ECLI:NL:GHAMS:2021:724
Authority Amsterdam
Court of Appeal
Date of decision 23-02-2021
Date of
publication 17-03-2021
Case number 20/00185
& 20/00193
Fields
of law Tax law Special
features Appeal Content indication
Viditax (FutD), 17-03-2021
FutD 2021-0997
with annotation from Fiscaal up to Date V-N Vandaag 2021/804
NTFR 2021/1401 with annotation from R. van der
Wilt V-N
2021/21.1.6
NLF 2021/0615 with annotation by Arco Bobeldijk
Pronunciation
characteristics
20/00185 and 20/00193 23 February 2021
to the
appeal of
[X] B.V., Amsterdam, interested party,
Agent: F.G. Barnard (Deloitte),
and to the
appeal lodged by
the inspector of the tax
authorities, the inspector,
against
the judgment of 10 February 2020 in the case of HAA 17/476 of the rechtbank Noord-
Holland
(hereinafter: the District Court) in the case between the
interested party and the Inspector.
1.1.On 30 April 2016, the tax inspector imposed
a corporation tax assessment on the interested party for the 2011 financial
year (hereinafter: the assessment), calculated on the basis
of a taxable amount of €3,862,679. The loss from previous years set off
by decision amounts to €138.
1.2.In a judgment dated 22 December 2016, the
Inspector - after an objection had been made - upheld the tax assessment and
the decision on the set-off of losses. The interested party lodged an appeal
with the court.
1.3.The court decided the appeal as follows in
its decision of 10 February 2020 (the interested party and the inspector are
referred to as 'the claimant' and 'the defendant'):
"The Court:
- declares the action to be well founded.
- Annuls the judgment on the objection.
-
reduces
the assessment to nil, sets the loss at an amount of € 5,939,824 and determines
that this judgment shall replace the annulled judgment on objection.
- order the defendant to pay the plaintiff's
legal costs in the amount of € 3,150; and
- Instructs the defendant to reimburse the
plaintiff for the court fee of € 333.
1.4.The Inspector filed an appeal with the
Court of Appeal against the judgment of the District Court on 13 March 2020. The interested party has
submitted a statement of defence.
1.5.The interested party lodged an appeal with
the Court of Appeal on 19 March 2020. The Inspector submitted a defence.
1.6
The parties submitted further
documents by letters dated 17 September 2020.
1.7.By letter to the parties dated September
28, 2020, the Court requested information from the interested party and asked
the parties to submit the pleadings submitted at the court hearing.
1.8.The parties submitted further documents, as
well as pleadings for the Court's hearing, on 29 September 2020.
1.9.The hearing took place on 30 September
2020. At the end of the hearing, the investigation was closed, except that the
interested party was requested - preferably in consultation with the Inspector
- to submit a further document containing a numerical elaboration
(specification) of the points of contention submitted to the Court, in particular regarding the disputed deduction and
capitalization of acquisition and financing costs.
An
official report of the proceedings at the hearing has been drawn up and is
enclosed with this judgment.
1.10.
A
further document, with three appendices, was received from the interested party
by email, dated 19 October 2020. The Inspector responded by letter dated 22
October 2020.
1.11.
The
parties informed the Court (the Inspector on 5 November 2020 and the Interested
Party on 12 November 2020) that they did not need a (further) hearing. The
investigation was then closed.
2.1.
In its
ruling, the court found the following facts:
“1.1. [F] , a [g] private equity firm, has managed several funds
since 1995.
1.2.One of these funds is [H]
, a fund that was launched in 2007 and has a committed capital of € 1.2
billion.
1.3.The potential investors were informed by
means of a Private Placement Memorandum dated November 2007, which sets out the
investment strategy of [H] 'to pursue the growing and attractive market of
infrastructure opportunities, primarily in Northern and Eastern Europe'. The
duration of the fund is 12 years, renewable 3 times by 1 year. If the structure
is not settled after 15 years and no sale or exit has taken place with regard to the targets, the investors will obtain shares
in the targets.
1.4.The working method is also described in the
'[I] Annual Review 2010'. The fund aims to achieve capital gains from
investments in portfolio companies or targets.
1.5.
The
'Financial report' of [H] of 2011 states, among other things, the following:
H] (General
Partner) LP is the General Partner of [H] (No. 1) LP, [H] (No. 2) LP, [H] (No.
3) LP and [H] (No. 4) LP. The four Limited Partnerships (together "the
Limited Partnerships") invest in parallel under the terms of a
Co-lnvestment Deed dated 17 November 2008.
2. In mid-2010, the investment opportunity in
the [N], called Project [O], was identified by [H]. The [N] consists of [P]
B.V. as holding company, [Q] B.V. and the subsidiaries of [Q] B.V.
3. At the end of August 2010, the investment
process was started by [H].
3.1.On 9 November 2010, a presentation was
given to the Investment Advisory Committee of [H]. In the presentation, the
findings of the due diligence carried out in the fields of legal, finance, tax,
environmental and industry, as well as the market research, were mentioned and
calculated. The presentation was based on a single Internal Rate of Return on
the investment, which depends on the future scenario but not on the form in
which the funds are provided (loans or equity).
3.2.
On 1
December 2010, a press release was issued stating that [H] would be taking over
[N].
3.3.After notification of the acquisition to
the Netherlands Competition Authority (NMa) on 30
November 2010, the NMa confirmed on [date] 2010 that
no licence was required for the acquisition.
According to the notification, [H] will acquire full control of [N]. It is
expected that the management of [N] (hereinafter also referred to as:
management) will acquire an indirect minority stake. This minority
participation will not acquire control.
3.4.After a request for advice to the works
council of [Q] B.V. dated 18 November 2010 and numerous consultations, the
management of [N] received a positive advice from the works council on 30
December 2010. In so far as relevant here, the request for advice states:
' [H]
intends to take a majority stake in the current company and will set up a Dutch
company for this purpose which will make the acquisition. [H] can finance the
acquisition of [N] from its own resources. However, [F] has the intention to
obtain approximately 50% of the required financing from external financiers at
the time of the completion of the transaction'.
4. [H] initially consisted of four limited
partnerships (LP), namely [J] LP (hereinafter: [J] ),
[K] LP (hereinafter: [K] ), [L] LP (hereinafter: [L] ) and [M] LP (hereinafter:
[M] ).
4.1.The LPs all have the same general partner,
namely [H] (General Partner) LP, with [H] Limited as the general partner
(hereinafter, the General Partner). The General Partner manages [H] and the [S]
and makes investment decisions on behalf of the Limited Partners. The Limited
Partnership Agreements ("LPAs") form the legal basis of the LPs. The
General Partner's control over [H] and the LPs is set forth in Article 5 of the
LPAs and the [H] Co-Investment Deed. The General Partner is entitled to the
carried interest.
4.2.The [g] company [T] advises the General
Partner. To this end, the General Partner has entered into an ongoing
Investment Advisory Agreement ("IAA") with [T]. In addition, an
Investment Advisory Committee ("IAC") has been appointed. The IAC
advises the General Partner in the evaluation of the investment opportunity.
According to the notification to the NMa, under 1.1,
the shares in the General Partner ([H] ) are held
indirectly by [U] B.V. The shares in
[U] B.V.
are held, according to the notification, by the partners of [T]. No person or
undertaking has sole or joint control in [U] B.V. and/or [T]
, according to the notification. [T] has no direct or indirect interest
in the General Partner ([H] ).
4.3.The investors participate in the LPs as
Limited Partners. To become a member of the LPAs, investors sign subscription
forms. On the basis of these subscription forms,
investors become Limited Partners of the LPs. The investors will enter into so-called commitments to provide capital to the
LPs, consisting of either capital or loans (Article 1.1(v) of the LPAs). The
committed amounts are provided following a draw down notice from the General
Partner to the Limited Partners (investors). According to Article 7 of the
LPAs, the results are shared out among the commitments.
4.4.The exhibits include a portion of an
Amended and Restated Administration Agreement dated March 15, 2013 designating
[I] Management Limited as the administrator of the LPs.
4.5.LPs are non-transparent for the purposes of
the Corporation Tax Act 1969 (hereinafter referred to as the LP Act).
5.
The
LPs have set up companies based in Guernsey, namely [V] (hereinafter V), [W]
(hereinafter W), [Aa] (hereinafter Aa) and [Ab] (hereinafter Ab). [J] holds all
the shares in [V] , [K] holds all the shares in [W] ,
[L] holds all the shares in [Aa] and [M] holds all the shares in [Ab] .
6.
[V] , [W] , [Aa] and [Ab] founded [Ac] UA in 2010. [Ac] UA is
a Dutch incorporated cooperative and has [V] (83.8%), [W] (4.1%), [Aa] (9.9%)
and [Ab] (2.2%) as members. The members each have 25% voting rights in [Ac] UA.
7.
In
connection with the takeover of the [N], the plaintiff, [W] B.V. and [Ad] B.V.
were incorporated. The claimant holds all shares in [W] B.V., which in turn
holds all shares in [Ad] B.V. [Ac] UA initially (see below item 12) holds all
shares in the claimant.
8.
Pursuant
to Section 4.8.a of the [J] LPA, the General Partner is authorized to establish
additional '(side car) vehicles' for legal, tax, regulatory or other reasons if
it is in the best interest of one or more Limited Partners.
8.1.
A
fifth LP was thus set up in January 2011: [Ae 1] LP (hereinafter [Ae 2] or Side
Car Vehicle).
8.2.[Ae 2] has the same General Partner as the aforementioned LPs and, like the other LPs, is
non-transparent for the purposes of the Corporate Income Tax Act.
8.3.[Ae 2] holds all the shares in [Ag], which
it incorporated and established in Guernsey ('Ag'). [Ag], unlike [V] , [W] , [Aa] or [Ab] , has no membership rights in [Ac] UA
nor does it hold any shares in the Claimant.
8.4.In [Ae 2]'s LPA of 14 January 2011, clause
3.6 noted that 'the draw down Commitments of each Limited Partner to the Partnership
shall be treated as commitment draw down by the No.1 Partnership and shall
reduce the undrawn commitments of such Limited Partner to the No.1 Partnership
accordingly pursuant to clause 4.8(b) of the No.1 Partnership Agreement'.
8.5.The interests in [J] and [Ae 2] are only
tradable in combination (LPA of [Ae 2] , Article
9.2(a)).
8.6.No subscription forms were prepared for [Ae
2] because the General Partner joined the LPA of [Ae 2] on behalf of the
Limited Partners of [J] . This was possible given the
power of attorney granted to the General Partner under the Limited Partnership
Agreement of [J] .
8.7.In a letter dated 26 November 2010 to [J]'s
investors, the General Partner's Director wrote that [Ae 2] was formed on tax
advice and that the investment through the Side Car Vehicle was economically
considered to be an investment by [J] . The letter
states the following:
'As part
of the acquisition structure being established by the Fund to acquire potential
targets, we intend to establish an English limited partnership to act as an
alternative investment vehicle (the "Side Car Vehicle"), with the
ambition being that investors in [H] (such investors being, the "No.1
Investors" and such partnership being "No.1 Partnership") will
make a portion of their investment in the potential targets through the Side
Car Vehicle rather than through the No.1 Partnership.
Such a
structure is permitted under clause 4.8 of the limited partnership agreement
constituting the No.1 Partnership ("LPA"). [H] acting through its
general partner [H] will act as general partner of the Side Car Vehicle.
We intend to
structure the Fund's investment in these potential targets through a mixture of
shareholder loan (the " [AI1] ") and equity. We have received tax
advice which states that the
No.1
Investors should invest in the [AI1] through the Side Car Vehicle rather than
through the No.1 Partnership. The No.1 Investors would invest in the equity
through the No.1 Partnership, as normal.
Under this
Side Car Vehicle structure, you would fund your pro rata share of the [AI1]
through a draw down being made at the same time as the drawdown by the No.1
Partnership in respect of the equity portion of the Fund's investment in the
potential targets.
Under
clause 4.8(d) of the LPA, no investment may be made through a structure such as
the Side Car Vehicle, if the structure would adversely affect the interests of
any investor, without the affirmative consent of such Limited Partner. We do
not believe that such structure is adverse to the interest of any investor but
if you believe that It may be adverse to your interests then we would ask that
you contact (...) no later than 6 December 2010.
In this
context we specifically draw your attention to the following terms of the LPA,
which are intended to ensure that investors' interests are not adversely
affected by making an investment through a structure such as the Side Car
Vehicle:
i.
Under
clause 4.8(b) of the LPA, investors' commitments directed through the Side Car
Vehicle will be treated as drawndown for the purposes of the LPA.
ii.
Clause
4.8(c) of the LPA requires that the investment made through the Side Car
Vehicle will be treated for the economic purposes of the LPA, as if it was an
investment made by the Partnership (including for Management Profit Share
purposes) and that distributions arising from the Side Car Vehicle's investment
will be taken into account for the purposes of the distribution waterfall. In
addition, we would propose that the establishment costs and any operating costs
of the Side Car Vehicle will be treated as part of the acquisition cost of the
potential targets, and will therefore be borne by all investors in the Fund pro
rata to their respective commitments, and not just by No.1 Investors.
8.8.The minutes of the January 14, 2011 General
Partner's board meeting approved the formation of the Side Car Vehicle / [Ae 2]
and further stated:
'Tax
advice was received which states that the No.1 Investors should invest in the
[shareholder loan] through the Side Car Vehicle rather than through the No.1
Partnership. The No.1 Investors should invest in the equity through the No.1
Partnership, as normal.'
9.
The
acquisition transaction ('closing') of the [N] took place on 1 February 2011
('closing date'). The Share Purchase Agreement (SPA) was signed by [Ad] B.V.
(as buyer) and [Ah] B.V. (as seller) on 11 January 2011. According to the SPA,
the transaction will be completed on the closing date (1 February or another
date to be agreed upon) and the purchase price for the shares of [P] B.V. amounts
to € 322.7 million, increased with an earn-out amount related to an ongoing
project.
10. Schedule 18 to the SPA relates to an Investment
Agreement dated 31 January 2011 setting out the terms on which the
investors/shareholders will invest in the target and finance the acquisition.
The individualised parts of the loans pursuant to the
Intercompany Loan Agreements are referred to herein as Loan Note Instruments
(hereinafter: Loan Notes). For the purposes of this document, Shareholder
Instruments means the shares in Plaintiff, the Loan Notes
and any other instrument evidencing indebtedness to shareholders.
10.1.
Under
Articles 5, 6 and 7 of this Investment Agreement, the Shareholder Instruments
may be transferred subject to conditions. This requires, among other things,
the consent of [Ac] UA.
10.2.
Article
10 of the Investment Agreement sets out how, in the event of a future sale of
the acquired [P] B.V. (exit), the proceeds of this sale will be used for the
purpose of
repayment
of inter alia the Intercompany Loans (the so-called waterfall provision).
Article 10.5 on 'distributions upon an exit' provides that the proceeds of any
sale of [P] B.V. will be used to repay the claims of the creditors and
shareholders. After all external debts have been paid, provisions have been
made for any tax or other exposures of the plaintiff, [W] B.V., [Ad]
B.V. and
[P] B.V. and its subsidiaries and taking into account
and to the extent necessary the selling costs, expenses and other reasonably
incurred transaction costs have been paid, the proceeds of the possible sale of
[P] B.V. will be used in the following order
( i) repayment
of the Intercompany Loans.
(ii)
redemption
of instruments other than the Intercompany Loans, which do not qualify as
shares.
(iii) repayment of the price paid for the shares;
and
(iv) repayment of any surplus to the
shareholders.
11. [Ad] B.V. formed a fiscal unity with [N] as
of 1 February 2011. As of February 3, 2011, the claimant, as parent company,
forms a fiscal unity for corporate income tax purposes with [W] B.V. and [Ad]
B.V. (including the [N] B.V. already joined).
12.
At the
time of the takeover, the sellers of the [N] , the [N]
family, acquired an interest in the claimant. In November 2011, the management
joined as an indirect shareholder via [Ai] B.V. As a result, the management
also acquired part of the subordinated loans to be mentioned. Thereby a shift
of interests took place between [Ac] UA on the one hand and [Aj] B.V. (the family [N] ) on the
other hand.
13.
The
shares in the claimant are held by [Ac] UA (82.3%), [Aj]
B.V. (the family of [N]; 15.5%) and [Ai] B.V. (also referred to in the
documents as [Ai] B.V.; 2.1%). After the boarding of management on 25 November
2011, [V] indirectly holds an interest of 68.87%, [W] indirectly an interest of
3.36%, [Aa] indirectly an interest of 8.10% and [Ab] indirectly an interest of
1.80% in plaintiff. [Aj] B.V. then holds an interest
of 15.51% in the claimant and management an interest of 2.36%. [Ag] holds no (indirect) interest in the claimant.
14.
The
financing of the acquisition took place as follows. On 14 January 2011, the
General Partner sent the draw down notices to the investors. On 28 January
2011, the General Partner allocated the amounts requested from the investors to
the bank accounts of [V] , [W] , [Aa] , [Ab] and [Ag].
14.1.
[V] , [W] , [Aa] and
[Ab] contributed equity to [Ac] UA to the amount of €64,600,000. [Ac] UA
subsequently contributed this amount to the plaintiff as equity. [Aj] B.V. and [Ai] B.V. (also referred to as [Ai] B.V. in
the documents) provided equity to the claimant for an amount of € 12,200,000
and € 4,500,000 respectively. Of the latter amount € 1,910,433 was eventually
taken over by management. A total of € 81.3 million was paid up on the shares
in the claimant.
14.2.
In
addition, [W] , [Aa] , [Ab] , [Ag] and [Aj] B.V. provided subordinated loans (Intercompany Loans or
Loan Notes) to the plaintiff of in total € 135 million (see below). In November
2011, the management joined as indirect shareholders and took over part of the
subordinated loans.
14.3.
The
claimant has paid up capital in [W] B.V. and the latter has subsequently paid up capital in [Ad] B.V. The capital contribution by the
claimant in [W] B.V. has been fully financed with the abovementioned means
obtained from the (indirect) shareholders (subordinated loans and equity).
14.4.
Loans
have also been raised from various banks by means of a Senior Facilities
Agreement (see below).
15.
The
subordinated loans (Intercompany Loans or Loan Notes) totalling
€ 135 million were provided to the plaintiff jointly by [W] ,
[Aa] , [Ab] , [Ag] and [Aj] B.V.
15.1.
The
subordinated loans are set out in three separate agreements, namely
Intercompany Loan Agreement Facility A, Intercompany Loan Agreement Facility B
and Intercompany Loan Agreement Facility C. Principal, interest and term of the
subordinated loans are as follows:
|
Name |
Loaned amount |
Annual interest |
Duration |
|
Facility A |
€
50.000.000 |
11,50 % |
10 years
minus 2 working days |
|
Facility B |
€
45.000.000 |
12,75 % |
10 years
minus 2 working days |
|
Facility
C |
€
40.000.000 |
14,00 % |
10 years
minus 2 working days |
15.2.
Facility B is subordinated to Facility A
and Facility C is subordinated to Facility B and Facility A. The subordinated
loans are all contractually subordinated to the bank financing.
15.3.
The
shareholders participate in the Loan Notes in proportion to their capital
contributions. The Loan Notes cannot be traded separately and are an integral
part of the equity contribution required by the banks.
15.4.
During
the term of the loans, the interest is added to the principal annually and is
only paid when the loans are repaid. In 2011, Plaintiff owed €15,636,270 in
interest on the subordinated loans. Of this, an amount of € 13,157,632 relates
to the Intercompany Loans of [H] and € 2,478,638 relates to the Intercompany
Loans of the family [N] and the managers.
15.5.
The
principal amounts of the Intercompany Loans were provided by the (indirect)
shareholders (hereinafter also referred to as: the lenders) as follows:
- [W] provided 3.44302% of Facility A,
Facility B and Facility C to plaintiff.
- [Aa] provided 8.29838% of Facility A,
Facility B and Facility C to plaintiff.
- [Ab] provided 1.84326% of Facility A,
Facility B and Facility C to plaintiff.
- [Ag] provided 70.52881% of Facility A,
Facility B and Facility C to plaintiff.
- [Aj] B.V.
provided 15.88653% of Facility A, Facility B and Facility C to plaintiff.
16.
The
Intercompany Loan Agreements are dated January 31, 2011 and are virtually
identical. The Facility A Intercompany Loan Agreement
reads as follows (the different text in the Facility B and Facility C
Intercompany Loan Agreements are shown in square brackets):
DATED 31 JANUARY
2011
[Aa]
[Ab]
[Ag]
AND
AS LENDERS
AS
BORROWER
(…)
THIS INTERCOMPANY LOAN AGREEMENT (the "Agreement") is made on 31st January 2011
(1)
[W], a company incorporated in Guernsey
(...), having its registered office at (...), Guernsey, (...) ("[W]").
(2)
[Aa], a company incorporated in Guernsey
(...), having its registered office at (...), Guernsey, (...) ("[Aa]").
(3)
[Ab], a company incorporated in Guernsey
(...), having its registered office at (...), Guernsey, (...) ("[Ab]").
(4)
[Ag], a company incorporated in Guernsey
(...), having its registered office at (...), Guernsey, (...) ("[Ag]").
(5)
[Aj] B.V. , a private company with
limited liability, having its
corporate seat at [place] , the Netherlands (...) ("[Aj]" and, together with [W] , [Aa] , [Ab] and [Ag] ,
collectively the "Lenders"
and each a "Lender").
AND
(6)
[Plaintiff], a private limited liability company incorporated under Dutch law, having its statutory seat in
Amsterdam, the Netherlands (...) (the "Borrower" and, together with the Lenders, collectively the
"Parties" and each a
"Party").
1
INTERPRETATION
In this
document, unless the context otherwise requires:
"Bankruptcy" means, in relation to
the Borrower, the appointment of a trustee in bankruptcy (receiver) or an administrator (trustee)
in respect of it because it is insolvent.
"Business Day" means a day on which
banks are open for general banking business in London (England) and Amsterdam
(The Netherlands).
"Events of Default" means any event
described in Clause 8.1 (Nature).
"Facility A" means a facility made
available under this Agreement [means the EUR 50,000,000 facility made
available by the Lenders to the Borrower on or about the date hereof].
"Facility B" means the EUR
45,000,000 facility made available by the Lenders to the Borrower on or about
the date hereof [means a facility made available under this Agreement].
"Facility C" means the EUR
40,000,000 facility made available by the Lenders to the Borrower on or about
the date hereof [means a facility made available under this Agreement].
"Margin" means 11.50 [12.75]
[14.00] per cent. per annum.
"Principal" means the principal
amount of EUR 50,000,000 [EUR 45,000,000] [EUR 40,000,000]. "Relevant Percentage" means:
( a) in
relation to [W] , 3.44302%; ( b) in relation to [Aa] , 8.29838%.
( c) in
relation to [Ab] , 1.84326%; and ( d) in relation to [Ag] , 70.52881%.
( e) in relation
to [Aj] :
( i)
7.943265% (this Relevant Percentage of the Principal for the purpose of a
certain deed of pledge is referred to as the "[Aj] Loan Part A-I [B-I] [C-I]"); and
(ii) an
additional 7.943265% (this Relevant Percentage of the Principal for the purpose
of a certain deed of pledge is referred to as the "[Aj] Loan Part A-II [B-II] [C-II]").
"Repayment Date" means the date
falling two Business Days prior to the tenth anniversary of the date hereof.
In this document
unless the context otherwise requires:
( a) words
importing:
(ii) the singular include the plural and vice
versa.
(iii) any gender includes the other genders.
( b) if a word
or phrase is defined cognate words and phrases have corresponding definitions.
( c) a reference
to:
( i) a
person includes corporations.
(ii) a person includes the legal personal
representatives, successors and assigns of that person.
(iii)
this
or any other document includes the document as varied or replaced, and
notwithstanding any change in the identity of the parties.
(iv)
writing
includes any mode of representing or reproducing words in tangible and
permanently visible form, and includes telex and facsimile transmission.
( v) time
is to local time in Amsterdam, The Netherlands.
(vi)
any
thing (including, without limitation, any amount) is a reference to the whole
or any part of it and a reference to a group of things or persons is a reference
to any one or more of them.
(vii)
a
month and cognate terms means a period commencing on any day of a calendar
month and ending on the corresponding day in the next calendar month but if a
corresponding day does not occur in the next calendar month the period shall
end on the last day of that next calendar month.
(viii)
a
right includes a remedy, authority or power; and
(ix) a reference to incorporated includes a
reference to being taken to be incorporated.
The
Borrower has entered into this Agreement in consideration of the Lenders
agreeing to make Facility A [B] [C] available to the Borrower under this
Agreement.
3.1
The
obligations of each Lender under this Agreement are several. No Lender is
responsible for the obligations of any other Lender under this Agreement.
3.2
A
Lender may, except as otherwise stated in this Agreement, separately enforce
its rights under this Agreement.
Each
Lender shall lend the Relevant Percentage of the Principal to the Borrower and
the Borrower shall borrow it from the Lenders.
The Principal
has been advanced by the Lenders to the Borrower on the date hereof.
5.1
Subject
to Clause 5.15.2 and Clause 8.2 (Acceleration),
the Borrower shall repay to each of the Lenders its Relevant Percentage of the
Principal (together with accrued interest) on the Repayment Date.
5.2
The
Borrower shall have the right to prepay the whole or any part of the Principal if
it has given
the
Lenders three Business Days of its intention to do so, provided that: ( a) the Borrower shall prepay each Lender pro rata; and
( b) the
Borrower shall also pay interest accrued on the prepaid amount up to the date
of the prepayment.
5.3
The
Borrower shall not repay of prepay:
( a)
Facility B or Facility C unless Facility A has been fully repaid; and ( b)
Facility C unless Facility B has been fully repaid.
Interest
shall accrue on the Principal at a rate equal to the Margin and such interest
shall, on the last day of each calendar year during the term of Facility A [B]
[C], be automatically capitalised and shall be added to the outstanding
Principal. Any such accrued interest shall, after being so capitalised, be
treated as part of the Principal, shall bear interest in accordance with this
Clause 5 (Interest) and shall be
payable in accordance with the repayment or prepayment provisions of this
Agreement.
Interest will:
( a)
accrue from day to day.
( b) be computed
from and including the day when the moneys upon which interest is payable
become owing to the Lenders by the Borrower until but excluding the day of
repayment or prepayment of those moneys; and
( c) be calculated
on the basis of a 365 day year.
The
Borrower shall make payments to each of the Lenders under this Agreement: ( a)
at a place, at a time and in a manner reasonably required by such Lender; and
(b) in immediately available funds and without set-off, counter-claims,
conditions or, unless required by law, deductions or withholdings.
( a) If
the day on which any payment is to be made under this Agreement is not a
Business Day, the payment shall be made on the preceding Business Day.
( b) If a
payment made by the Borrower is received by any Lender on the due date but
after the time specified for payment or otherwise not in accordance with this
Agreement, that payment will be deemed to have been received by such Lender
before the specified time on the following Business Day.
Any payment to
be made by the Borrower to the Lenders under this Agreement shall be made in
euro.
Each of the
following is an Event of Default:
( a) the
Borrower does not pay on the due date any money due and owing by it under this
Agreement unless:
( i) its failure
to pay is caused by administrative or technical error; and
(ii) payment is
made within 3 Business Days of its due date.
( b) the
Borrower fails to observe or perform any of its other obligations under this
Agreement and if that default is capable of remedy:
( i) it is
not remedied within 15 Business Days (or any other longer period agreed by the
Lenders) of its occurrence, and
(ii) the
Borrower does not during that period take all reasonable actions which, in the
reasonable opinion of the Lenders, are necessary or desirable to remedy that
default.
( c) this
document is void, voidable or otherwise unenforceable by the Lenders or is
claimed to be so by the Borrower.
( d) the
Bankruptcy of the Borrower.
( e) the
Borrower enters into an arrangement or compromise with, or assignment for the
benefit of, all or any class of its creditors or members or a moratorium
involving any of them.
( f) the
Borrower being or stating that it is unable to pay its debts when they fall
due; or
( g) an
application being made for an order, a resolution being passed or proposed, a
meeting being convened or any other action being taken to cause any thing
described above.
( a) Upon the
occurrence of an Event of Default which is continuing, the Lenders may by
notice to
the
Borrower (the "Notice of Acceleration")
declare any outstanding amount under this Agreement (whether Principal,
interest, fees or any other amount owing by the Borrower to the Lenders under
this Agreement) either:
(ii) payable on demand; or
(iii)
immediately
due and owing, whereupon they will become so.
( b) If a
Notice of Acceleration is given to the Borrower, any amount from time to time
received or recovered by the Lenders pursuant to this Agreement shall be
applied in the following order of priority:
( i) in payment
of any amount outstanding under Facility A.
(ii) in payment of any amount outstanding under
Facility B; and
(iii) in payment of any amount outstanding under
Facility C.
If a Lender receives any payment by the Borrower which
exceeds the amount payable to that Lender pursuant to this Agreement, it shall
redistribute the excess to the other Lenders so that each Lender receives the
amount payable to it pursuant to this Agreement.
The
Borrower may not assign any of its rights or transfer any of its rights or
obligations under this Agreement without the prior written consent of the
Lenders.
Each of
the Parties irrevocably waives any right it may have or in the future may
obtain to rescind (ontbinden) this
Agreement in whole or in part pursuant to Section 6:265 of the Dutch Civil
Code.
Each of
the Lenders may set off any matured obligation due from the Borrower under this
Agreement against any matured obligation owed by such Lender to the Borrower, regardless
of the place of payment, booking branch or currency of either obligation.
This
Agreement may be executed in any number of counterparts, each of which when
executed and delivered is an original, and all of which together evidence the
same agreement.
This Agreement
and any non-contractual obligations arising out of or in connection with it are
governed by and shall be construed in accordance with the laws of the
Netherlands.
Any
dispute among the parties which relates to this Agreement or arises out of or
in connection herewith, including, without limitation, disputes relating to any
non-contractual obligation arising out of or in connection with this Agreement
or further agreements resulting from this Agreement, which cannot be amicably
resolved among the parties, shall be resolved by arbitration in accordance with
the Rules of the Netherlands Arbitration Institute in Rotterdam, provided
always that the parties have the right to settle any such dispute in summary
proceedings and the right to obtain seizure. The arbitration panel shall be
composed of three members. The place of arbitration shall be Amsterdam, the
Netherlands. The language to be used in the arbitral proceedings shall be
English. The arbitration board shall judge pursuant to the rules of law. The
award rendered by the arbitration board shall be final and binding upon the
parties and not subject to appeal.
17.
On 12
January 2011, [W] B.V. ("as parent") and [Ad] B.V. ("as
company") contracted an external loan for a total amount of € 210,000,000
with a syndicate of banks, being a Senior Facility Agreement ([AmA]). The shares of [W] B.V. have been pledged to the
banks on the basis of the [AmA].
17.1.
[Al]
NV, [Am], [An] BA (hereinafter 'An'), [Ao] NV, [Ap]
NV and [Aq] are the lead arrangers of the [AmA]. An] is also the (security) agent for the financing.
17.2.
The [AmA] is divided into several facilities, namely Facility A,
Facility B, Capex/Acquisition Facility and Revolving Facility. Facility A has a
term of six years, amounts to € 60,000,000 and bears an annual interest rate of
4%. Facility B has a term of seven years, amounts to
The term
of the facility is € 105,000,000 and the annual interest rate is 4.5%. The
Capex/Acquisition Facility has a term of six years, amounts to € 30,000,000 and
bears an annual interest rate of 4%. The Revolving Facility has a term of six
years, amounts to
The
facility has an annual interest rate of 4%. Facility A and B are fully drawn.
17.3.
A
total of € 168.5 million of the [AmA] has been drawn.
Of the Revolving Facility € 3.5 million has been drawn and the
Capex/Acquisition has not been drawn.
17.4.
The
equity contribution of [H] was set at 45% of the required funds ( [AmA] , schedule 2, part 1B,
article 3, letter a and in Term Sheet):
‘3.
Closing Requirements
(a)
The
Investors will make cash contributions or rollover existing investments by way
of subscription for ordinary shares, shareholder loans/preferred equity
certificates and/or asset or business contributions to the Group in an
aggregate amount equal to at least 45% of the aggregate funded capital
structure at the Closing Date (taking into account any cancellation of the Term
facilities on or prior to the Closing Date and any contributions to be made
after the Closing Date by the management team of the Target Group) (together,
the Minimum Equity Contribution).
17.5.
In the
event of the sale of more than 50% of the ownership and/or control, the banks demand
repayment of the Senior Facilities. This is the case when more than 50% of the
equity contribution is traded. For this reason, the banks demand that the
entire equity contribution at the parent ( [W] B.V.)
of the borrower ( [Ad] B.V.) is paid up in shares (€ 216 million). At the level
of [W] B.V., the 'change of control' clause therefore applies. At [Ad] B.V.,
too, the full equity contribution has been paid up in shares.
17.6.
The
(minimum) equity contribution is fully subordinated to the senior loans
according to the financing conditions.
17.7.
Article
26 of the [AmA] sets out the financial covenants that
the group must meet on a quarterly basis. These are based on prudent base case
business models and not on more positive management case forecasts. The
difference between these scenarios is the so-called headroom in the EBITDA to
absorb setbacks.
17.8.
A
Structure Memorandum is part of the financing documentation (
[AmA], schedule 2, Part 1A, Article 4, letter
d). Structure Memorandum is defined in the [AmA] as: 'the steps paper entitled
"Project [O]: Tax Structure Memorandum" to be dated on or about the
Closing Date describing the Group and the Acquisition and prepared by [As]
Belastingadviseurs BV in the agreed form and addressed to, and/or capable of
being relied upon by, the Arranger and the other Secured Parties.' This
Structure Memorandum has not been submitted by the Claimant. Instead, a summary
prepared by [As] was submitted on 30 December 2013.
18.
The
so-called Intercreditor Agreement dated 12 January 2011 also contains
conditions under which the credit facilities have been granted. The
subordinated loans are subordinated to the banks that have granted loans under
the [AmA]. Pursuant to Article 6 of the Intercreditor
Agreement, repayment may only be made once certain conditions have been met.
Loans other than the bank loans may be repaid if the bank loans have been
repaid or if the banks give their consent.
19.
According
to the Representative, the interest rates of the subordinated loans were based
on an offer of a Mezzanine Facility amounting to € 36.2 million, mentioned in
the Term Sheet of 5 March 2010, which was ultimately not concluded. In a letter
dated 25 April 2013 to the Respondent, the Representative stated the following
in this regard:
At the
time of the acquisition of [Q] BV it was considered to attract additional
Mezzanine financing which is junior to senior bank debt and other debt markets
were looked at. Various Mezzanine providers have offered Mezzanine debt ranging
from €36m to €45m. The offered Mezzanine Facilities had a margin of 12% (cash
plus non-cash) over Euribor.
Based on
the market conditions at the time, it was decided not to use this Mezzanine
financing and other subordinated loans from other markets. A variable in this
decision was the interest compensation on the offered Mezzanine debt and on
other (more subordinated and more expensive) debts in the market. [F] decided
at the time, after weighing up the interests, to provide the financing himself
by means of a subordinated loan, to run the risk and to retain 'return on
investment' by not paying higher fees to the market. The subordinated loans
provided by [F], family and management
have
interest rates of 11.5%, 12.75% and 14% due to subordination of the different
tranches to each other.'
20.
On
December 15, 2014, Agent provided a benchmarking analysis to support the arm's
length nature of the fee on the Loan Notes, the " [X] B.V. - Interest
benchmarking analysis." The interest analysis used the Bloomberg database.
Since Bloomberg does not publish data on corporate loans with a credit rating
of CCC+ (non investment
grade), no comparables were found. Instead, it is assumed that the interest
rate on 10-year loans increases linearly by 0.78% per notch down from BBB to
CCC.
21.
Plaintiff's
consolidated (period) losses for the years 2011-2014 are as follows: 2011 -/- €
15.939.000
2012 -/- €
16.405.000
2013 -/- €
19.653.000
2014 -/- €
28.624.000
22.
The movement of principal and interest on the
Loan Notes, according to a statement made by the Respondent, over the years is
as follows:
€ amounts x
l.000 A B C total principal € 50,000 € 45,000 € 40,000 € 135,000 interest
11.50% 12.75% 14% 12.66% interest
end of year 1 €
55,750 € 50,738 € 45,600 € 152,088
end of
year 2 € 62,161 € 57,207 € 51,984 € 171,352 € 19,264
end of
year 3 € 69,310 € 64,500 € 59,262 € 193,072 € 21,720
end of
year 4 € 77,280 € 72,724 € 67,558 € 217,563 € 24,491
end of
year 5 € 86,168 € 81,996 € 77,017 € 245,181 € 27,618
end of
year 6 € 96,077 € 92,451 € 87,799 € 276,327 € 31,146
end of
year 7 € 107,126 € 104,239 € 100,091 € 311,455 € 35,128
end of
year 8 € 119,445 € 117,529 € 114,103 € 351,078 € 39,623
end of
year 9 € 133,181 € 132,514 € 130,078 € 395,773 € 44,696
end of
year 10 € 148,497 € 149,409 € 148,289 € 446,196 € 50,422
interest €
98,497 € 104,409 € 108,289 € 311,196
average
per year € 9 850 € 10 441 € 10 829 € 31 120
average
interest rate 19.7% 23.2% 27.1% 23.1%
23.1.
In an
appendix to the letter from the authorised
representative dated 22 February 2013, an overview is given of acquisition and
financing costs relating to the acquisition of the [N] totalling
€7,477,548. In addition, there is a cost in the form of an arrangement fee of
the Senior Lenders amounting to € 8.4 million (4% of € 210 million). According
to the Respondent's report dated 2 March 2016 entitled 'Assessment of
Acquisition Financing 2011', the Respondent assessed 95% of the amount of €
7,477,548 when imposing the assessment. According to the report, 7% of these
costs can be considered transaction costs attributable to the Claimant. In
determining the assessment, an amount of € 354,761 in financing costs was
allowed as a deduction. This amount is exclusive of the Loan Syndication fee of
the [An] amounting to € 150,000, which is imputable to the claimant and is to
be considered as financing costs. In paragraph 5.1 of the Respondent's report
the costs are subdivided as follows (whereby [H] is referred to as [F] ):
Costs
[F] acquisition costs financing (capitalisation) 1a. [An] € 3,000,000 € 2,850,000 € 150,000
b. [At] €480,767
€480,767
c. [Au] €
793,993 € 317,597 € 158,799
2 [Av] €
1,074,962
3 [Axis] €
717,744 € 472,244 € 120,500 € 125,000
4 [Az] €
262,500 € 262,500
5 [AA]
€187,928 €140,946 €46,982
6 [AB] BV
€ 150,000 € 150,000
7 [AC] €
125,000 € 125 .000
8 [AD] CV
€ 136,184
9 [AE] €
120,000 € 120,000
Subtotal €
7,049,078 € 6,130,200 € 438,097 € 480,78
[EX] €
40,617 [AG] BV € 32,615 € 32,615
€ 73.232 €
73.232
assessed
(95%) €7,122,310 €6,203,432 €438,097 €480,781
100% 87%
6% 7%
not evaluated
(5%) € 355,240 € 309,409 € 21,851 € 23,980
total
€7,477,550 €6,512,841 €459,948 €504,761
excluding
Loan Syndication fee € 354,761
23.2.
The
Respondent's report provided the following explanation of this cost report:
1. a. [An]: [As] has described these costs of
€ 3 million in the cost statements dated 20 May 2014 and 19 November 2014 as
financing costs and explained them as follows: 'Financing costs are costs related to the financing of the acquisition
and are deductible. In line with case law, these costs will be deducted in the
year of entering into the financing. " [Axis]
reported on 9 October 2015, when asked, that "there is no fee letter available for the work of the [An]."
In response
to my repeated request of October 14, 2015 for the fee letter and its location
in the Facilities Agreement and Funds Flow statement, the principal and proof
of payment were still provided.
In
contrast to earlier information it appears that there
is an [Ana] of € 2.85 million (95%)
and a Loan Syndication fee of € 150,000 (5%). The client is general partner [H]
Limited, the contractor is [AnA] M&A, the order
was issued on 1 November 2010 and the M&A services are described in Annex
1. The final invoice dated 24 January 2011 is in the name of [Ad] BV p/a World
Trade Center Schiphol, the business address of [F] NL. In the taxpayer's
corporation tax return, the [An] fee has been capitalized; it is amortized
annually.
On further
reflection, [Axis] is of the opinion that the [Ana] are partly mixed costs, of
which € 650,655 should be regarded as deductible acquisition costs in the
exploitation phase. € 2,199,345 is deductible as financing costs.
Position
of the Tax Authorities:
[As]
provided incorrect information on behalf of taxpayer regarding the nature of
the costs and the absence of the fee letter. It concerns M&A services to
the general partner. The invoice is wrongly in the name of the taxpayer. The
M&A [Ana] cannot be charged to the Dutch taxable profit. Only with regard to the Loan Syndication fee are financing costs
involved; these must be capitalised over the term of
the syndicated loans (6 years). The depreciation costs in the Vpb return must be corrected for 95% and regarded as a dividend
distribution to the shareholders.
2011 2012 2013
Amortisation
Fee [An] € 430,174 € 471,388 € 470,101 [Ana] (95%) € 408,665 € 447,819 € 446,596
Loan syndication
fee (5%) € 21,509 € 23,569 € 23,505
b.
[At]: taxpayer did not receive an engagement
letter or invoice from [At] according to
[As].
. [At] has
assisted [An] in discussions concerning the bank financing. Thus [At] has an
engagement letter with [An] . [An] has charged the
costs on the basis of the Facilities Agreement. There
are no underlying documents available.
In the
Facilities Agreement, in section 1B, Conditions Precedent to Initial Utilisation, it is stated as a condition that legal
opinions of [At] must be obtained.
These have
not been provided.
Position
of the Tax Authorities:
The
underlying invoice from [An] , correspondence with the
[An] , legal opinions and proof of payment have not been provided. The costs
may relate to the services provided by [AnA] M&A
to general partner [H] Limited, see paragraph 1a above. The costs have not been
plausibly made and should be regarded as costs incurred by the general partner.
c.
[Au] is the legal advisor of [H]. The engagement
letter is dated 8 March 2011, more than a month after the closing of the transaction.
The engagement must have been issued earlier by [T] as general partner of [H] , because the description of the work shows that [Au] also
assisted "with negotiation and finalisation of the term sheet during and after the
conclusion of the initial auction process for the selection of the Company as
the purchaser of the Target". The invoice states: "Project [O],
for the period from February 11, 2011 to March 3, 2011." [As] identified
the costs in the proposal dated February 22, 2013 as fully deductible, directly
attributable financing costs.
Position
of the Tax Authorities:
The
engagement letter in the name of [Ad] BV is incorrectly dated. Also the period of the activities mentioned on the invoice
is incorrect. The activities relate to [H] (suppose: 40%, [F]
), the acquisition and internal financing (suppose: 40%, purchase costs)
and the external financing (suppose: 20%, deductible).
2.
[Av] conducted its business pursuant to
a Master Services Agreement ("MSA") between [H] and [Av] . There is no engagement letter with the Dutch companies.
There is also no description of the activities. On the basis
of the MSA, [Av] provides, according to [As], legal services relating to
the financing and acquisition of Targets by [H]. Earlier, [As] described the
activities as: drafting a legal due diligence report, the SPA
and the structure. [Av] also submitted the NMa
request on behalf of [F] . On the final invoice, the
description of the work stated: "For services rendered in the period up to
01/02/2011 concerning project [X] ". There are additional invoices from
[Av] for an amount of € 273,497 which leads to a total cost of € 1,074,962.
Position
of the Tax Authorities:
The costs
relate to the work on behalf of [H] or the purchase of [Q] BV. These costs are not deductible.
3.
[As] : The
engagement letter is dated 1 November 2010 and is in the name of [H] Limited,
the general partner of [H] . The work relates to (I) financial due diligence,
(II) tax
due diligence, (III) tax structuring (...) and (IV) comments on the sale &
purchase agreement. The associated fee letter amounts to € 245,500. The invoice
amount on 18 February 2011 is € 649,990. [As] did not give any insight into the
nature and scope of the extra work. [As] has submitted an additional invoice to
the amount of € 67,754.
