The case concerned interest payments of €15,636,270 on loans granted to finance the acquisition of shares in X-Group. In its corporate income tax return for FY2011, “Holding B.V.” had deducted an interest expense of €2,478,638 from its taxable profit, considering that the remaining part of its interest expenses were excluded from tax deductions under the interest limitation rule in Article 10a of the Corporate Income Tax Act. The tax authority disallowed tax deductions for the full amount refering to both local interest limitation rules and general anti-avoidance principles. It found that the main motive of the complex financial arrangement that had been set up to finance the acquisition of shares in the X-Group was to obtain tax benefits. An appeal was filed in which “Holding B.V.” now argued that the full amount of interest on the loans could be deducted from its taxable profits. It also argued that a loan fee could be deducted from its taxable profits in a lump sum. The District Court and the Court of Appeal largely ruled in favour of the tax authorities. An appeal and cross-appeal was then filed with the Supreme Court. Judgement of the Supreme Court. The Supreme Court found the principal appeal by “Holding B.V.” well-founded and partially reversed the judgment of the Court of Appeal. Excerpts in English “4.3.3 Article 10a(1) opening words and (c) of the Act aims to prevent the Dutch tax base from being eroded by the deduction of interest due on a debt incurred arbitrarily and without business reasons. This is the case if, within a group of affiliated entities, the method of financing a business-based transaction is prompted to such an extent by tax motives – erosion of the Dutch tax base – that it includes legal acts that are not necessary for the realisation of those business-based objectives and that would not have been carried out without those tax motives (profit drain). 4.3.4 In the genesis history of section 10a of the Act, it has been noted that the scope of this section is limited to cases of group profit drainage. Here, it must be assumed that an entity does not belong to the taxpayer’s group if that entity is not considered to be an associated entity under section 10a(4) of the Act.8 This means that Article 10a(1) chapeau and (c) of the Act lacks application in the case where, although the debt incurred by the taxpayer is related to the acquisition or expansion of an interest in an entity subsequently related to him (the taxpayer), that debt was incurred with another entity not related to him (the taxpayer). This is therefore the case even if this other entity has a direct or indirect interest in the taxpayer, or if this other entity is otherwise related to the taxpayer. This applies even if, in that case, the debt is not predominantly based on business considerations. As a rule, this situation does not fall within the scope of Section 10a(1) opening words and (c) of the Act. 4.3.5 The circumstance that, in the case referred to above in 4.3.4, Article 10a(1) opening words and (c) of the Act does not, as a rule, prevent interest from being eligible for deduction when determining profit, does not, however, mean that such deduction can then be accepted in all cases. Deduction of interest, as far as relevant here, cannot be accepted if (a) the incurring of the debt with the entity not related to the taxpayer is part of a set of legal transactions between affiliated entities, and (b) this set of legal transactions has been brought about with the decisive purpose of thwarting affiliation within the meaning of Section 10a(4) of the Act. Having regard to what has been considered above in 4.3.3 and 4.3.4 regarding the purpose of Section 10a(1) opening words and (c) of the Act, the purpose and purport of that provision would be thwarted if such a combination of legal acts could result in the deduction of that interest not being able to be refused under that provision when determining profits. 4.4 With regard to part A of plea II, the following is considered. 4.4.1 Also in view of what has been set out above in 4.3.1 to 4.3.5, the circumstances relevant in this case can be summarised as follows. (i) The loans referred to above in 2.5.3 are in connection with the acquisition of an interest in an entity that is subsequently a related entity to the interested party (the top holder). (ii) Sub-Fund I is a related entity to interested party within the meaning of section 10a(4) of the Act (see above in 2.3.1). (iii) Sub-Fund V is not such a related entity (see above in 2.3.2 and 2.3.5). (iv) All investors who participate as limited partners in LP 1 also and only participate as limited partners in LP 1A, so that sub-fund I and sub-fund V are indirectly held by the same group of investors. (v) In relation to both sub-funds I and V, the Court held – uncontested in cassation – that they are subject to corporation tax in Guernsey at a rate of nil. 4.4.2 The circumstances described above in 4.4.1 mean that the part of each of the loans granted by sub-fund V to the interested party does not, in principle, fall within the scope of section 10a(1)(c) of the Act. However, based on the same circumstances, no other inference is possible than that, if this part of each of the loans had been provided by sub-fund I and not by sub-fund V, this part would unquestionably fall within the purview of Section 10a(1)(c) of the Act, and the interested party would not have been able to successfully invoke the rebuttal mechanism of Section 10a(3)(b) of the Act in respect of the interest payable in respect of that part. 4.4.3 As reflected above in 3.2.2, the Court held that, in view of the contrived insertion of LP 1A into the structure, the overriding motive for the allocation ...

