not been plausibly demonstrated by the defendant, as held below.”

“ In the court’s opinion, the loan commitments come so close to the provision of equity capital that they should be equated with it for the application of the doctrine of fraus legis. Although the loan commitments were designated as loans and there is also an obligation to repay the funds under the LPAs, if the following facts and circumstances are also taken into account, they show that, from the perspective of the underlying investors, it did not matter whether an interest-free shareholder loan was provided or equity. The court takes into account not only that the loan commitments are presented as equity in the LPs’ financial statements, but also that – as is not in dispute between the parties – were interest-free. As a result, the investors in the LPs would enjoy the full return on their investment (including the amounts received by the LPs as interest) in the form of profit distributions (or disposal benefits). In these circumstances, the court does not see sufficient ground in the possible characterisation of the loan commitments under UK company law as debt capital to treat the claimant’s case differently from the case at issue in the judgment of 16 July 2021.”

“8.6.1. The claimant has argued that the application of fraus legis in its case is not compatible with the freedom of establishment enshrined in Article 49 of the Treaty on the Functioning of the European Union. She has referred to the Lexel judgment in this regard. The defendant does not consider such a restriction to be present. He refers in this regard to the judgment of the Amsterdam Court of Appeal of 30 September 2021, ECLI:NL:GHAMS:2021:2832 and the conclusions of A-G Wattel of 23 June 2021, ECLI:NL:PHR:2021:666, and of 31 August 2021, ECLI:NL:PHR:2021:780.
8.6.2. The court does not follow the claimant’s contention. The Supreme Court ruled, unclausibly, in r.o. 4.5.2 of its judgment of 16 July 2021 that litigants cannot invoke Union law in cases of abuse of rights. The court understands this judgment to mean that Union law does not preclude the application of fraus legis because that doctrine is precisely tailored to combat wholly artificial constructions that have no connection with economic reality and are only intended to obtain a tax advantage. Importantly, when determining the legal consequences of fraus legis, the principle of proportionality plays a decisive role, so that the entire interest deduction is not simply refused, but the part of the interest deduction that is justified must be assessed. The Lexel judgment does not preclude such a fight against wholly artificial constructions. The court adds that the doctrine of fraus legis applies without distinction in domestic and cross-border cases. In this regard, the court also refers to the opinion given under 6.5.2.”

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