Position
of the Tax Authorities:
The fee of
€ 245,500 partly relates to the SPA and to the advice on the structure of [H]
above the Netherlands, such as the incorporation of [Ae 1] LP to prevent the
interest costs on the shareholder loans from falling under the deduction
limitation of Article 10a of the Dutch Corporate Income Tax Act. The additional
fee of € 404,490 + € 67,754 for additional work is not substantiated,
but may relate to the advice to establish the 'Side Car Vehicle' [Ae 1]
LP (...). These are costs of the general partner Advice costs that relate to
the loans of related entities in later years also fall under the deduction
limitation of article l0a of the Corporate Income Tax Act (P.M.).
Of the
original fee of € 245,500, the activities at II, III and IV partly relate to
[H], therefore I have estimated the NL part of these costs at 50%: € 125,000
(rounded off). The remaining costs are not deductible.
4.
[Az] has, according to [As]: "performed a commercial due diligence. That is to say
that [Az] carried out research into the various markets in which [N] is active.
A distinction was made between the underlying market (natural oils and related
products) and the market for storage of natural oils and related products in
which [N] is active. A comparison was also made with the competition in
north-west Europe, an analysis of customer trends and an analysis of the
management plan drawn up at the time by the [N] management. In addition, [X]
requested [Az] to assist them in discussions with banks in the context of
attracting bank financing. ”
The
engagement letter is in the name of [H] Limited and is dated 14 October 2010.
In my opinion, the activities can be described as market research for the
potential investment of [H] in [Q] BV. [Az] reported to [T] on 5 November 2010
and the findings were included in the presentation to the Investment Advisory
Committee. The invoice dated 8 February 2011 states "For work carried out during October 2010." With an additional,
unissued invoice of €37,500, the total costs amount to €262,500.
Position
of the Tax Authorities:
This
concerns search costs of [H]. These costs are not deductible.
[W]
[AA], a group entity of [F] ,
according to [Ash], charges his time in relation to the acquisition of [Q] BV
on an hourly basis. [AA] was primarily involved in negotiating the financing of
the acquisition and reviewing and drafting the legal documents. Part of the
Fund's decision whether or not to make an investment
in a particular company is to determine the financing costs. The financing
expenses are then incorporated into a financial model which is relevant to the
investment decision. Such a financial model was also prepared for the [N]
transaction (which [As] later denies, rd). As such, the
activities of [AA] should be classified as exploration activities of [X].
Taxpayer has no engagement letter with [AA] . Nor is a
breakdown of [AA]'s activities available. [AA] has mainly provided legal
advice. This included review of the financing agreements, SPA, and other legal
documentation. An amount of approximately € 30K concerned legal services. On
the invoice dated 9 February 2012, one year after the acquisition of [Q] BV on
1 February 2011, it is stated: "We
herewith send you transaction related services for the years 2010 and 2011".
Position
of the Tax Authorities:
The costs
largely relate to the investment considerations of the general partner and
partly to the financing with equity capital and (external) debt capital. [AA]
prepared, among other things, the presentation to the Investment Advisory
Committee and provided (...) financial input; the
financial model. The correspondence with the Senior Lenders and Mezzanine
Lenders was not provided, nor was the financial
model that was drawn up for the consideration of the financing
alternatives. Only the results were incorporated into the presentation to the
Investment Advisory Committee. I have estimated the financing part of the costs
at 25%. The remaining costs are search costs of the general partner.
5.
[AB] , [AC] , [AD]
, [AE]: According to [As], no formal agreements have been drawn up in
respect of these consultants. All documentation present (the invoices, rd) in relation to these assignments has already been
provided. These consultants provided industrial/technical advice in relation to
the [N] . Among other things, they assisted with the
industrial/technical due diligence carried out by [X] on the [N] .
Position
of the Tax Authorities:
The
industrial opinions have been provided to the principal [T] on behalf of [H] . The reports were included as an appendix to the
investment decision of the general partner [H] Limited. These costs were
improperly charged to taxpayer.
Finally:
Of the other advisory costs, [AF] (valuations, € 40,617) and [AG] (environment,
€ 32,615) were also hired by [H] Limited. They report to the Investment
Advisory Committee.
The
position taken by the tax authorities on the interest deduction on the €135 million shareholder loans of [H] is set out in section 4.7 of this
memorandum. The interest adjustment in 2011 was € 15,636,270. Of this amount,
€13,157,632 was designated as non-deductible in the submitted corporation tax
return, so that the taxable profit in the return must be increased by
€2,478,638.
This
correction will also affect the years 2012 to 2015.
Section
5.1 of this memorandum sets out the position of the Tax Office in relation to acquisition and financing costs. Most
of the costs are costs of the general partner [H] Limited (87%). Of the
remaining costs, 6% can be regarded as acquisition costs (non-deductible) and
7% as financing costs (deductible).
The
consequences for the taxable amount of the fiscal unity are as follows:
2011 2012
2013
taxable
amount € 1,330,136 € 4,859,314 € 6,241,151 (according
to declaration)
interest
[AI1] §4.7 € 2,478,638 € 2,971,783 € 3,486,346 Fee [An] (AFS) §5.1 € 408,665 €
447,819 € 446,596
finance cost
§5.1 € 354,761-/- - - -
subtotal
corrections € 2,532,543 € 3,419,602 € 3,932,942 corrected bel. Amount €
3,862,679 € 8,278,916 € 10,174,093
The finance
costs should be amortised over 6 years. For practical
reasons, they have been included in the above overview as costs for 2011.
24.
On 22
January 2015, the claimant filed a corporate income tax return for the year
2011 for a taxable profit of €1,330,274 and a taxable amount of €1,330,136; a
loss of €138 was set off against this. In the tax return an amount of €
3,000,000 in acquisition and financing costs has been capitalised
under 'Goodwill'. Furthermore, the claimant has designated an amount of €
13,157,632 as non-deductible interest pursuant to Section 10a of the Vpb Act.
In total,
the interest on the subordinated loans amounts to € 15,636,270. An amount of €
2,478,638 has been deducted because this relates to interest on loans from the
[N] family and managers.
25.
In
accordance with the return filed, a provisional corporate tax assessment was
imposed on the plaintiff with a date of February 7, 2015.
26.
The
final assessment was imposed with the date of April 30, 2016. In imposing the
final assessment, the Respondent deviated from the submitted tax return. The
assessment was imposed according to a taxable profit of € 3,862,817 and a
taxable amount of € 3,862,679; this includes a loss of € 138.
The
corrections to the declaration were calculated as follows (see Respondent's
report dated 2 March 2016 called 'Assessment of Acquisition Financing 2011', p.
29):
Interest on
Intercompany Loans € 2,478,638
Fee [An]
(95% amortisation/sharing) € 408,665 + Financing
costs € 354,761 -/-
Total
corrections € 2,532,543
Taxable
amount according to tax return € 1,330,136 Adjustments € 2,532,543
Taxable amount
assessment € 3,862,679
27.
The
claimant objected to this by letter dated 6 June 2016. In this letter, she
indicated, among other things, that, contrary to the submitted tax return, she was of the opinion that the financing costs could be charged
to the profit at once and that she was of the opinion that the interest should
be fully deductible. The objection was rejected.
28.
On 4
December 2015, an information decision was made in respect of the claimant. This
was withdrawn by a decision on objection dated 29 March 2016.
29.
In
addition to the [N], [F] also acquired the so-called [AJ]. In doing so, a
similar structure to the above was used, except that the legal forms involved
were designated as ' [AJ] ' instead of ' [X] '. On December 29, 2014, the
shares in Plaintiff and [AJ] I B.V. were transferred to [X] [AJ] B.V. in
connection with a merger, against the issuance of own shares by the latter
company. In the process, the Intercompany Loans were taken over from the
subordinated lenders/(indirect) shareholders against corresponding loans
provided by the same lenders.
30.
In
connection with the exit of [F] from the [N] and the [AJ] ,
the following took place. On 16 December 2015, the Claimant sold the shares [W]
B.V. to third parties for € 654,008,431. On 16 December 2015, [AJ] I B.V. sold
the shares of [AJ] II B.V. to third parties for € 444,090,114. On 18 December
2015, the Claimant and [AJ] I B.V. paid a total of approximately €730 million
in dividends to the shareholder [X] [AJ] B.V. The latter company passed on the
dividends received to its shareholders. Furthermore, on 21 December 2015, the
Loan Notes including accrued interest totalling
approximately € 242 million were repaid to [X] [AJ] B.V. and the latter company
repaid these amounts to the subordinated lenders/(indirect) shareholders."
As the
parties have not contested the above facts in and of themselves, the Court will
also proceed on the basis thereof, on the understanding that the Inspector at
the hearing of the Court - contrary to what has been stated under 12, 14.2 and
15.4 and 24 of the judgment of the District Court - stated further, without
being contested, that the management had not yet granted any loans to the
interested party in the current year. Hereinafter, the Court will start from
this statement.
In
addition, the Court supplements the above facts as follows.
2.2.In the Private Placement Memorandum of
November 2007, as mentioned under 1.3 of the ruling court, (furthermore) the
following is stated:
"Summary
of Principal Terms The Fund:
The Fund
is being established to make primarily controlling investments or
co-controlling investments alongside other investors in a diversified portfolio
of infrastructure and related assets. (…)
Fund
Structure
The Fund
will be constituted by [J] and [K] which are English limited partnerships
together with one or more additional investment entities in order to meet the
specific needs of Investors. (...) Committed Capital:
The Fund
is seeking to raise up to EUR 1 billion in Commitments (...) although the
General Partner reserves the right to accept Commitments in excess of this
amount.
General Partner:
The
General Partner will be [AK] (General Partner) LP, a Guernsey limited
partnership (the general partners of which will be [H] Limited, a Guernsey
limited company and [AL] GmbH & Co. KG, a German limited partnership). The
General Partner shall be provided with investment advice by [T] together with
its subsidiaries.
(…)
Appendices
Appendix 1
- Definitions (...)
"Commitment"
means the amount which Investors agree to make available to the Fund for
investment and working capital purposes (...).
(…)
" [H]
"or "Fund" means the limited partnerships and/or other
investment vehicles constituting [H] as more particularly described in this
Memorandum;"
2.3.
In the
memorandum of association, dated 4 December 2009, of [J] Limited Partnership
(hereinafter referred to as: LP 1), it is stated - this in addition to section
4 of the judgment court - among other things that
"WHEREAS:-
(…)
(C) The
business of the Partnership is to carry on the business of investing and
monitoring the performance of those investments as part of the Fund (known as
" [F] ") and to carry out all functions and acts in connection
therewith in partnership.
(…)
1.
DEFINITIONS (...)
(v)
"Commitment" means, in respect of each Limited Partnership, the
aggregate of the Capital Contribution and the Loan advanced and agreed to be
advanced by such Partner (...).
(…)
(xx)
"Fund" means the fund known as " [F] " being comprised of
the aggregate amount of (i) the commitments to the Partnerships; (ii) (...) and
(iii) (...).
(…)
(uuu) "Loan" means, in respect of a Limited
Partner or the General Partner, the aggregate amount (if any) of the
interest-free subordinated loan advanced or agreed to be advanced (as the
context may require) to the Partnership or the General Partner, as applicable.
(…)
4. LOANS
(...)
4.2
Currency, Interest and Repayment (...)
(b)
No
interest shall be paid or payable by the Partnership upon any Loans, advanced
to the Partnership by the Partners. Instead any Loans which are drawn down by
the General Partner prior to the completion of an Investment will, where
possible, be invested in Cash Deposits. Any income earned thereon will not be
distributed in accordance with clauses 7 and 8 but insread will be allocated to
Partners pro rata to their Commitments and distributed to such Partners at the
end of each Accounting Period or earlier at the sole discretion of the General
Partner except that such income may be retained by the General Partner in order
to meet future drawdowns from Limited Partners.
(c)
Insofar
as: (i) any Loan is drawn for the purposes of an Investment and such Investment
does not complete; or (ii) any portion of any Loan remains unused after
completion of an Investment due to an excess drawdown, then such Loan, or the
relevant portion thereof shall be repaid to Limited Partners as soon as
practicable after the General Partner has determined that such Loan or the
relevant portion thereof is not required by the Partnership, and in any event
within 60 days of the date of the relevant Drawdown Notice, but shall be
available for further drawdown provided always that the General Partner may use
such Loan, or a portion thereof (...);
(d)
Loans
shall be repaid as provided in clauses 7 and 8 below. (…); (…)
7.
ALLOCATION
OF LIABILITIES, PROFITS AND LOSSES
7.1 Determining Amounts of Income, Capital and
Losses to be Allocated
For the
purposes of determining the amount of Income and Capital which shall be
allocated between the Limited Partners, the General and the Special Limited
Partner the following provisions shall apply:
(a)
After
the payment of or provision for fees, costs and expenses (...), or the payment
of or provision for liabilities howsoever arising, all Income and Capital
(...), shall be allocated as follows:
(i) first, to the General Partner in respect of
amounts allocable (...)
(ii)
secondly,
to the Limited Partners (and the General Partner) pro rata to their Commitments
(...) to pay the Acquisition Cost of Invesment which have been realized (...).
(iii)
thirdly,
to the Limited Partners (and the General Partner) pro rata to their Commitments
until cumulative allocations of Income and Capital to such Limited Partners
represent a return at the rate of 6% per annum (...) on the amount of
Commitments drawndown (...).
(iv)
fourthly,
to the Limited Partners (and the General Partner) pro rata to their Commitments
in payment of amounts equal to the Realised Investment Proportion of all
Partnership Expenses (...); (...)
(ix) ninthly (...) (...)
Losses
will be allocated in a manner consistent with the allocation of Income and
Capital. (…)
8.4
Repayment of Loans
Until the
entire amount of the Loans from the Limited Partners shall have been repaid,
all distributions of Capital and Income made by the Partnership to the Limited
Partners shall be applied in or towards repayment of the Loans outstanding from
time to time, in proportion amongst the Limited Partners pro rata to their
respective Commitments (...).
8.5.
Limitations
on Distributions
The
General Partner shall not be obliged to cause the Partnership to make any
distribution pursuant to this clause 8:-.
(i) unless there is cash available therefore.
(ii)
which
would render the Partnership insolvent; (...)
(iv) (...); (...)
11.
ACCOUNTS, REPORTS AND AUDITORS (...)
11.2
Reports (...)
(b)
Subject
to any legal or regulatory requirements the General Partner may in lieu of
preparing reports in respect of the Partnership under clause 11.1 and 11.2
prepare a single report in respect
of the
investments of the Fund provided that such report and accounts contain the same
information as would have been provided had they been prepared in accordance with
clause 11.1 and 11.2(a) above and are sent to each Limited Partner within the
same time period as that set out in clauses 11.1 and 11.2(a)."
