In 2011 a Dutch group “Hunkemöller BV” acquired “Target BV” for EUR 135 million. The acquisition was financed by four French affiliates “FCPRs” in the Dutch Group – EUR 60,345,000 in the form of convertible instruments (intercompany debt) and the remainder in the form of equity. The convertible instruments carried an interest rates of 13 percent. The four French FCPRs were considered transparent for French tax purposes, but non-transparent for Dutch tax purposes. Hence the interest payments were deducted from the taxable income reported by the Group in the Netherlands, but the interest income was not taxed in France – the structure thus resulted in a tax mismatch. The Dutch tax authorities argued that the interest payments should not be deductible as the setup of the financing structure constituted abuse of law; the financing structure was set up in this particular manner to get around a Dutch anti-abuse rule which limits interest deduction on loans from affiliated entities in respect of certain “abusive transactions”. See the preliminary AG Opinion here Decision of the Supreme Court The Supreme Court ruled in favor of the tax authority. The aim and purpose of the law is to prevent the levy of corporate income tax becoming arbitrarily and continuously obstructed through bringing together the profits of a business on the one hand (i.e. through forming a CIT fiscal unity) and artificially creating interest charges on the other (profit-drainage), by using legal acts which are not necessary to the achievement of the commercial objectives of the taxpayer and which can only attributed to the overriding motive of producing the intended tax benefits. Click here for English translation Click here for other translation ...

X B.V., a private limited company established in the Netherlands, is part of a globally operating group (hereafter: the Group). In the years under review, the head office, which was also the top holding company, was located in the USA. Until 1 February 2008, the X B.V. was, together with BV 1 and BV 2, included in a fiscal unity for corporate income tax with the Interested Party as the parent company. As of 1 February 2008, a number of companies were added to the fiscal unity, including BV 3 and BV 4. X B.V. is considered transparent for tax purposes according to US standards. Its parent company is a company domiciled in the USA, as further described in 2.1.8 below. In 2006, BV 1 borrowed € 195,000,000 under a Euro Credit Facility (ECF), a head office guaranteed credit facility with a syndicate of sixteen banks. BV 1 contributed this amount in 2007 as share premium to BV 2. BV 2 paid the larger part of this amount as capital into BV 3. BV 2 and BV 3 have jointly paid the amount of (rounded off) € 195.000.000 into a newly established Irish holding company, Ltd 1. Ltd 1 used the capital contribution to purchase a company established in Ireland, Ltd 2 from a group company established in the United Kingdom for an amount of (rounded off) GBP 130.000.000. BV 3 (for 99 per cent) and BV 4 (for 1 per cent) jointly formed a French entity, SNC, on 28 November 2007. SNC is transparent for tax purposes under Dutch standards. For French tax purposes, SNC is a non-transparent group company. BV 3 sold its subsidiary, SA 1, on 6 December 2007 to SNC for €550,000,000, with SNC acknowledging the purchase price. On 12 December 2007, that claim against SNC was converted into capital. SA 1 merged with SNC on 15 January 2008, with SNC as the surviving legal entity. SNC acquired through the merger, inter alia, a bank debt of €45,000,000 to the Group cash pool managed by BV 2 with a bank (the Pool). This debt is the remainder of a loan taken out by SA 1 in 1998 for external acquisitions and which was refinanced from the Pool in 2004. BV 3 borrowed € 65,000,000 under the ECF on 6 February 2008 and on-lent this amount to SNC. SNC borrowed on the same day a total of € 240,000,000 under the ECF of which one loan of € 195,000,000 and one loan of € 45,000,000. SNC repaid the bank debt from the Pool with the loan