On 1 June 2012, the Dutch Supreme Court (Hoge Raad der Nederlanden) gave its decision in Case No. 11/0009 concerning the deductibility of interest paid on a debt-claim to a low-taxed group company in connection with the transfer of immovable property located in the Netherlands within a group of companies. Details of the case are summarized below.
(a) Facts. In 1998, the Taxpayer received immovable property from another group company (F BV). The Taxpayer did not pay any consideration, i.e. he was indebted with F BV. The Taxpayer paid interest on that debt.
F BV owned the shares in the Taxpayer and in 2002, the shares in the Taxpayer were transferred to a trust office established in Aruba. Also, the Taxpayer was registered in the trade register of Aruba. As a result, the taxpayer was no longer part of the group because it only owned certificates of shares.
The taxpayer deducted the interest paid on the debt owed to F BV. The tax inspector rejected the deduction, arguing that the construction constituted abuse.
(b) Legal Background. Article 10a(2)(c) of the Dutch Corporate Income Tax Act (2002 version) provided that interest paid on a loan related to an (in)direct contribution of capital or other appropriation of funds by the company or resident related party to the lending company is not deductible.
(c) Decision. First, the Supreme Court confirmed the decision of the Court of Appeal that article 10a(2)(c) of the ITA was not applicable in the case at issue. The reason was that the Taxpayer did not use business capital for the benefit of the former group company F BV. In addition, F BV did not use capital for its own behalf because immovable property was converted into a debt claim.
Thereafter, the Supreme Court confirmed the decision of the Court of Appeal that the interest was not deductible because the construction constituted a tax-avoidance scheme. The Supreme Court also observed that the equity position of F BV did not substantially change because immovable property was converted into an indirect interest in the Taxpayer and an interest-bearing debt claim on a related company. Furthermore, the Supreme Court followed the decision of the Court of Appeal that acceptance of such a construction would result in arbitrary and repeated tax-base erosion resulting from the deduction of interest from income from immovable property, without a substantial change of interest and control.
The Supreme Court held, therefore, that the construction was contrary to the aim and purpose of the law because no sufficient compensatory levy could be imposed.
In this context, the Court also noted that article 10a did not contain an exhaustive summary of situations in which interest is not deductible. The legislative history does not allow the transfer of property within a group of companies in combination with the creation of a debt-claim towards a low-taxed group company.
Finally, the Court rejected the Taxpayer's argument that the denial of the deduction was incompatible with the EU freedom of movement of capital (article 56 of the EC Treaty (now article 63 Treaty on the Functioning of the EU (TFEU)). The Court pointed out that this freedom cannot be invoked in tax-avoidance cases.
Consequently, the Court held that the interest was not deductible in the case at hand.