2.4.The documents include an application form
for participation in [J]. It includes the following:
"SECTION 4
GENERAL REPRESENTATION
We hereby
declare, represent and warrant that:
(…)
4.8 we are aware that an investment in the Partnership
involves substantial risks including the risk of a complete loss of our
investment and have determined that a limited partnership interest in the
Partnership is a suitable investment for us (...)."
2.5.Of the correspondence requested by the
Inspector from the provider of the Mezzanine Facility referred to in paragraph
19 of the judgment court, one email was provided.
In this
message from [Am], the provider of the Mezzanine Facility, to (among others)
[T] (the Court understands: the General Partner or [T];
see also under 2.2) of 27 October 2010 the following was stated, among other
things:
"As
discussed with you, we had a preliminary discussion with Credit this morning
and have obtained a green light to proceed on the basis previously outlined to
you and as set out in the attached term sheet.
At this
juncture we are focusing on a senior debt only structure. The inclusion of
mezzanine debt would slightly reduce the available amount of senior debt
thereby pushing up the cost of the mezzanine debt beyond its nominal cost. In
our opinion, it is unlikely to leverage the expected equity returns you
indicated last week and is therefore, for this transaction, not an attractive
source of financing."
2.6.1.Section 17 of the Senior Facility Agreement
([AmA] ) of the syndicate of
banks referred to in section 17 of the judgment court stated, inter alia, the
following:
“17. FEES
17.1. Commitment
Fee (...)
17.2
Arrangement Fees
Subject to
a Utilisation being made under this Agreement, the Parent shall pay to the
Arrangers an arrangement fee in the amount and at the times agreed in a Fee
Letter."
2.6.2.The 'Parent' in the [AmA]
refers to [W] B.V. and Utilisation means according to
the definition provisions of the [AmA] : 'a Loan or a Letter of Credit'.
2.6.3.In a letter from the syndicate of banks
dated 12 January 2011, also signed by [W] B.V., the following was stated, among
other things:
"[W]ithin a fee letter
We refer
to a facilities agreement dated on or about the date of this letter (...). (…)
This is a
Fee Letter referred to in Clause 17.2 (Arrangement
Fee) of the Facilities Agreement.
1.
PACKAGE
FEE
(a) The
arrangement fee payable under Clause 17.2 (Arrangement
Fee) of the Facilities Agreement is € 8,400,000 being an amount equal to
4.00 per cent (4.00%) of the Total Commitments as at the date of the Facilities
Agreement (...).
(…)
2.
PAYMENTS
(a) You
hereby authorize the Agent to deduct the Arrangement Fee on the date of the
first Utilisation of any of the Facilities, from the proceeds of that
Utilisation."
2.7. In the Final Report [X] BV ('Beoordeling
Overnamefinanciering 2011', p. 11) of the Inspector
(the document is also mentioned in the judgment of the District Court under
23.1) the following is stated, among other things:
"Taxpayer
financed the acquisition of the [N] in 2011 as follows:
[Court: overview]
Of the
equity contribution, [F] has accounted for approximately 19% as equity."
2.8.1.The documents include a 'Financial Report'
2011 of [H] , as also mentioned under 1.5 of the court
ruling (hereinafter: the Fund). This document (furthermore) mentions the following:
"General
The
General Partner herewith submits the audited Report and Financial Statements of
[H] ("the Fund") for the year ended 31 December 2011. The Financial
Statements have been prepared in accordance with Clause 11.2(b) of the Limited
Partnership Agreements of the Partnerships constituting the Fund.
(...)
Purpose
The
purpose of the Fund is to carry on the business of investing and monitoring the
performance of such investments (...).
(…)
General
Partner of the General Partner
The
General Partner, [H] (General Partner) LP, is itself a limited Partnership
which acts through its own General Partner, [H] Limited. The Directors of [H]
Limited (...) are as follows: [AM]
[AN]
[AO]
(…)
Notes to the
Financial Statements
1. Organisation and purpose
The Fund
comprises [H] (No. 1) LP (the "No. 1 Partnership"), [Ae 1] LP (from
14 January 2011), [H] (No. 2) LP (the "No. 2 Partnership"), [H] (No.
3) LP (the "No. 3 Partnership") and
[H] (No.
4) LP (the "No. 4 Partnership") (together "the Fund"). The
No. 1, No. 2. No. 3 and No. 4 Partnerships invests in parallel under the terms
of the [H] Co-Investment Deed dated 17 November 2008. [Ae 1] LP (the "Side
Car Vehicle") was established for the purpose of making investments
alongside [H] (No. 1) LP, such that investors in [H] (No. 1) LP may, in certain
instances, make a portion of their investment through the Side Car Vehicle
rather than through the No. 1 Partnership.
(…)
2. Principal accounting policies
(a) Basis
of accounting
(…)
(b) Investments
(…)
The
General Partner considers that investments in subsidiaries and associates are
held as part of an investment portfolio with a view to ultimate realization of
capital gains.
(…)
(h) Income
(…)
Certain
investments held by the Fund bear interest but are subordinated to the secured
bank lenders and mezzanine lenders of the relevant investment. Income may only
be received by the Fund if approved by such lenders and therefore may be
considered to be equity related in nature. Accordingly the income on these
instruments is recognised on the same basis as that for equity shares,
specifically when lender approval has been obtained and all necessary
conditions for payment have been met."
The total
of the loan accounts mentioned in the Fund's Financial Report amounts to
€663,455,000 as at 31 December 2011. The total of the
partner's accounts (including the loan accounts) as at
31 December 2011 amounts to € 663,600,000. Of the total of the commitments of
the limited partners of the limited partnerships belonging to the Fund as at 31 December 2011 (€ 707,454,000), € 180,730,000 was used
for the acquisition of [Q] B.V. (Financial Report p. 17). This investment is
included in the "Notes to the Financial Statements" in the overview
of the "Equity Investments" (Financial Report p. 16). In the Fund's
Financial Report, only interest on bank loans has been recognised
as income for 2011 (Bank interest € 217,000).
Furthermore,
the financial report includes an auditor's report ([auditor]
), which reads, inter alia, as follows:
"This
report is made solely to the partners, as a body (...).
To the
fullest extent permitted by law, we do not accept or assume responsibility to
anyone other than the Fund and the partners as a body (...)."
2.8.2. In a letter from Agent to the Inspector
dated May 28, 2015, the Fund's Financial Report was explained as follows:
"As
we have already indicated (...) the name [H] is intended for commercial
purposes only. The [H] consists of several, economically and legally separate
Limited Partnerships. These (...) entities have no legal, accounting or tax
obligation to prepare consolidated financial statements. However, for
communication to investors, (...) aggregate financial statements of all Limited
Partnerships are prepared."
2.9.1.
In the
2011 Financial Report of [Ag], the following is stated, among other things:
"Board
of Directors (...)
[AM]
(...)
[AP]
(...)
[AN] (...)
[AQ] (...)
(…)
Balance Sheet
As at 31
December 2011
EUR Note 2011
Non
Current Assets 2 105,595,997
Loan
Receivable 105,595,997 (...) (...) (...)
Total Net
Assets 106,363,944
Shareholders'
Equity (...) Share Capital (...) 101
Share
Premium (...) 95,342,517 Reserves (...) 11,021,326
Total
Shareholders' Equity 106,363,944 (...)
Notes to
the Financial Statements (...)
2.
Loan
Receivable (...)
On 31 January
2011 the Company entered into an intercompany loan agreement with [X] B.V.
(...). The Company is to provide 70.52881% of three facilities, A- EUR
50,000,000; B - EUR 45,000,000; C - EUR 40,000,000 to [X] B.V."
2.9.2.In the Fund's 2011 consolidated financial
statements, the joint LPs have a receivable of approximately €4 million on the
balance sheet (page 9 and page 17 of the financial statements). The 2011 Annual
Reports of the Guernsey Limiteds, which form part of
the documents in dispute, do not show any debt obligations to the LPs.
2.10.1.
A
letter from the interested party to the Inspector dated 19 November 2014
stated, inter alia, the following:
"Transfer
pricing documentation
In our
opinion, we have complied with the substantiation of the professional nature of
the conditions of the subordinated loans as required under Section 8b Vpb. However, in order to meet
your request [X] is currently collecting further substantiation. We will inform
you separately as soon as possible (...)."
2.10.2.
In the
'Interest benchmarking analysis' of [As] dated 15 December 2014, as mentioned
under 20 ruling court, the following is (further) stated:
"Economic
Analysis (...)
3.1.
Selection
of transfer pricing method (...)
Based on
information provided by [stakeholder] management, we identified one potential
internal comparable within the group, namely a credit facility received in 2011
by
[W] B.V.
from a syndicate of six banks (...) (hereinafter referred to as "the
Banks"). [W] B.V. has provided the Banks with a securitization by means of
a pledge of the shares in [W] B.V. Furthermore, the intercompany Loans are
subordinated to the credit facility received from the Banks. Therefore, the
Lenders which provided the intercompany Loans to [interested party] bear higher
credit than the Banks in relation to the credit facility. Regarding pricing
arrangements, the credit facility agreement also indicated that in addition to
the interest rates, the borrower also has to pay commitment fees (quarterly)
and combined facility and security agent fee (annually). This implies that due
to the differences in characteristics, contractual terms and economic
circumstances, the credit facility received from the third party deemed not to
be comparable to the intercompany Loans.
Hence, in
the absence of internal CUPs, our analysis was based on the identification of
external CUPs (...).
3.2.
Estimation
of [interested party's] credit rating (...)
To
determine the credit rating of [X] B.V., we have used a Ratio-Inferred-Rating
("RiR") model. The RiR model allows the estimation of the
creditworthiness of a company by comparison with other companies which are
publicly rated, based on a number of (key) financial ratios. (…)
Overall
credit rating (estimated) CCC+ (...)
3.3. Interest rate benchmarking
3.3.1.
Introduction
In order
to benchmark the interest paid by [interested party] in relation to the Loans,
we have performed a search on Bloomberg. (…)
However,
the data published by Bloomberg does not cover the whole spectrum of issuer
creditworthiness. For instance, Bloomberg does not publish composite yield
curves for corporate debt rate "CCC+" (and denominated in EUR).
(…)
Because
yield to maturity data with the same creditworthiness as [X] B.V. (i.e., with a
credit rating of "CCC+") was not available on Bloomberg, we have used
linear extrapolation to determine the market yield to maturity on
EUR-denominated (industrial) corporate bonds with credit rating of
"CCC+". In other words, we have assumed that the increase in 10-year
yields on bonds with credit ratings between "BBB-"and "CCC
"increases linearly with every notch increase (...).
It is
important to stress that in reality it is frequently
observed that yields to maturity increase more than linearly with
creditworthiness downgrades (...).
(…)
Hence, the
linear extrapolation exercise performed is likely to underestimate the interes
rate that a CCC+ rated company would have paid in third party transactions.
4. Outcome of
the analysis and conclusions
Based on the
analysis performed, we have concluded that in relation to the Loans, at arm's
length [interested party] would have paid an interest of at least 10.64% (...).
Furthermore,
as Loan B is subordinated to Loan A, and Loan C is subordinated to Loan A and
B, the level of risk attributed to each Loan is different. Therefore, the
interest rate applied on Loan B is expected to be higher than the interest rate
applied on Loan A. Similarly, the interest rate applied on Loan C is expected
to be higher than the interest rate applied on Loan B. Based on our practical
experience, the subordination premium applied on interest rates ranges at least
from 0.5% to 1.5%. This implies that interest rate applied on Loan A should be
increased by 0.5%-1.5% for determining the interest rate on Loan B, and accordingly
increased by 1%-3% (which equals to two subordination premiums) to determine
the interest rate on Loan C."
2.11.
According
to the official report drawn up, the parties expressed their views at the court
session - partly factually and partly legally - about the classification of the
Fund as follows (the interested party and the inspector were referred to as
'claimant' and 'defendant'):
"In
response to questions from the court, the plaintiff's agent states: (...)
The
defendant says that [H] is an open mutual fund. We dispute that, [H] is a
closed fund.
(…)
and
declares that the defendant (...)
We end up
with an open-ended mutual fund. Now that there is no certificate of
incorporation, it is an open fund. There are several funds attached to it.
Section 2(2) of the Corporation Tax Act is not satisfied, so [H] can only be an
open fund on joint account. The consent of all unitholders is then not required
for alienation, which is what it comes down to.
That we
referred to [H] earlier in the documents as a limited partnership is a (...)
mistake. (…)
The fact
that the investors are linked as limited partners does not prevent the fund
from being considered an open fund. On the contrary, it is a sub-fund. That's
how it is very often these days. Almost all funds are umbrella funds,
containing about 300 types of stocks.
The
phenomenon of sub-funds is more the rule than the exception. We also have Dutch
sub-funds, which submit a single declaration because it is in fact a single
fund. They are then also issued with a single assessment. In fact
this is also the case here. (...) It does not matter in which sub fund the
investors end up. German investors are only allowed to invest in specific funds
because otherwise they would have administrative problems with the tax return.
(…)
In
plaintiff's case, there is one investment policy and one management."
2.12.
In the
grounds for the objection filed by the interested party against the 2011
corporate tax assessment (letter from [As] dated 7 July 2016), the following
was stated, among other things:
"Interested
party's point of view on the deductibility of acquisition and financing costs
In its
corporation tax return for 2011, the taxpayer did not deduct the acquisition
costs and capitalized an amount of € 11.4 million (the [An] fee and the
arrangement fee to the banks) of the financing costs (fees, not interest) as
prepaid expenses under 'Goodwill'.
(…)
(€
3.000.000)
The [An] fee of € 3,000,000 in total consists of an
[Ana] relating to various activities carried out by [AnA]
M&A (€ 2,850,000). In addition, a loan syndication fee (€ 150,000) was
charged.
The loan
syndication fee of €150,000 relates entirely to services provided by the [An]
in the context of the bank financing to [Ad] B.V. As a result, these costs
should fully qualify as direct financing costs and as such should be fully
deductible in 2011. (…)
-
[An]
fee: In 2011, an amount of € 430,174 was amortised
for [An] costs. We take the view that the full [An] fee of € 3,000,000 should
be deductible in 2011. This results in an additional deduction of € 2,569,826.
-
Financing
costs: In 2011, an amount of € 1,204,488 was written off in financing costs.
This concerns the amortization of the arrangement fee of € 8,400,000 that was
paid to the banks for the Senior Facility. We believe that the arrangement fee
should be fully deductible in 2011."
2.13.1.
At the
hearing of the Court, the following was stated on behalf of the interested
party:
"In
this regard, the Court remands for consideration of paragraph 88 of the
district court opinion in which the district court found that the investors had
provided risk-bearing equity to the
fund. I
have no objection to this consideration.
However, I
do object to the opinion that there is risk-bearing capital. The Court tells me
that this has not been argued before. In my opinion, the issue is the
following. The investors deposit money. [F] decides whether it will be capital
or loans. The whole structure is built around that. The investors rely on the
equity/debt allocation. What allocation? That is the allocation of money that
the fund does within the structure. To the Court's question of whether, for
example, in the case of a EUR 10 million investment, investors have given the
money away at the discretion of the fund, I would answer as follows. That is
correct; the management is in the free hands of [F] .
