Supreme Court upholds refusal to allow interest deduction for artificial investment arrangement

Case

In this case, a joint venture company established in the Netherlands (hereinafter: the interested party) was used to facilitate collaboration between a Dutch bank and a French bank. To set up the intended investment arrangement, the interested party was acquired as a shell company by a Luxembourg-based, wholly-owned subsidiary of the French bank (hereinafter: LuxCo). LuxCo provided the interested party with limited recourse loans (hereinafter: LR loans), enabling the latter to acquire a 15% shareholding in a Luxembourg subsidiary held by the former. That shareholding consisted of ordinary shares and preference shares. The interested party’s obligations in respect of the LR loans were limited to the total income it received from the preference shares. The Dutch bank acquired a 5% shareholding in the interested party. With the capital paid in by the Dutch bank, the interested party acquired a bond portfolio issued by third parties. The variable interest rate on this bond portfolio was converted into a fixed interest rate, aligned with the interest expense created by the LR loans, by means of an interest rate swap agreement with the Dutch bank.

Although the dividend on the preference shares was tax-deductible in Luxembourg, the income from these shares received by the interested party still qualified for the participation exemption at the time. At the same time, the interested party deducted the interest on the LR loans from the return on the bond portfolio. The Tax Inspector adjusted this interest deduction. The parties did not dispute that the LR loans qualified as tainted loans within the meaning of Article 10a of the Dutch 1969 Corporate Income Tax Act (Wet Vpb 1969) (hereinafter: CITA). The dispute between them was about whether the interest deduction should be disallowed under Article 10a CITA, or on the grounds of fraus legis.

Court of Appeal’s ruling

The Court ruled that the interest on the LR loans was not deductible under Article 10a CITA during the period from 1 January 2008 and on the basis of fraus legis for the period up to 1 January 2008. Given that a compensatory levy had been imposed on the interest at the level of LuxCo, the compensatory levy test under the rebuttal rule of Article 10a(3)(b) CITA was met during the entire period. However, as from 1 January 2008, the Tax Inspector could refuse interest deduction under Article 10a CITA if they were able to demonstrate that the debt or the related legal act was not predominantly based on business motives.

The Court argued that the Tax Inspector could rely on the aforementioned rebuttal rule under Article 10a(3)(b) CITA for the period as from 1 January 2008. The Court considered it plausible that, given the overall structure of the investment arrangement, in which the interest was offset against the return on the bond portfolio, the debt (the LR loans) and/or the related legal act (the acquisition of the preference shares) were not based predominantly on business motives.

For the period prior to 1 January 2008, the Court addressed the issue of fraus legis. The Court of Appeal held that in situations such as this, where use is made of the so-called Bosal loophole, a conflict with the aim and purpose of the Act may arise not only in cases where interest is set off against purchased profit (Credit Suisse judgment; Supreme Court 21 April 2017, ECLI:NL:HR:2017:638, BNB 2017/162), but also where interest due is set off against benefits otherwise created in an artificial manner (Triple-Dip judgment; Supreme Court 9 July 2021, ECLI:NL:HR:2021:1102, BNB 2021/136). It is noteworthy that the Court adds ‘(artificially) created’ interest charges. With reference to the Hunkemöller judgment (Supreme Court 16 July 2021, ECLI:NL:HR2021:1152, BNB 2021/137), the Court ultimately concluded that the aim and purpose of the Act preclude that – by bringing together a company’s profits on the one hand and artificially created interest charges on the other – the levying of corporate income tax is thwarted in an arbitrary and ongoing manner. The Court argued that this is done by employing legal acts to achieve – in essence – legitimate business objectives, which are not required for achieving those objectives but are solely attributable to the decisive motive of bringing about the envisaged tax consequences. The interested party lodged an appeal in cassation against this judgment.

Supreme Court’s judgment

The Supreme Court upheld the Court of Appeal’s ruling, both with regard to the application of Article 10a CITA as from 1 January 2008 and the application of fraus legis up to 1 January 2008.

As regards the period after 1 January 2008, the Supreme Court did not get to the substance of Court of Appeal’s judgment. This is regrettable, as it now remains unclear whether the interest deduction is refused because the debt, the legal act, or the combination of both is not predominantly based on business motives. In view of previous case law of the Supreme Court, the arm’s length nature of the debt should not automatically pose a problem in the context of the application of Article 10a CITA. But, as stated, this is not clear.

By referring to its reasoning in the Hunkemöller judgment, the Supreme Court actually confirmed that the doctrine of fraus legis may be applied with respect to the period during which the ‘counter-rebuttal’ rule (tegen-tegenbewijsregeling) did not yet apply. This is noteworthy because one might ask why there are artificially created interest charges with direct financing, and what the business motives are in this case when considered in isolation. The Supreme Court also referred to the repeatability and artificial nature of the investment arrangement, in which the interest expense created is offset against the artificially created benefits. In any event, the Supreme Court confirmed that fraus legis can play an independent role alongside Article 10a CITA, although it is questionable whether this is still necessary given the current wording of Article 10a CITA.

Finally, the Supreme Court rejected the reliance on EU law, arguing that Article 10a CITA and fraus legis remain within the limits of the EU law concept of abuse. They are aimed at arrangements of an artificial nature that are specifically intended to avoid taxation on Dutch profits. The Supreme Court declared the appeal in cassation unfounded.

Source:

• Supreme Court 1 May 2026, 21/04746, ECLI:NL:HR:2026:736