Rate of interest on corporate income tax breaches the principle of proportionality

When is interest on tax due?

In broad terms, the interest on tax regime implies that the Tax Inspector will charge interest on tax if imposition of a tax assessment with an amount payable by the taxpayer takes too long due to the latter’s actions. Conversely, the Tax Inspector will reimburse interest on tax if it takes too long to determine a refund. The interest on tax regime is therefore based on the principle of default.

The basic principle governing assessment taxes is that the Tax Inspector makes a - provisional - assessment with an amount payable within eight weeks of submission of a request by the taxpayer, or within 13 weeks of filing a tax return. Taking into account a payment period of six weeks, the interest calculation ends after 14 and 19 weeks respectively, provided that the - provisional - assessment is issued in accordance with the request or the tax return.

However, the calculation of interest for income tax and corporate income tax purposes never starts earlier than six months after the end of the year/fiscal year. Furthermore, no interest is charged if the provisional assessment is based on a request received before the first day of the fifth month after the end of the tax period, or if a tax return is filed within the normal period. Here, too, the condition is that the provisional assessment should be determined in accordance with the tax return.

Interest on tax rate

The interest rate for all taxes was initially aligned with the statutory interest rate on non-commercial transactions. However, as the estimated budgetary yield of the scheme was at risk of not being met, the legislature decided to distinguish between corporate income tax and other taxes as early as in 2014. Henceforth, the statutory interest rate on commercial transactions subject to a minimum of 8% applied to interest on corporate income tax, while the statutory interest rate on non-commercial transactions subject to a minimum of 4% applied to interest on other taxes.

During the corona crisis, temporarily lower interest rates applied of only 0.01% in the period of 1 June 2020 through 30 September 2020. To allow for a more flexible response to changing circumstances, it was decided to determine interest on tax rates by order in council as from 1 October 2020. During the period of 1 October 2020 through 31 December 2021, the rate was 4% for all taxes. As of 1 January 2022, the original rules applied, stipulating a minimum interest rate of 8% for corporate income tax purposes (and currently for withholding tax purposes as well).

Northern Netherlands Court decision

However, on 7 November 2024, the Court of Northern Netherlands ruled that the distinction made (once again) since 1 January 2022 violates the principle of proportionality. Unlike Acts of Parliament, lower regulations, including orders in council, may be tested against general legal principles. To do so, the Court uses a review framework developed by the Supreme Court. This framework first of all provides that the Court should exercise restraint in assessing the balance of interests made by the regulator when introducing the regulation. But the adverse consequences of a regulation for taxpayers should not be disproportionate to the objectives to be served by it. The question to be asked by the Court is whether the regulator could reasonably have arrived at the regulation in question.

Breach of the principle of proportionality

The Court answered that question in the negative. The arguments for applying the statutory interest rate on commercial transactions, with a minimum of 8%, for interest on corporate income tax are downright weak. The contention that corporate income tax would be comparable to a trade receivable was decisively dismissed. The comparison with the default interest regime in the General Administrative Law Act (Algemene wet bestuursrecht) is also flawed. Furthermore, the purpose of the interest rate distinction remains unclear. By contrast, the adverse consequences of the higher interest rate for corporate income taxpayers are evident. The Court therefore concluded that the principle of proportionality has been violated and ruled the high interest rate set out in Article 1(b) of the Interest on Tax Decree (Besluit belasting- en invorderingsrente) (text 2022) to be non-binding. For this case, the parties agreed that interest on tax should be calculated at a rate of 4%. The Court reduced the interest charged accordingly.

Source: Rechtbank Noord-Nederland 7 november 2024, 23/5244, ECLI:NL:RBNNE:2024:4361