To the Court's question whether the capital committed to [F] by investors has
left the investors' assets, I answer that this is correct. [F] decides in which
partnerships it will invest.
(…)
On the
interest rate agreed in relation to the Loan Notes. The interest rate is
substantiated by the report of [As]. However, when this report did not yet
exist (it was drawn up only later), how was the interest rate determined when
the shareholder loan was concluded in 2011? What was it based on at the time? I
do not know.
I am not
able to give you an answer. [AR] [Court:
director of interested party] has just indicated non-verbally that it does not
know this either. I think that [F], before making an investment, models, very
carefully, what interest rate a company can pay and still bear; in this case
triple c. Afterwards it turned out that the interest rate had in any case been
determined correctly.
(…)
In
response to the Court's question as to who the actual directors of the general
partner are, I answer as follows. In 2011 they were [AM] and [AN]. Were they
employed and if so where? They were employed by [I] Management Limited in
Guernsey. This Ltd. is a so-called 'employment entity'. Who is the shareholder
of this Ltd? They are the owners of [F] ; partly [g]
partners and partly the [g] family."
2.13.2.
At the
hearing of the Court, the following was stated on behalf of the Inspector:
"In my pleading I referred to a judgment of this Court
of 26 May 2020 [ECLI:NL:GHAMS:2020:1407].
In it, the Court explained, inter alia, the concept of 'group'. Following a
similar line of reasoning, I take the position that [Aj]
and the management fall outside the group. The interest is much smaller; furthermore,
[Aj] is a company domiciled in the Netherlands, and
therefore, there is a compensatory levy. Moreover, with
regard to the interest owed to [Aj], which is
then deductible to that extent, the Court of Appeal may ignore the guarantee
analogy for this year; the business/commercial loan discussion therefore does
not really play a role with regard to the loan of [Aj].
The Court of Appeal may rely on the numerical conclusion in the notice of defence on appeal. On practical grounds, the Court of
Appeal may assume that the Loan Notes provided by [Aj]
are businesslike. If the Court were to determine that there is a participation
loan, the interest income taken into account by [Aj] will be reduced ex officio.
(…)
About the
irresponsible loan. I have the burden of proof. In this respect I refer to the
Bank Base Case (BBC), mentioned on page 20 of the Final Report. To the request
of the Court of Appeal to further explain the data mentioned in the BBC I
respond as follows. The figures are based on or derived from [F]'s investment
decision whether or not to proceed with the purchase of [N]. That investment
decision is a document dated 9 November 2010. The document is mentioned in the
final report. I am looking for the appendix number. In private equity
everything revolves around cash. Forecasts are made for the next 5/6 years. In
this case from December 2011 to December 2018. Based on a conservative bank
forecast, banks are willing to lend certain amounts of money. In 2011, this was
approximately 50 percent. A minimum equity contribution of 45 percent is
required from the private equity investor. This prognosis concerns the
financial arrangements; it examines whether there is sufficient liquidity to
pay the interest on bank debts and whether there is sufficient liquidity to
follow the repayment schedule. ICR' stands for Interest Coverage Ratio. It
looks at how many times the interest can be paid from the EBITDA. Values are
agreed on this. The fact that the ICR increases is related to the revenue model
of private equity. The aim is to improve the target's cash flow in order to generate as much operational cash as possible.
In December 2017, the ICR is forecast to make a jump. This is because the loans
to the bank will be almost paid off by then; the interest rate will go down, so
that the ICR will go up; to 24 in 2017. The forecast can be used to assess
whether the requirements of the banks can be met.
Line 2 includes
loans from shareholders (shareholderloans). The
question is whether there is still room for a company to borrow on the capital
market. The question is then what kind of credit rating that company has and
what its ICR would be; the ICR is much lower for a shareholder loan. For the
shareholders, this is less relevant; they will be paid if the company is sold.
Even if the ICR remains more or less the same in this
scenario, this is not what banks will accept. At an ICR of 2, a bank is already
'nervous'. In response to the Court's question on what I base this on, I would
answer as follows. It is based on the enclosed benchmark; that benchmark is the
minimum. The benchmark is taken from the facility agreement with the banks.
This agreement is part of the documents. In response to the Court's question as
to what the benchmark interest rate is that corresponds to a CCC rating, I
would answer as follows. I believe that no loans with characteristics such as
the shareholder loan in question can be found in the databases where these
types of loans are registered. There are no loans comparable to the shareholder
loan to be found. This is a Bloomberg benchmark. The Tax and Customs
Administration does not have data on or a database of loans. We sometimes have
licenses to consult such a database. I base my opinion on the report of [As]
itself. It states that a search was made in a Bloomberg database and no
comparable loan was found.
About the
management case. The bank case is the prudent one. It contains a head room. A
management case is often much more positive with the prognoses. It assumes
higher sales, more cash flow and therefore a better ICR. But even if I work out
the ICR for the management case, it does not give a better picture compared to
the bank case. I end up with triple c or b or b -. No useful comparables emerge;
no unaffiliated parties can be found who would provide these kinds of loans.
The fact that you can't find them could also mean that they just aren't
there."
As before
the court, the following is in dispute between the parties: the deductibility
of the interest charges owed in connection with the 'Loan Notes' mentioned in
item 15 of the court ruling, and the deductibility of the costs of financing
the acquisition of the [N] by the interested party. The following questions in particular are at issue here:
1.
Should
the Loan Notes be considered as equity or as a loan under civil law?
2.
If the
Loan Notes are to be considered a loan under civil law:
(a)
Do the
Loan Notes qualify as a so-called sham loan? And if not:
(b)
Have
the Loan Notes been entered into under such conditions that they actually
function as equity of the interested party (Article 10, first paragraph,
subsection d, of the Corporation Tax Act 1969; hereinafter: the
Act)?
3. If the Loan Notes do not actually function
as equity:
(a)
the
taking out of the Loan Notes by the interested party should be regarded as a
non-bankrupt transaction, and
(b)
are
the conditions under which the Loan Notes have been concluded such that (one or
more of) those loans may be regarded as a 'non-bankrupt' loan and, if so, to
what extent does that prevent the deduction of the interest charges at issue?
4.
If and
to the extent that the interest charges taken into account
in respect of the Loan Notes are business expenses of the party concerned, does
Article 10a of the Law prevent the deduction of those interest charges?
5.
If and
in so far as the interest charges taken into account
are business expenses of the person concerned, and Article 10a of the Law does
not prevent the deduction of those interest charges: does Article 10d of the
Law prevent the deduction of those interest charges?
6.
If and
in so far as the answers to questions 1 to 5 do not preclude the deductibility
of the interest charges, is the deduction of the interest charges not permitted
on the basis of the doctrine of fraus
legis?
7.
Are
the costs of acquiring the companies acquired by the interested party ('the N')
and of financing them deductible?
8. Should the so-called Arrangement Fee and
Loan Syndication Fee be activated?
4. Assessment of the
dispute
Civil law qualification
of the Loan Notes
4.1.1.
The court considered the following about
the question whether the Loan Notes should
be considered as a loan under civil law or whether these loans only seem to be a loan:
“35.
Qualified by civil law standards, the Intercompany Loans or Loan Notes are,
according to the Respondent, to be regarded as equity and not as money loans.
Furthermore, he argues that this is a case of sham loans. The parties actually intended a capital contribution (relative sham
act). In support of this, the Respondent has submitted the following.
35.1.
The
subordinated loans cannot be viewed separately from the other agreements made
with the investors (Private Placement Memorandum, LPAs), affiliated parties
(Investment Agreement) and third parties (the banks). The parties do not intend
to redeem the loans, other than in the event of an 'exit' whereby all
Shareholder Instruments are repaid in a lump sum on dissolution of the structure.
If no exit has taken place at the dissolution of [H], the investors will
receive an equity interest in the relevant portfolio company.
35.2.
The
Respondent further submitted in this regard that the shareholders (in the
Investment Agreement) and the external banks (in the Structure Memorandum) made
further, partly undisclosed agreements regarding the intercompany Loan Notes,
on which the external banks said they relied. Plaintiff has not provided the
original Structure Memorandum. The further undisclosed understandings are
likely to affect the character of the money supply and the meaning or rather
lack of meaning of the terms set out in the Intercompany Loan Agreements,
according to the Respondent.
35.3.
According
to the defendant, for all parties there is provision of equity, while the
plaintiff wants to give the opposite impression to the Dutch tax authorities,
namely that there is loan capital. Seen from the banks' point of view, the Loan
Notes fully function as risk-bearing equity, which is in accordance with their
financing requirements. For the investors, there is an equity investment in the
[N] , as stated by the Respondent with reference to
the Private Placement Memorandum and [I] Annual Review 2010 (see section 1).
The perception was also presented to the [N] works council that [H] would
finance the acquisition of the [N] with 50% equity from its own funds.
35.4.
In its
memorandum, the defendant also referred to the form and content of the
Intercompany Loan Agreements, namely that they were very brief in comparison
with the agreements with the banks, that the terms of the loans without
benchmarks 'fell out of the sky' and that the subordinated loans were
comparatively expensive.
36.
In its
assessment of the positions taken by the Respondent, the Court puts the
following first. For answering the question whether a provision of money such
as the one in question should be considered a loan for tax purposes or a
provision of capital, the civil law form is, in principle, decisive. There is a
question of a sham loan if there is only a sham loan, while the parties
actually intended to provide capital (HR 27 January 1988, no. 23 919,
ECLI:NL:HR:1988:ZC3744, BNB 1988/217 (hereinafter also
referred to as BNB 1988/217) and HR 25 November 2011, no. 08/05323,
ECLI:NL:HR:2011:BN3442, BNB 2012/37 (hereinafter also referred to as BNB
2012/37)). The Court agrees with the plaintiff that the risk of proof regarding
the existence of a sham loan lies with the party invoking its existence, which
means that, in this case, the burden of proof in this respect lies with the
defendant.
37.
The
District Court does not follow the defendant in its opinion that the
subordinated loans cannot be regarded as loans under civil law and must be
regarded as equity. In terms of form and content, they are loan agreements. The
assertions that they are summary or incorporeal in relation to agreements with
third parties cannot lead to a different opinion. It follows from the terms of
the Intercompany Loan Agreements, reproduced in section 16 of this judgment,
that there is an obligation to repay. Repayment of the loan, including accrued
interest, is made no later than after 10 years minus two business days. No
interim repayment schedule has been agreed. Under certain conditions, the
plaintiff may repay the lenders earlier, taking into account
the relative seniority of the subordinated loans (Article 5 of the Intercompany
Loan Agreements). The subordinated loans are payable immediately in the event
of 'an Event of Default which is continuing' (Clause 8.2 of the Intercompany
Loan Agreements). The fact that the interest is credited and not paid during
the term does not detract from the qualification as a money loan as this does
not remove the obligation to repay. Pursuant to article 6 of the Intercreditor
Agreement, interim repayment is indeed subject to the consent of the banks, but
this condition does not, in the opinion of the District Court, detract from the
existence of the repayment obligation. The other agreements referred to by the
Respondent, such as the Private Placement Memorandum, the LPAs, the Investment
Agreement and the [AmA] ,
also do not affect the existence of a repayment obligation.
38.
The
arguments of the Respondent to the effect that the parties involved were aimed
at achieving a return in the event of a sale of the [N] (exit) whereby all
Shareholder Instruments would be repaid at once for the benefit of the
(indirect) shareholders, and that it was not the intention of the parties to
grant a money loan, do not alter the fact that according to the form there is a
money loan and a repayment obligation. A substantive test of the repayment
obligation is not relevant in this context (cf. HR 8 September 2006, no. 42
015, ECLI:NL:HR:2006:AV2327, BNB 2007/104, paragraph
3.4).
39.
Insofar as the defendant takes the position
that the subordinated loans must be regarded as sham loans, the court rules as
follows. In view of the above-mentioned assessment framework, it is up to the
Respondent to prove that, notwithstanding the Intercompany Loan Agreements, the
intention of the Claimant and the lenders ( [W] , [Aa]
, [Ab] and [Ag], [Aj] B.V. and later also the
managers) was to provide capital. The Court is of the opinion that the facts
and circumstances mentioned by the Respondent - also when viewed together - do
not lead to the conclusion that the actual intention of the Claimant and the
subordinated loan providers was not to provide a loan. In this respect the court
considers the following.
40.
Assuming
that it has always been the intention of the parties to sell the [N] and to pay
out the principal and the return on it at the time of sale, this does not mean
that the parties actually intended to provide capital
with the subordinated loans. The defendant has not made it plausible that the
will of the plaintiff and of the lenders (
[W] , [Aa] , [Ab] and [Ag] , [Aj]
B.V. and management) with the subordinated loans was aimed at providing
capital. In the 2011 financial statements of [W] ,
[Aa] , [Ab] and [Ag] and those of the plaintiff, the subordinated loans including
accrued interest are classified as receivables ('Loan Receivable') and
liabilities ('Non-current liabilities') respectively, and the interest accrued
in that year is accounted for as 'Loan interest', which indicates that to third
parties the subordinated loans were presented as liabilities. The defendant's
assertion that the provision of loan capital was aimed at obtaining an interest
deduction for the Vpb does not lead the court to rule
otherwise, and in fact indicates that it was the intention of the parties
involved to provide a loan. The Court does not consider the reference to the
intention of parties other than those involved in the loan agreements, such as
the banks, the investors and the works council of the
[N], to be relevant for the assessment of the question of whether there is a
sham transaction. What matters in this case is the determination of the motives
of the parties involved in the subordinated loan. If the subordinated loans are
regarded as equity by the banks, investors or the
works council of the acquired [N], this does not mean that this is also the
case for the plaintiff. According to the [AmA],
schedule 2, part 1B, article 3, letter a, reproduced in section 17.4, it was
also agreed with the banks that the minimum required equity contribution could
be made both in the form of payment of capital and in the form of a
subordinated shareholder loan. The banks were concerned with the fact that they
had preference over other creditors and not with the legal form in which the
equity was contributed; the fact that the bank reports and financial covenants
in article 26 of the [AmA] make no distinction
between the loans and the equity is not considered relevant by the Court.
41.
The
foregoing leads to the conclusion that Defendant has not proven that the
Intercompany Loans are sham loans."
4.1.2.
The
inspector also argued on appeal that the obligation of the interested party
under the Loan Notes was equal in civil law to its obligation towards the
providers of capital. According to the Inspector, the District Court erred in
rejecting the argument that civil law involves the provision of capital. In
addition, on appeal, the Inspector maintained his position that the Loan Notes
were only ostensibly a loan, because in reality the
Interested Party and the Guernsey Limiteds would have
intended a provision of capital.
4.1.3.
On
appeal, the interested party maintains what she argued in the first instance
and follows the decision of the district court.