At issue was the point in time where intra-group receivables in the form of dividends denominated in a foreign currency could be said to have been received by the Dutch shareholder “DPP B.V.” for tax purposes. The Dutch participation exemption applies to dividends up to the point at which such a receivable must be capitalized as a separate asset in the balance sheet. Only from that point on would any foreign exchange loss or gain be tax deductible (or taxable). The District Court and the Court of Appeal ruled in favor of the tax authorities. Judgement of the Supreme Court The Dutch Supreme Court declared the appeal unfounded and upheld the judgment of the Court of Appeal. Click here for English translation Click here for other translation ...

“Lux Credit B.V.” took out various credit facilities from related parties [company name 2] s.a.r.l. and [company name 3] s.a.r.l. – both resident in Luxembourg. These were financings whereby “Lux Credit facility B.V.” could draw funds (facilities) up to a pre-agreed maximum amount. In doing so, “Lux Credit B.V.” owed both interest and “commitment fees”. The commitment fees were calculated on the maximum amount of the facility. Interest and commitment fees were owed. The interest payable to [company name 2] and [company name 3], respectively, was calculated by deducting the commitment fees from the interest payable on the amount withdrawn, with interest payable on the amount withdrawn, the commitment fees owed after the due date and the interest owed after the due date. In its returns for the current financial years, “Lux Credit B.V.” charged both interest and commitment fees against taxable profit. Following an audit, an assessment of additional taxable income was issued for the financial years 2012/2013 – 2016/2017. According to the tax authorities, the financial arrangement was not at arm’s length. The interest rate and commitment fees were adjusted and part of the loans were classified as equity. A complaint was filed by “Lux Credit B.V.” Judgement of the District Court The Court found mainly in favour of Credit Facility B.V.. It upheld most of the adjustments relating to commitment fees, but overturned the adjustment to the interest rate. According to the Court, Lux Credit B.V. was entitled to an interest deduction for the years under review, calculated at the contractually agreed interest rate on the amounts actually borrowed. Excerpts “51. With regard to the transfer pricing documentation, the court considers the following. Although the documentation referred to in Section 8b(3) of the 1969 Vpb Act was not available at the time the defendant requested it, the claimant has remedied this defect by again preparing records to substantiate the conditions surrounding the facilities. In the court’s opinion, the defendant did not make it plausible with what it argued that the claimant’s administration contains such defects and shortcomings that it cannot serve as a basis for the profit calculation that must lead to the conclusion that the claimant did not file the required return.10 The court also took into account that the parliamentary history of Section 8b of the 1969 Vpb Act noted that the documentation requirement of Section 8b(3) of the 1969 Vpb Act relates to the availability of information necessary to assess whether the prices and conditions(transfer prices) used in affiliated relationships qualify as arm’s length. 11 In the court’s opinion, the defendant has not argued sufficiently to conclude that the transfer-pricing data further collected, prepared and documented by the claimant and the documents that were present at [company name 2] and [company name 3] on the determination of the credit ratings are so deficient that the claimant has not complied with the obligations of Section 8b(3) of the 1969 Income Tax Act. The fact that source documents for the period, in which the transactions were entered into, have not been preserved and the defendant has comments on the data used by the claimant and disagrees with the outcomes of the claimant, do not alter this.” “56. In the court’s view, the defendant was right to make the adjustments in respect of commitment fees on facilities 1 and 3 for the years under review. The defendant was also correct in imposing the 2014/2015, 2015/2016 and 2016/2017 assessments to correct the commitment fees on Facility 7bn. In assessing whether the defendant was justified in making those corrections, the court relied on what [company name 1] and [company name 2] and [company name 3] agreed on civilly. The agreements between [company name 1] and [company name 2] and [company name 3] explicitly distinguish between interest due and commitment fees due. The court therefore rejects the plaintiff’s position that it must be assessed whether the total of the commitment fee and interest costs remained within the margins of Section 8b of the 1969 Vpb Act, and the commitment fee and interest costs should be considered together as an “all-in rate”. That the terms of Facilities 1, 3 and 7bn show similarities with Payment in Kind loans, as claimed by the claimant, does not make it necessary in this case to deviate from what the parties agreed under civil law. Indeed, the defendant has argued, with reasons, that stipulating headroom for the purpose of funding interest that may be credited, if the same facts and circumstances are present, is not usual in the market but it is usual in the market that over interest to be credited, a charge arises only at the time of the maturity of the interest. It is not usual that a charge – in this case in the form of commitment fees – is already due before the due date. This involves a double burden, as interest is also charged on the commitment fee. On the other hand, the plaintiff has not made it plausible that independent third-party parties were willing to agree such terms in similar circumstances, nor has it made its economic reality plausible. The court also took into account that the claimant did not make any calculations, prior to setting the maximum amount and commitment fees. 57. In the court’s view, the defendant was right to make the adjustments in respect of the commitment fees and interest payable thereon in respect of Facility 5. The defendant has made it plausible that such an agreement between independent third parties will not be concluded. The defendant was right to point out the following aspects:” “In the court’s opinion, with what the defendant has put forward and also in view of what the claimant has put forward in response, the defendant has failed to make it plausible that the interest rates agreed by [company name 1] , [company name 2] and [company name 3] regarding facilities 1, 3 and 7bn are not in line with what would have been agreed by independent parties in the ...

