On 21 April 2017, the Dutch Supreme Court has handed down four decisions concerning tax planning structures in which an international group acquired companies which had realized profits prior to the moment of their acquisition and sought to deduct intercompany interest from these profits. The decisions could have an impact on current and future intercompany lending transactions.
Interest deduction The Supreme Court ruled that the interest can be disallowed on the basis of the abuse of law (fraus legis) doctrine, but only to the extent that the profits in question were actually realized before the acquisition of the companies by the group. The fraus legis judgement will not have much impact in practice, as this kind of transactions has mostly already been made impossible by legislative changes in 2011.
The judgements further clarify that the anti-base erosion rules in article 10a of the Corporation Tax Act 1969 effectively do not apply to interest on intercompany debt if the intercompany loans are, on group level, funded by linking loans attracted from third parties. The decision on article 10a could significantly limit the scope for disallowing interest deductions pursuant to that provision. This could have an impact on current and future intercompany lending transactions.
Penalties The Supreme Court reaffirmed and clarified its position on administrative penalties in tax cases. No penalties can be imposed on a taxpayer who could reasonably argue that his position was the correct one, even when he did not consider such arguments at the time he filed his return, but only became aware of them after the filing.
Remarkably, the judgements handed down on 21 April 2017 will have an impact outside the field of administrative penalties in tax cases. Even though the judgements did not involve criminal law, the Supreme Court expressly ruled that the exception for objectively arguable positions applies in a similar way to criminal prosecution in tax cases. This may well have an impact in other areas of criminal law as well.