4.1.4.
With
respect to the question whether the Loan Notes are a loan under civil law or
must be qualified as a sham loan, the Court of Appeal agrees with the judgment
of the District Court in sections 36-38 and 39-40, respectively. The arguments
brought forward by the Inspector on appeal against this judgment do not lead
the Court to a different judgment.
Participation loan
4.2.1.
With regard to the question of whether the loans were contracted under such
conditions that they actually functioned as equity of the interested party, the court considered the following.
“42. The
Respondent also takes the position that the interest on the subordinated loans
is not deductible on the basis of Section 10(1)(d) of
the Corporate Income Tax Act and the related case law (participation loan).
43. In its
judgment of 5 June 1957, No. 13 127, ECLI:NL:HR:1957:AY1891,
BNB 1957/239, the Supreme Court held that profits distributed to a creditor are
no longer regarded as costs of the business for the debtor:
if the
share of the profit forms part of the arrangement of the relationship between
the creditor and the debtor, which involves the creditor in the business of the
debtor to such an extent that he shares in it to some extent'.
44.
As
previously mentioned in paragraph 36, in order to
answer the question of whether, for tax purposes, a creditor has granted money
to an entrepreneur as a loan or as a provision of capital, the civil law form
is generally decisive. An exception to this rule is made, inter alia, if the
loan is granted under such conditions that the creditor to some extent
participates in the debtor's business with the amount lent by him, as follows
from the aforementioned judgments BNB 1988/217 and BNB 2012/37, as well as from
the judgment of the Supreme Court of 11 March 1998, No. 32 240, ECLI:NL:HR:1998:AA2453, BNB 1998/208 (hereinafter also referred to as
BNB 1998/208). In BNB 1998/208, the Supreme Court further ruled that these
conditions are only met if the remuneration for the provision of money depends
on the profit, the debt is subordinated to all unsecured creditors and the debt
has no fixed term, but is only payable in case of bankruptcy, suspension of
payments or liquidation. As the profit-sharing bonds in the latter case had a
fixed term, the Supreme Court ruled that not all criteria were met. The fact
that the term was 50 years did not mean that this had to be denied significance
for the question of whether the bond holders had a certain share in the company
of the interested party, according to the aforementioned
judgment.
45.
If the
payment due is not dependent on the profit, there is no question of a certain
degree of participation in the business of the creditor, as follows from the
Supreme Court judgement of 17 February 1999, no. 34 151, ECLI:NL:HR:1999:AA2655, BNB 1999/176 (also referred to below as BNB
1999/176). A term of a loan of more than 50 years is such that independent
significance must be denied to the fact that the loan in this case had a fixed
term of 95 years, as follows from the judgment of the Supreme Court of 25
November 2005, no. 40 989, ECLI:NL:HR:2005:AT5958, BNB 2006/82 (hereinafter BNB
2006/82). As the remuneration for the loan in the latter case was almost
entirely profit-dependent, the Supreme Court ruled that the loan qualified as a
participation loan as referred to in BNB 1998/208.
46.
The Respondent argues that the remuneration on
the subordinated loans is profit-dependent, that the loans are subordinated to
all other creditors and that (during the term of the structure) the loans have
no repayment obligation, so that in this case there is no fixed term. The
Claimant takes the position that, in view of BNB 2018/60, the criteria for the
Participation Loan should not be assessed materially, but formally, and that
thus viewed, there cannot be a Participation Loan. After all, the Intercompany
Loans have a fixed term of 10 years minus two working days and the interest
payment is fixed so that the liability of the payment is not profit dependent,
according to the Claimant.
47.
Article
10, paragraph 1, opening words and (d) of the Vpb Act
reads as follows, with effect from 2007:
In
determining the profit, no deduction shall be made:
(…)
d.
interest
on a loan and changes in the value of the loan, if the loan is contracted under
such conditions that it actually functions as the taxpayer's own capital;'.
48.
Until
1 January 2007, Section 10(1)(d) of the Dutch Corporate Income Tax Act, in
conjunction with subsections 2 through 4 of that Section, provided an
interpretation of the term 'hybrid loan'. From 2003 to 2007, these provisions
read as follows:
In
determining the profit, no deduction shall be made:
(..)
d.
allowances on a loan and changes in the value of the loan, if the loan is
contracted under such conditions that it actually functions
as the taxpayer's own capital. This will be the case if, with respect to the
loan, de jure or de facto, a circumstance as referred to in subsection 2(a),
(b) or (c) occurs.
(…)
2. The circumstances referred to in subsection
1(d) are:
a.
the
amount of the remuneration on the loan is entirely dependent on the profits or
the distribution of profits of the taxpayer or of an entity affiliated with the
taxpayer as referred to in Section 10a(4). The loan
has no fixed
repayment
date or a repayment date more than 10 years from the date of the loan.
b.
the
amount of the remuneration on the loan is partially dependent on the profit or
the profit distribution of the taxpayer or of an entity affiliated with the
taxpayer as referred to in Section 10a(4). The part of
the remuneration that does not depend on the profit is at the time the
remuneration is agreed less than half of the market interest rate that applies
to loans with the same term but for which the remuneration is not
profit-dependent. The loan does not have a fixed repayment date, or a repayment
date more than 10 years from the date of the loan.
c.
The
amount of the consideration shall not be made dependent on the profits or the
distribution of profits of the taxpayer or of an entity affiliated with the
taxpayer as referred to in Section 10a(4), but the
chargeability of the consideration shall be made dependent thereon. The loan is
subordinated and has no fixed redemption date or a redemption date more than 50
years from the date on which the loan was contracted.
3.
Whenever
a change in the remuneration of a loan is agreed, it shall be assessed whether
subsection 1(d) applies to the loan for the remaining term. Where the repayment
date is deferred, for the purposes of subsection 1(d) the loan shall be deemed
to have had that new repayment date from the time the loan was taken out.
4.
Where
a loan has been obtained from an entity with which the debtor is associated
within the meaning of Section 8b, there shall, for the purposes of subsection
2, be deemed to be a profit-related payment, if such payment is de jure or de
facto:
a.
no
remuneration on the loan has been agreed, or
b.
a fee
has been agreed which deviates significantly from the fee which would have been
agreed upon by independent parties in the course of business'.
In 2002,
the text of these provisions was identical, with the proviso that the second
sentence of both subsection a and subsection b of the second paragraph read as
follows: 'The redemption date is more than 10 years after the date on which the
loan was contracted'.
49.
In the
explanatory memorandum, the following was noted with regard
to these provisions which applied until 1 January 2007:
Hybrid
loans are forms of capital that are a mixture of equity capital and loan
capital. They are forms of capital that formally have the nature of a loan, but
materially have the characteristics of equity. Case law has formulated a number of criteria on the basis of which a form of capital
that is formally outside the Netherlands can be substantively designated as
equity. Important factors are whether the "loan" is profit-dependent,
has an indefinite term and is subordinated to other creditors. In its report
(...) the Study Group on Corporation Tax in an International Perspective
indicated that a more detailed statutory interpretation of these criteria could
prevent purely tax-driven products from being used or developed at the
interface between equity and loan capital. As a precondition, the Study Group
stated that banking products or transactions that are not tax-driven should be
left untouched as much as possible and that Dutch businesses should not get out
of step internationally. The proposed scheme is in line with these
recommendations of the Study Group. (Parliamentary Papers II 2001/2002, 28 034,
no. 3, p. 7) and 'For that matter,
the scheme is only intended to give a different tax treatment to hybrid forms
of financing than would be the case on the basis of
case law involving the requalification of the loan. This mainly concerns the
judgments of 11 March 1998 (BNB 1998/208) and 17 February 1999 (BNB 1999/176c).
This also means that the proposed regulation does not limit the possibilities
of the tax authorities to correct the character of a loan or the amount of an
interest payment in affiliated relationships, if this differs from what would
be done between independent parties. After all, this follows directly from the
idea of total profit, which precedes the application of Article 10.
Incidentally, the proposed measure does not include an exhaustive list in the
corporation tax. For reclassification on other grounds, namely the doctrine of
appearance and essence or the so-called "bottomless pit" criterion,
the relevant case law will remain valid. I am thinking in
particular of the judgment of the Supreme Court of 27 January 1988 (BNB
1988/217). (Parliamentary Papers II 2001/2002, 28 034, no. 3, p. 27)
50.
The
Working for Profit Act repealed the second sentence of Article 10, paragraph 1
(d), and paragraphs 2 to 4 of Article 10. This has been explained as follows
(Parliamentary Papers II 200506, 30 572, no. 3, p. 18-19):
Hybrid
loans are forms of capital that are a mixture of equity and debt. In civil law,
they are loans, but in practice they have the characteristics of equity.
Companies find it attractive to raise hybrid forms of capital, because the
remuneration for them (the interest) is tax deductible, while they can serve
commercially to strengthen the guarantee capital or regulatory capital.
When the
2001 Income Tax Act was introduced, the capital gains tax was introduced for
private investors. As a result, the provision of equity capital and loan
capital to such investors was henceforth included in the basis of box III in
the same way. It was feared that this could reinforce the tendency to develop
products at the interface between equity and loan capital. Because case law
offered few possibilities for reclassifying a loan as equity capital, the Study
Group on Corporation Tax in an International Perspective, under the
chairmanship of the former State Secretary for Economic Affairs, Mrs. Van Rooy, advised in its report "Broadening and
Reducing" of 11 June 2001 (...) to give further statutory interpretation
to the criteria used by the Supreme Court (BNB 1998/208 and BNB 1999/176). A
precondition was that banking products or transactions that are not fiscally
indicated would be left untouched as much as possible and that Dutch businesses
would not get out of line internationally. This led to the inclusion of a
provision in the Corporation Tax Act stipulating that the remuneration on a
loan is not deductible if the loan has certain statutorily defined
characteristics of equity.
In
practice, little use has been made of the more detailed statutory definition of
a hybrid loan. This seems to indicate that the introduction of the capital
gains tax - contrary to what was feared at the time - has hardly stimulated the
development of new products at the interface between equity and debt. It has
also emerged that the conditions formulated at the time impose restrictions on
the application of this provision. Preliminary consultations between taxpayers
and the Tax Authorities show that practitioners find the application
complicated. All in all, the added value of the further statutory
interpretation appears to be limited. For this reason, it is proposed that the
further statutory interpretation be dropped and that the abstract formulation
"loan contracted under such conditions that it actually functions as
equity" suffices. This means that the distinction between equity and loan
capital is made again on the basis of the criteria
developed in case law.
51.
In the
explanatory memorandum on the articles of association (Parliamentary Papers II
2005/06, 30 572, no. 3, p. 47), the following was also noted about the
cancellation of the further specific statutory interpretation of the concept of
hybrid loans and the interpretation of the criteria developed by the Supreme
Court:
The
elimination of subsection 1 (d), second sentence, and subsections 2 through 4
includes the elimination of the specific statutory interpretation of the term
"hybrid loans". These are loans that have the character of a
debtor-claim relationship under civil law, but materially exhibit the
characteristics of the provision of equity to "the debtor". The Dutch
Supreme Court has developed criteria to distinguish normal loans from hybrid
loans. The essence of these criteria can be found in the Supreme Court
judgement of 5 June 1957, No. 13 127, BNB 1957/239: there must be "an
arrangement of the relationship between creditor and debtor, which involves the
creditor so closely in the business of the debtor that he shares to some extent
in it". In later judgments this was further
The
wording of this paragraph is similar to that used in
the judgement of HR 11 March 1998, no. 32 240, BNB 1998/208. Here we find a
similar formulation: "if the loan is granted under such conditions that
the creditor, with the amount lent by him, to some extent participates in the
business of the debtor". This principle is elaborated in this judgment in
concrete criteria: "These conditions are only met if the remuneration for
the provision of money depends on the profit, the debt is subordinated to all
unsecured creditors and the debt has no fixed term but is only payable in the
event of bankruptcy, suspension of payments or liquidation." The
elimination of the further specific statutory interpretation of the concept of
hybrid loans results in a complete reliance on these criteria and on the
further interpretation thereof that has taken place and will take place in case
law.
52.
On the
advice of the Council of State, the legislator maintained the first sentence of
Article 10(1)(d) of the Corporate Income Tax Act as from 1 January 2007.
According to the Council of State, the deletion of part (d), including the
first sentence, would imply that it would be implied that the interest on the
loans previously covered by part (d) would always be deductible (Kamerstukken II, 2005/06, 30 572, no. 4, p. 14):
‘3.3.
Non-deduction of interest and other costs
3.3.1. Undercapitalisation (...)
In
addition to a thin capitalization rule, provisions may be included whereby,
under certain circumstances, what is made available as loan capital essentially
constitutes the provision of equity. (Counter) evidence is possible in this
regard. Such a provision is currently included in Section 10(1)(d) and (2) to
(4) of the 1969 Corporate Income Tax Act. The Council advises not to delete
these provisions in their entirety. The Explanatory Memorandum states that the
repeal of these specific statutory provisions for hybrid loans means that the
criteria set out in the judgment of 11 March 1998, BNB 1998/208, and the more
detailed interpretation which has been and will be given to them in case law,
will be applied in full. As the intention is to leave the interpretation of the
concept of 'loans which qualify as provision of equity' to the tax courts
again, the Council advises not to delete the first sentence of Section 10(1)(d)
of the 1969 Corporate Income Tax Act in order to avoid
a situation whereby it would be inferred from the deletion of the entire
provision that, as intended by the legislator, the interest on such loans is
always deductible.
(…)
3.3.
Non-deductibility
of interest and other costs
3.3.1.
Undercapitalization
The Council
advises leaving the first sentence of Section 10(1)(d) of the Corporate Income
Tax Act unchanged, so that the deletion of the entire provision does not lead
to the conclusion that interest on hybrid loans is always deductible. I have
followed this advice.
The Board
sees no reason to introduce the new Section 10b of the Dutch Corporate Income
Tax Act, which is substantively the same as Section 10(4) of the current Act,
as the intention is to leave the interpretation of the term 'hybrid loan' to
the tax courts again.
The reason for
maintaining this measure is mainly to prevent international qualification
differences in the case of long-term loans, which the tax court cannot
eliminate.
References in
the Corporation Tax Act to Section 10(1)(d) have also not been deleted as a result of the retention of the first sentence on the
advice of the Council of State (Parliamentary Papers II, 2005/06, 30 572, no.
4, p. 27).
53.
It follows
from the parliamentary documents referred to above and the legislative history
of Article 10(1)(d) of the Corporate Income Tax Act that the legislator has
left the interpretation of the criteria for assessing whether there is a
so-called participation loan to the tax court. The legislator has explicitly
indicated that it will fall back on the distinction between equity and debt
based on the criteria developed in case law, namely that the remuneration for
the provision of money depends on the profit, that the debt is subordinated to
all unsecured creditors and that the debt has no fixed term, but is only
payable in the event of bankruptcy, suspension of payments or liquidation.