After the case was remanded by the Supreme Court in 2022, the Court of Appeal classified a Luxembourg company’s shareholder loan to “X Shareholder Loan B.V.” of €57,237,500 as an ‘imprudent loan’, with the result that the interest due on that loan was only tax deductible to a limited extent. The remaining interest was non-deductible because of fraus legis (evasion of the law). Allowing the interest due on the shareholder loan to be deductible would result in an evasion of tax, contrary to the purpose and purport of the 1969 Corporation Tax Act as a whole. The purpose and purport of this Act oppose the avoidance of the levying of corporate income tax, by bringing together, on the one hand, the profits of a company and, on the other hand, artificially created interest charges (profit drainage), in an arbitrary and continuous manner by employing – for the achievement of in itself considered business objectives – legal acts which are not necessary for the achievement of those objectives and which can only be traced back to the overriding motive of bringing about the intended tax consequence (cf. HR 16 July 2021, ECLI:NL:HR:2021:1152). Click here for English translation Click here for other translation ...

“X Shareholder Loan B.V.” and its subsidiaries had been set up in connection with a private equity acquisition structure. In 2011, one of “X Shareholder Loan B.V.”‘s subsidiaries bought the shares of the Dutch holding company. This purchase was partly financed by a loan X bv had obtained from its Luxembourg parent company. The Luxembourg parent company had obtained the the funds by issuing ‘preferred equity certificates’ (PECs) to its shareholders. These shareholders were sub-funds of a private equity fund, none of which held a direct or indirect interest in “X Shareholder Loan B.V.” of more than one-third. The tax authorities found, that deductibility of the interest paid by “X Shareholder Loan B.V.” to its Luxembourg parent was limited under Section 10a Vpb 1969 Act. The Court of Appeal upheld the assessment. According to the Court, whether there is an intra-group rerouting does not depend on whether the parties involved are related entities within the meaning of section 10a, i.e. whether they hold an interest of at least one-third. Instead, it should be assessed whether all the entities involved belong to the same group or concern. This does not necessarily require an interest of at least one-third. No satisfied with the decision “X Shareholder Loan B.V.” filed an appeal with the Supreme Court. Judgement of the Supreme Court The Supreme Court declared the appeal well-founded and remanded the case to Court of Appeal for further consideration of the issues that had not addressed by the court in its previous decision. Click here for English translation Click here for other translation ...

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 ...

