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Netherlands Supreme Court decides that Dutch thin capitalization provisions in the case of financing companies are not incompatible with ICCPR and ECHR — Orbitax Tax News & Alerts

On 29 June 2012, the Dutch Supreme Court (Hoge Raad der Nederlanden) gave its decision in X BV. v. the Tax Administration (Case No. 11/00482) concerning the calculation of the non-deductible interest under the Dutch thin capitalization rules. Details of the case are summarized below.

(a) Facts. The activities of X BV (the Taxpayer) consist of borrowing money and the holding and financing of participations. Almost all (98%) of the borrowed loans were granted by the Taxpayer's shareholders, who were resident in Curaçao. The Taxpayer deducted the full amount of interest paid on those loans. The tax inspector, however, denied part of the interest deduction based on the application of thin capitalization rules.

(b) Legal background. Article 10d(1) and (2) of the Corporate Income Tax Act (CITA) provides that interest on excessive debt paid to a company of the same group is not deductible.

Article 10d(3) limits the maximum amount of interest which is deductible under these provisions to the amount of interest paid to related companies less the amount of interest received from related companies.

Finally, Article 10d(4) of the CITA provides that excessive debt is the part of the annual average debt which exceeds three times the annual average equity of the company, and this excess exceeds EUR 500,000. Debt is taken into account insofar it exceeds outstanding loans.

Finally, upon request, the resident company may compare its own debt/equity with the debt/equity ratio of the group of companies to which it belongs.

(c) Issues. The issues were: