Company A had acquired the business (assets and liabilities) of another company, through an Acquisition B.V. Company A provided a loan of EUR 300,000 to Acquisition B.V. in 2008. The Acquisition B.V. failed to perform well and went bankrupt in 2011. Company A claimed a write-down loss on the loan in its corporate income tax return. The Tax Administration stated that this was an extreme default risk loan and did not accept the loss. According to Dutch case law the main characteristic of an EDR loan is that an arm’s length interest rate cannot be found – the shareholder grants the loan under such circumstances that it is clear from the outset that it cannot be repaid and the shareholder does not have business interest, other than in its capacity as shareholder, to grant the loan. The Arnhem-Leeuwarden Court of Appeal disagreed with the Tax Administration. The Supreme Court stated that “special circumstance” between a creditor and a debtor occurs if a business relationship is involved. One that would have been of sufficient weight to the creditor to provide a loan under the same conditions and circumstances and to accept the resulting bad debt risk, even without an intercompany relationship. The Supreme Court argued that the Court of Appeal had provided insufficient grounds for there not being a “special circumstance” in this case. Another issue in this case was the fact that the debtor of the loan was not a subsidiary of company A. Instead, it was a sister company (80% shareholding). On this issue the Supreme Court clearly stated that “parallel” deduction of a write-down loss in respect of an extreme default risk loan is not possible. Click here for translation ...

In this case, the Dutch Supreme Court further outlined the Dutch perspective on the distinction between debt and equity in its already infamous judgments on the so-called extreme default risk loan (EDR loan) L sold a securities portfolio to B for EUR 5.3 million against B’s acknowledgement of debt to L for the same amount. The debt was then converted into a 10 year loan with  an interest rate of 5% and a pledge on the portfolio. Both L and B were then moved to the Netherlands Antilles. Later on L deducted a EUR 1.2 mill. loss on the loan to B due to a decrease in value of the securities portfolio. The Dutch Tax Authorities disallowed the deduction based on the argument, that the loan was not a business motivated loan. The Dutch Supreme Court ruled that in principle civil law arrangement is decisive in regard to taxation. However there are exceptions in which a civil law loan arrangement can be disregarded. A non-business motivated loan is defined as an intercompany loan that carries an interest rate which – given the terms and conditions of the loan – is not at arm’s length, and which a third party would not have granted given the risk involved. In such cases, any losses arising from the loan are not deductible for Dutch corporate tax purposes. But at the same time, the lender still has to report an arm’s length interest which equals the interest that the borrower would have paid in case it had borrowed from a third party with a guarantee from the lender. Click here for translation ...