This case concerns a private equity takeover structure with apparently an intended international mismatch, i.e. a deduction/no inclusion of the remuneration on the provision of funds. The case was (primarily) decided by the Court of Appeal on the basis of non-business loan case law. The facts are as follows: A private equity fund [A] raised LP equity capital from (institutional) investors in its subfund [B] and then channelled it into two (sub)funds configured in the Cayman Islands, Fund [C] and [D] Fund. Participating in those two Funds were LPs in which the limited partners were the external equity investors and the general partners were Jersey-based [A] entities and/or executives. The equity raised in [A] was used for leveraged, debt-financed acquisitions of European targets to be sold at a capital gain after five to seven years, after optimising their EBITDA. One of these European targets was the Dutch [F] group. The equity used in its acquisition was provided not only by the [A] funds (approximately € 401 m), but also (for a total of approximately € 284 m) by (i) the management of the [F] group, (ii) the selling party [E] and (iii) co-investors not affiliated with [A]. 1.4 The equity raised in the [A] funds was converted into hybrid, but under Luxembourg law, debt in the form of preferred equity shares: A-PECs (€ 49 m) and B-PECs (€ 636 m), issued by the Luxembourg mother ( [G] ) of the interested party. G] has contributed € 43 million to the interested party as capital and has also lent or on-lent it approximately € 635 million as a shareholder loan (SHL). The interested party has not provided [G] with any securities and owes [G] over 15% interest per year on the SHL. This interest is not paid, but credited. The SHL and the credited interest are subordinated to, in particular, the claims of a syndicate of banks that lent € 640 million to the target in order to pay off existing debts. That syndicate has demanded securities and has stipulated that the SHL plus credited interest may not be repaid before the banks have been paid in full. The tax authority considers the SHL as (disguised) equity of the interested party because according to him it differs economically hardly or not at all from the risk-bearing equity (participation loan) c.q. because this SHL is unthinkable within the OECD transfer pricing rules and within the conceptual framework of a reasonable thinking entrepreneur. He therefore considers the interest of € 45,256,000 not deductible. In the alternative, etc., he is of the opinion that the loan is not business-like, that Article 10a prevents deduction or that the interested party and its financiers have acted in fraudem legis. In any case he considers the interest not deductible. According to the Court of Appeal, the SHL is a loan in civil law and not a sham, and is not a participation loan in tax law, because its term is not indefinite, meaningless or longer than 50 years. However, the Court of Appeal considers the loan to be non-business because no securities have been stipulated, the high interest is added, it already seems impossible after a short time to repay the loan including the added interest without selling the target, and the resulting non-business risk of default cannot be compensated with an (even) higher interest without making the loan profitable. Since the interested party’s mother/creditress ([G] ) is just as unacceptable as a guarantor as the interested party himself, your guarantor analogy ex HR BNB 2012/37 cannot be applied. Therefore, the Court of Appeal has instead imputed the interest on a ten-year government bond (2.5%) as business interest, leading to an interest of € 7,435,594 in the year of dispute. It is not in dispute that 35,5% of this (€2,639,636) is deductible because 35,5% of the SHL was used for transactions not contaminated (pursuant to Section 10a Vpb Act). The remaining €4,795,958 is attributable to the contaminated financing of the contaminated acquisition of the [F] Group. The Court of Appeal then examined whether the deduction of the remaining € 4,795,958 would be contrary to Article 10a of the Dutch Corporate Income Tax Act or fraus legis. Since both the transaction and the loan are tainted (Article 10a Corporate Income Tax Act), the interested party must, according to paragraph 3 of that provision, either demonstrate business motives for both, or demonstrate a reasonable levy or third-party debt parallelism with the creditor. According to the Court of Appeal, it did not succeed in doing so for the SHL, among other things because it shrouded the financing structure behind [G], in particular that in the Cayman Islands and Jersey, ‘in a fog of mystery,’ which fog of mystery remains at its evidential risk. On the basis of the facts which have been established, including the circumstances that (i) the [A] funds set up in the Cayman Islands administered the capital made available to them as equity, (ii) all LPs participating in those funds there were referred to as ‘[A] ‘ in their names, (iii) all those LPs had the same general partners employed by [A] in Jersey, and (iv) the notification to the European Commission stated that the Luxembourg-based [H] was acquiring full control of the [F] group, the Court formed the view that the PECs to [G] had been provided by the [A] group through the Cayman Islands out of equity initially contributed to [B] LP by the ultimate investors, and that that equity had been double-hybridised through the Cayman Islands, Jersey and Luxembourg for anti-tax reasons. The interested party, on whom the counter-evidence of the arm’s length nature of the acquisition financing structure rested, did not rebut that presumption, nor did it substantiate a third-party debt parallelism or a reasonable levy on the creditor, since (i) the SHL and the B-PECs are not entirely parallel and the interest rate difference, although small, increases exponentially through the compound interest, (ii) the SHL is co-financed by A-PECs, whose interest rate ...