of € 45,000,000. On 7 February 2008 it purchased Ltd 1, [F] NV and [G] from BV 3 for rounded € 255,000,000, financed by € 195,000,000 in ECF loans and the aforementioned loan from BV 3 of € 65,000,000, and further purchased an additional participation for rounded € 5,000,000. With the received € 255,000,000, BV 3 repaid its ECF debt of € 60,000,000. On 7 February 2008 it lent the remaining € 195,000,000 to BV 1, which repaid its ECF debt in February 2008. BV 2 sold the shares in a Moroccan and a Tunisian entity to SNC on 7 February 2008 against payment of € 5,088,000. BV 2 borrowed € 191,000,000 under the ECF to finance capital contributions in subsidiaries in Norway, Singapore and Switzerland, for external and internal purchase of shares in companies and for the expansion on 10 December 2008 with 8.71 percent (€ 12,115,000) of its 86.96 percent interest in [M] SpA indirectly held through a transparent Spanish SC of the English group companies [LTD 4] and [LTD 5] . On 29 May 2009, Luxco SA borrowed an amount of € 291,000,000 under the ECF. Luxco is a Luxembourg-based finance company that belongs to the Concern. Luxco on-lent that amount to BV 3 under the same conditions. In turn, BV 3 on-lent the same amount under the same conditions to SNC. With that loan, SNC repaid its ECF debt of € 240,000,000. It lent the remainder to its subsidiary [SA 2] in connection with the acquisition by SA 2 of [SA 3]. That acquisition took place on 25 May 2009 against acknowledgment of debt. SA2 repaid part of the loan from SNC with funds obtained from SA3. The remainder of the loan was converted into capital. On 24 June 2009, Luxco placed a public bond loan of € 500,000,000. Luxco used the net proceeds to provide a US dollar loan of € 482,000,000 to its US sister company [US] Inc (hereinafter: US Inc). US Inc is the parent company of the interested party. The currency risk has been hedged by Luxco with an external hedge. US Inc converted the funds from the Luxco loan into euros and subsequently granted a loan of € 482,000,000 to interested party on 1 July 2009. Interested party paid this amount into new shares in its indirect and affiliated subsidiary BV 5, as a result of which interested party obtained a direct interest of 99.996 percent in BV 5. From the paid-up funds, BV 5 provided two loans within the fiscal unity: a loan of € 191,000,000 to BV 2 and a loan of € 291,000,000 to BV 3. BV 2 and BV 3 used the funds obtained from these loans to pay off the ECF debt and the debt to Luxco, respectively. Luxco repaid its ECF debt on 1 July 2009. On 13 and 14 December 2010, BV 2 and BV 3 took out loans under the ECF amounting to € 197,000,000 and € 300,000,000 respectively. These amounts were equal to the principal and outstanding interest of their debts to BV 5. With the proceeds of these loans, BV 2 and BV 3 repaid their debts to BV 5. BV 5 distributed the net interest income as dividend and repaid € 482,000,000 of capital to interested party. Interested party repaid its debt to US Inc on 14 December 2010 (including outstanding interest). US Inc repaid its debt to Luxco on 14 ...

A Dutch company, Lender B.V., had acquired companies through a private equity structure. The Dutch company that had been set up for the purpose of the acquisition was financed by subordinated loans payable to related parties established on the island of Guernsey. In the tax return for the Dutch company interest in the amount of € 13,157,632 was deducted in the taxable income based on an interest rate of 11,5 – 14 percent. The tax authorities denied the deduction, as the financing arrangement was considered abusive. Decision of the Supreme Court The Court decided in favor of the tax authorities. The interest on the loans was determined to 2.5% (instead of the agreed 11.5 – 14%). This interest was not deductible, because granting of the loans was considered as abusive. Furthermore, an Arrangement Fee of € 8.4 mio. could not be charged at once, but had to be capitalised. Click here for English translation Click here for other translation ...

