“AB SARL” had in its tax return treated mandatory redeemable preferred shares (MRPS) as debt and the payments made under the MRPS as deductible interest. The tax authorities disagreed and qualified the MRPS as equity and the payments as non-deductible dividends. On that basis an assessment was issued. Judgement of the Administrative Court The Court upheld the assessment issued by the tax authorities and qualified the mandatory redeemable preferred shares (MRPS) as equity. Click here for English translation Click here for other translation ...

A Dutch company, Lender BV, provided loans to an affiliated Russian company on which interest was paid. The Dispute was (1) whether the full amount of interest should be included in the taxable income in the Netherlands, or if part of the “interest payment” was subject to the participation exemption or (2) whether the Netherlands was required to provide relief from double taxation for the Russian dividend tax and, if so, to what amount. The Tax court found it to be a loan and the payments therefor qualified as interest and not dividend. The participation exemption does not apply to interest. In addition, the court ruled that the Russian thin-capitalization rules did not have an effect on the Netherlands through Article 9 of the Convention for the avoidance of double taxation between the Netherlands and Russia. Application of the participation exemption was not an issue. In the opinion of the court, a (re) qualification of interest as a dividend on the basis of the thin capitalization rules in Russia cannot be based on Article 10 of the Treaty. This has not been explicitly included in the text of the treaty and, in the opinion of the court, could not have been the intention of the countries in the absence of a concrete substantiation with facts and / or circumstances. Since the income on the basis of Article 11 of the Treaty cannot be taxed in Russia, the Netherlands is not required to provide relief from double taxation for the Russian dividend tax deducted therefrom. The appeal is unfounded. Click here for other translation ...