X bv is part of the worldwide X group, a financial service provider listed on the US stock exchange. At issue is deductibility of interest payments by X bv on a € 482 million loan granted by the parent company, US Inc. In 2010 the original loan between X bv and US Inc. was converted into two loans of € 191 million and € 291 million granted by a Luxembourg finance company in the X group, to two jointly taxed subsidiaries of X bv. According to the Dutch Tax Authorities, the interest payments on these loans falls under the provisions in Dutch art. 10a of the VPB Act 1969 whereby interest deductions are restricted. The Court of appeal disagreed and ruled in favor of X bv. This decision was appealed to the Supreme Court by the tax authorities. In a preliminary ruling, the Advocate General advises the Supreme Court to dismiss the appeal. According to the Advocate General, X bv is entitled to the interest deduction. The conditions of the loans are at arm’s length. Taxpayers are free in their choice of financing their participations, including choosing financing arrangements based on tax reasons. The loans have not been taken out on the basis of non-business (shareholder) motives. Nor is it important that the interest deducted in the Netherlands is also deducted in the US and France (under the Dutch provisions applicable in the years of the disputed transactions). Click here for 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 ...

The taxpayer is registered and incorporated in the Republic of South Africa and carries on business in the petrochemical industry. It has some of its subsidiaries in foreign jurisdictions. Business activities include the importation and refinement of crude oil. This matter concerns the analysis of supply agreements entered into between the XYZ Corp and some of its foreign subsidiaries. It thus brings to fore, inter alia the application of the South African developing fiscal legal principles, namely, residence based taxation, section 9D of the Income Tax Act 58 of 1962 and other established principles of tax law, such as anti-tax avoidance provisions and substance over form. Tax avoidance is the use of legal methods to modify taxpayer’s financial situation to reduce the amount of tax that is payable SARS’s ground of assessment is that the XYZ Group structure constituted a transaction, operation or scheme as contemplated in section 103(1) of the Act. The structure had the effect of avoiding liability for the payment of tax imposed under the Act. The case is based on the principle of substance over form, in which event the provisions of section 9D will be applicable. Alternatively the respondent’s case is based on the application of section 103 of the Act. XYZ Group denies that the substance of the relevant agreements differed from their form. It contends that both in form and substance the relevant amounts were received by or accrued to XYZIL from sale of crude oil by XYZIL to SISIL. XYZ Group states that in order to treat a transaction as simulated or a sham, it is necessary to find that there was dishonesty. The parties did not intend the transaction to have effect in accordance with its terms but intended to disguise the transaction. The transaction should be intended to deceive by concealing what the real agreement or transaction between the parties is. Substance over form: If the transaction is genuine then it is not simulated, and if it is simulated then it is a dishonest transaction, whatever the motives of those who concluded the transaction. The true position is that „the court examines the transaction as a whole, including all surrounding circumstances, any unusual features of the transaction and the manner in which the parties intend to implement it, before determining in any particular case whether a transaction is simulated. Among those features will be the income tax consequences of the transaction. Tax evasion is of course impermissible and therefore, if a transaction is simulated, it may amount to tax evasion. But there is nothing impermissible about arranging one’s affairs XYZ as to minimise one’s tax liability, in other words, in tax avoidance. If the revenue authorities regard any particular form of tax avoidance as undesirable they arefree to amend the Act, as occurs annually, to close anything they regard as a loophole. That is what occurred when s 8C was introduced. Once that is appreciated the argument based on simulation must fail. For it to succeed, it required the participants in the scheme to have intended, when exercising their options to enter into agreements of purchase and sale of shares, to do XYZ on terms other than those set out in the scheme. Before a transaction is in fraudem legis in the above sense, it must be satisfied that there is some unexpressed agreement or tacit understanding between the parties. The Court rules as follows: The question is whether the substance of the relevant agreements differs from form. The interposition of XIXL and the separate reading of “back-to-back” agreements take XIXL out of the equation. Regrettably no matter how the appellant’s witnesses try to dress the contracts and their implementation, the surrounding circumstances; implementation of the uncharacteristic features of the transaction point to none other than disguised contracts. The court can only read one thing not expressed as it is; tax avoidance. Based on the evidence the court concludes that the purpose of relevant supply agreements was to avoid the anticipated tax which would accrue to XYZIL, a CFC if it sold the crude oil directly to XYZ. The court has concluded that the whole scheme and or the implementation of supply agreements is a sham. The court, therefore cannot consider the facsimile argument in isolation to support the averment that the contracts were concluded in IOM. Furthermore there is nothing before court to the effect that XYZIL has an FBE with a truly active business with connections to South Africa being used for bona fide non- tax business purposes. There is not even a shred of evidence alluding to the existence of an FBE. Section 76 (2) empowers SARS with a discretion to remit a portion or all of the additional tax assessment in terms of section 76 (1). Additional tax prescribed in Section 76(1) is 200% of the relevant tax amount. The appeal is dismissed. The assessments by the South African Revenue Services for 2005, 2006 and 2007 tax years as well as interest and penalties, are confirmed ...