To acquire companies and resell them with capital gains a French Investment Fund distributed the capital of its investors (€ 5.4 billion in equity) between a French Fund Commun de Placement à Risques (FCPRs) and British Ltds managed by the French Investment Fund. For the purpose of acquiring the [X] group (the target), the French Investment Fund set up three legal entities in the Netherlands, [Y] UA, [B] BV, and [C] BV (the acquisition holding company). These three joint taxed entities are shown as Fiscal unit [A] below. The capital to be used for the acquisition of [X] group was divided into four FCPRs that held 30%, 30%, 30% and 10% in [Y] respectively. To get the full amount needed for the acquisition, [Y] members provided from their equity to [Y]: (i) member capital (€ 74.69 million by the FCPRs, € 1.96 million by the Fund Management, € 1.38 million by [D]) and (ii) investment in convertible instruments (hybrid loan at 13% per annum that is not paid, but added interest-bearing: € 60.4 million from the FCPRs and € 1.1 million from [D]). Within Fiscal unit [A], all amounts were paid in [B], which provided the acquisition holding company [C] with € 72.64 million as capital and € 62.36 million as loan. [C] also took out loans from third parties: (i) a senior facility of € 113.75 million from a bank syndicate and (ii) a mezzanine facility of € 35 million in total from [D] and [E]. On November 22, 2010, the French [F] Sàrl controlled by the French Investment Fund agreed on the acquisition with the owners of the target. “Before closing”, [F] transferred its rights and obligations under this agreement to [C], which purchased the target shares on January 21, 2011 for € 265 million, which were delivered and paid on January 31, 2011. As a result, the target was removed from the fiscal unit of the sellers [G] as of 31 January 2011 and was immediately included in the fiscal unit [A]. [C] on that day granted a loan of € 25 million at 9% to its German subsidiary [I] GmbH. Prior to the transaction the sellers and the target company had agreed that upon sale certain employees of the target would receive a bonus. The dispute is (i) whether the convertibles are a sham loan; (ii) if not, whether they actually function as equity under art. 10 (1) (d) Wet Vpb; (iii) if not, whether their interest charges are partly or fully deductible business expenses; (iv) if not, or art. 10a Wet Vpb stands in the way of deduction, and (v) if not, whether fraus legis stands in the way of interest deduction. Also in dispute is (vi) whether tax on the interest received on the loan to [I] GmbH violates EU freedom of establishment and (viii) whether the bonuses are deducted from the interested party or from [G]. Amsterdam Court of Appeal: The Court ruled that (i) it is a civil law loan that (ii) is not a participant loan and (iii) is not inconsistent or carries an arm’s length interest and that (iv) art. 10a Wet Vpb does not prevent interest deduction because the commitment requirement of paragraph 4 is not met, but (v) that the financing structure is set up in fraud legislation, which prevents interest deduction. The Court derived the motive from the artificiality and commercial futility of the financing scheme and the struggle with the aim and intent of the law from the (i) the norm of art. 10a Corporate Income Tax Act by avoiding its criteria artificially and (ii) the norm that an (interest) charge must have a non-fiscal cause in order to be recognized as a business expense for tax purposes. Re (vi), the Court holds that the difference in treatment between interest on a loan to a joined tax domestic subsidiary and interest on a loan to an non-joined tax German subsidiary is part of fiscal consolidation and therefore does not infringe the freedom of establishment. Contrary to the Rechtbank, the Court ruled ad (viii) that on the basis of the total profit concept, at least the realization principle, the bonuses are not borne by the interested party but by the sellers. Excerpts regarding the arm’s length principle “In principle, the assessment of transfer prices as agreed upon between affiliated parties will be based on the allocation of functions and risks as chosen by the parties. Any price adjustment by the Tax and Customs Administration will therefore be based on this allocation of functions and risks. In this respect it is not important whether comparable contracts would have been agreed between independent parties. For example, if a group decides to transfer the intangible assets to one group entity, it will not be objected that such a transaction would never have been agreed between independent third parties. However, it may happen that the contractual terms do not reflect economic reality. If this is the case, the economic reality will be taken into account, not the contractual stipulation. In addition, some risks cannot be separated from certain functions. After all, in independent relationships, a party will only be willing to take on a certain risk if it can manage and bear that risk.” “The arm’s-length principle implies that the conditions applicable to transactions between related parties are compared with the conditions agreed upon in similar situations between independent third parties. In very rare cases, similar situations between independent parties will result in a specific price. In the majority of cases, however, similar situations between independent third parties may result in a price within certain ranges. The final price agreed will depend on the circumstances, such as the bargaining power of each of the parties involved. It follows from the application of the arm’s-length principle that any price within those ranges will be considered an acceptable transfer price. Only if the price moves outside these margins, is there no longer talk of an arm’s-length price since a third party acting in ...