In doing
so, the legislator has indicated that it will fall back on the further
interpretation of these criteria that has taken place and will take place in case
law. In accordance with this intention, the first sentence of Article 10(1)(d)
of the Corporate Income Tax Act contains only an abstract formulation, and the
further statutory interpretation of the criteria (the second sentence of this
provision in combination with paragraphs 2 to 4 of Article 10 of the Corporate
Income Tax Act) lapsed as of 1 January 2007, leaving room for further
interpretation of the criteria in case law.
54.
The
Court also takes as a starting point what the Supreme Court considered in its
judgment of 5 January 2018, No. 16/01 047, ECLI:NL:HR:2018:2, BNB 2018/60 under
2.4.2:
“2.4.2. In order to determine whether, for tax purposes, a loan
should be regarded as a loan of money or of capital, it is, as a rule, the form
under civil law that is decisive. This rule does not apply if the loan is
granted under such conditions that the creditor, with the amount lent by him,
to some extent participates in the business of the debtor. These conditions are
only met if the payment for the grant of money depends on the profit, the debt
is subordinated to all unsecured creditors, and the debt has no fixed term, but
is only payable in case of bankruptcy, suspension of payments or liquidation
(see BNB 1998/208, paragraph 3.3). The answer to the question whether the debt
has been subordinated to all unsecured creditors will depend on what has been
agreed in this respect.
The legal
view, defended by the plea in law, that the criteria for participation loans
must be substantively assessed cannot be accepted in its entirety. That view is
inconsistent with the starting point that, for answering the question whether,
for tax purposes, a provision of money should be regarded as a loan of money or
as a provision of capital, it is, as a rule, the civil-law form which is
decisive. It also undermines the legal certainty that the Supreme Court
intended when formulating the criteria for the participation loan. The
foregoing does not affect the fact that a clause in a loan agreement to which
independent significance must be denied may be ignored (cf. HR 25 November
2005, no. 40989, ECLI:NL:HE:2005:AT5958, BNB 2006/82).
55.
In the
District Court's opinion, the aforementioned test
framework implies that the criteria (further) developed in case law since the
BNB 1998/208 judgment are leading when assessing whether a loan should be
considered a participation loan under civil law. One of these criteria concerns
the absence of a fixed term for the loan. BNB 1998/208 concerned the
classification of a subordinated profit-sharing convertible bond with a (fixed)
term of 50 years. In BNB 1998/208, this circumstance did not mean that this
term had to be denied independent significance for the question of whether the
bondholders had a certain stake in the interested party's company. The turning
point appears to be at a loan with a term of more than 50 years (cf. Amsterdam
Court of Appeals 18 April 2019, nos. 18/00018 and 18/00019, ECLI:NL:GHAMS:2019:1504, section 4.8.3, and BNB 2006/82, section
3.2).
56.1.
According
to the Respondent, the Loan Notes are entered into under such conditions that
they in fact function as equity. For that purpose, the defendant argues, as
shown above, that the Loan Notes actually have a
profit-dependent remuneration, that they are subordinated to all creditors and
that (on balance) during the term of the structure no repayment obligation
exists. As long as the structure exists, nothing can
(and may) actually be repaid. This is possible only after the entire company
has been sold and the external creditors have been paid off. Without an exit,
the investors of [H] will receive shares in the target after 15 years, as
follows from the Private Placement Memorandum. The defendant further states in
this respect that the Loan Notes are inextricably linked to the shares in the
plaintiff and that they are not separately transferable. The Loan Notes were
issued in accordance with the (indirect) shareholder relationship in Plaintiff.
56.2.
According
to the Respondent, the remuneration on the Loan Notes is profit-related because
the interest is not paid but credited and in the return calculations no
distinction is made between equity and Loan Notes. At the exit, there is one
internal rate of return (hereinafter: IRR). In the annual accounts of [H],
according to the defendant, no interest on the Loan Notes is recognized and the
investment in the [N] is seen as one equity investment. Also
from the point of view of the managers and the company, there is always one
IRR, no distinction is made between the shares and the Loan Notes and only the
bank debt is considered as debt, according to the Respondent with reference to
the [N] Management Participation Programme of [date]
2011 submitted with its further document of 2 April 2019. From the banks' point
of view, this distinction is not made either. The yield on the Loan Notes is
credited because payment may only be made once all other obligations have been
settled first. According to the Respondent, the yield is only a mathematical
quantity. The Claimant does not actually have any funds of its own and is only
able to make any payment after a dividend payment allowed by the banks, which
will only be the case after the sale and the repayment of the bank debts. The
remuneration is thus dependent on the development of the company's value and
is, according to the defendant, profit-dependent.
Through the addition of the interest, the risk of the company lies primarily
with the holders of the Loan Notes.
56.3.
The
defendant also argues that the term of the Loan Notes lacks (independent) meaning.
The term of the Loan Notes is inextricably linked to the period of possession
of the shares in Plaintiff. The involvement of [F] with the claimant is,
according to his own statement, approximately four to six years. The
acquisition structure set up has existed for a maximum of 15 years. According
to the defendant, the formal term lacks significance because the loan will
exist during the term of the structure and will be settled simultaneously with
the settlement of the capital.
57. On the basis of the conditions as laid down in articles 5
and 6 of the Intercompany Loan Agreements, the Court deems it plausible that a
fixed term of 10 years minus two business days and a fixed interest rate of
11.5% (Facility A), 12.75% (Facility B) and 14% (Facility C) applies to the
loan. It cannot be said that the agreed fixed term of the loans should be
denied independent significance in this respect or that in combination with the
conditions laid down in the other agreements, such as the Investment Agreement,
the Intercreditor Agreement, the [AmA] and other loan
documentation, the granting of money is profit-dependent.
In this regard, the court considers the following.
58. The
circumstances that the Loan Notes are not independently transferable, that they
are inextricably linked to the shares in Plaintiff and that the return on the
shares and the Loan Notes at the settlement can be expressed in one amount or
percentage (IRR), cannot lead to the opinion that there is a participation
loan. The subordinated loans and the interest credited to them are, on the basis of the existing conditions, preferential to the
shares. The principal and the interest would also have been due if the [N] had
not been sold at a (sufficient) profit or if there had been a bankruptcy, etc.
(according to the agreements referred to as 'Events of Default'). If the return
exceeds the repayment obligation on the Loan Notes, the excess is to be
regarded as remuneration for the members' capital. The circumstance that [H] ,
the investors and participating managers will presumably consider the
remuneration they receive upon an exit or settlement of their position in the
[N] as a remuneration for the provision of capital and that in the documents a
single IRR is taken into account, also does not mean that the loans have been
entered into under such conditions that they actually function as equity (cf.
Amsterdam Court of Appeal 18 April 2019, nos. 18/00018 and 18/00019,
ECLI:NL:GHAMS:2019:1504, para. 4.8.5). The same applies to the circumstance
that from the Bank's point of view the Loan Notes are equated with equity.
59.
At the
exit in 2015, a separate payment on the shares and the Loan Notes also took
place. The circumstance that at that exit in 2015, first the shareholders were
satisfied by means of dividend payments and afterwards the holders of the Loan
Notes were repaid, does not change the above-mentioned opinion, since the
obligations under the Loan Notes (payment of principal and credited interest)
could be fully satisfied from the realised return.
60.
Nor
does the fact that [H] has a maximum term of 15 years mean that the agreed
fixed term of 10 years less two working days must be disregarded. Under the
contractual terms, the term of the subordinated loans was shorter than that of
the structure/H. The subordinated loans were concluded on 31 January 2011 and,
in view of that duration, would have to be repaid at the beginning of 2021. [H]
was established in 2007 and has a maximum term of 15 years, so that the
structure would end in 2022 at the latest. The Respondent's assertions that the
aim was to sell the 'target' at an earlier point in time after five or six
years does not change this, as this is not described in the terms of the
relevant agreements.
61.
As the
defendant itself has also expressed in its statement of defence
(sections 6.1c.3a, 6.1c.4a and 6.1c.5a) and in its reply to the rejoinder (p.
9, @23-24 and @25-27), it assumes a material assessment of the criteria for the
participation loan and not an assessment based on the conditions as laid down
in the (separate) agreements. In view of the above judgment, this approach is
not allowed in general. Furthermore, there are no facts and circumstances that
are of such a nature that an exception should be made in the present case.
Stipulations in the Intercompany Loan Agreements cannot be ignored on the
ground that no separate significance should be attached to them.
62.
It
follows from the foregoing that two of the three criteria for the presence of a
participation loan are not met. Although it is not disputed that the
subordinated loans are subordinated to all unsecured creditors, the criteria
that the remuneration for the provision of money depends on the profit and that
the debt has no fixed term are not met. Therefore, it cannot be said that the
subordinated loans were entered into under such conditions that they actually
function as equity of the plaintiff and there is no question of participation
loans."
4.2.2.According to the Inspector, the District
Court's opinion that the Loan Notes should not be considered participation
loans is based on an incorrect application of the HR ruling of 5 January 2018,
ECLI:NL:HR:2018:2, BNB 2018/60. According to him, this judgment offers room in
'extreme case situations' to reach a different opinion than that of the
district court. According to the Inspector, such an extreme situation exists in
this case. Furthermore, the Inspector maintains the arguments put forward in
the first instance with regard to this point of dispute, such as that the
formally agreed term of the Loan Notes is meaningless, that instead of creating
loans, the parties involved actually intended to provide capital, and that the
fee payable by the interested party in connection with the Loan Notes is profit-dependent.
4.2.3.On appeal, the interested party maintains
what she argued in the first instance and follows the decision of the district
court.
4.2.4.With regard to the question whether the Loan Notes must
be classified as a participation loan, the Court of Appeal agrees with the
opinion of the District Court. Like the Court, the Court of Appeal considers it
plausible that based on the conditions of the Loan Notes, they have a fixed
term of ten years. On this basis, the conditions which according to case law
tend to be imposed on the existence of a participation loan have not been met
(cf. paragraphs 43-62 of the judgment of the District Court). The Court of
Appeal sees no circumstances in the design of the Loan Notes that would lead to
deny independent meaning to the agreed fixed term. The question of whether the
remuneration of the provision of money is profit-dependent can be left open
when assessing the question of whether the Loan Notes are a participation loan.
What the Inspector brought forward on this point in appeal does not lead the
Court of Justice to a different opinion than that of the District Court.
Substantive nature of taking out the Loan Notes by the
Interested Party
4.3.1.The District Court assessed the Inspector's
assertion that the interest expense owed on the Loan Notes - irrespective of
the answer to the question of whether the loans were entered into on arm's
length terms - should not be charged to the result of the interested party
according to arm's length standards, as follows.
63. With
reference to, inter alia, the so-called racehorse judgment (HR 14 June 2002,
no. 36 453, ECLI:NL:HR:2002:AB2865, BNB 2002/290) and
the total profit concept (Article 8(1) of the Vpb Act
in conjunction with Article 3.8 of the IB 2001 Act), the Respondent argues that
the interest on the subordinated loans cannot be charged to the profits because
it is not a business expense. According to the Respondent, the profit must be
stripped of shareholder influence and shareholder motives.
64. In support, the defendant argues that the
plaintiff was not involved in the acquisition or takeover of the [N] . The financing of this was arranged by [F] and
implemented by the plaintiff as it stood. There are no indications that the
claimant has weighed up the conditions of the subordinated loans. According to
the defendant, such an assessment would have been reasonable, because of the
influence of the interest burden on the result. After deduction of interest,
the claimant has a structural loss position, which endangers the continuity of
the business. In fact, the principal sum and the fee can only be repaid in the
event of a successful exit. A rational entrepreneur does not sell his company
to pay the interest, according to the defendant.
According
to the defendant, the plaintiff does have freedom of choice when it comes to
the financing of its business, but this freedom is restricted where no
reasonable entrepreneur can maintain that the financing expenses have been
incurred fully with a view to the business interests of his company. A rational
entrepreneur as plaintiff would realize that there is a risk that the
development of her operational profit would not structurally keep pace with the
interest on the Loan Notes. As the interest on the Loan Notes has de facto no
effect and no meaning towards third parties, the defendant concludes that the
charges were only made to please the shareholders.
a.
The
plaintiff contends that the interest is in rem.
65.1.
To
this end, it refers to research conducted at the request of the Cabinet into,
among other things, the question of why high leverage is used in takeovers by
private equity funds (research report of 13 April 2017, 'Private equity in the
Netherlands: a stakeholder perspective', Parliamentary Papers 2016/17, no. 34
267, no. 10). According to the claimant, the research shows that the return of
a private equity fund is achieved through a combination of factors. These
include operational improvements, synergy benefits, a revised strategic focus
and the investment selection that is made. The claimant argues that the optimal
use of tax benefits also plays a role in achieving the return. For example,
interest expenses may in principle be deducted for the purposes of the Vpb Act. As regards the tax benefits generated, it is
important to note that this is certainly not the only reason for using
leverage. For example, the use of leverage makes it possible to make more
acquisitions. With a limited amount of equity, it can increase the clout of a
fund. In addition, high leverage leads to a more result-sensitive reward on the
limited partners' equity. The study provides an example in which an investment
is financed with 90% debt capital. An improvement of the company from 100 to
105 results in a 50% return on the equity invested. All of
these reasons for the use of debt over equity can, according to Claimant, be
considered businesslike in their own right and, according to Claimant,
substantiate the businesslike nature of the loan as such.
65.2.
The
plaintiff also disputes the defendant's assertions that the continuity of the
company can be jeopardised with the current financing
structure. In general, the general partners of private equity funds such as
this seem to be able to manage the risks of a high leverage well. They are
close to the company and bring years of knowledge and expertise to the table.
They are also able to correctly assess the desirability of additional capital
injections at the time when problems appear to be present. According to the
claimant, there is no increased risk of bankruptcy as a result
of additional loan capital financing. The claimant also notes that,
according to the forecast made when the subordinated loans were granted, it
will have a positive net result for the period from December 2011 to December
2018 (Annex 22 to the notice of appeal), even after payment of the interest
charges on both the bank debt and the subordinated loans. The calculation of
the interest expense associated with the subordinated loans shown in Exhibit 22
is unrelated to the facts, according to the Claimant, and misrepresents the
facts. The ownership model of private equity is temporary
and an exit occurs in most cases between four and seven years. The Claimant
sold its shareholding in [W] B.V. in December 2015. [F] thus held an interest
in [W] B.V. and its participations for approximately five years. After the
sale, all subordinated loans, including accrued interest, were repaid. This
actual repayment confirms the prognosis made when the subordinated loans were
contracted that the plaintiff would be able to meet all its obligations,
according to the plaintiff.
b.
In
assessing the reasonableness of the interest payable on the Loan Notes, the
court put first and foremost that this interest relates to the financing of the
(acquisition of the)
[N] by
[Ad] B.V., via [W] B.V., the latter company being held by the claimant.
Together with the [N], these companies form as of 3 February 2011 a fiscal
unity as referred to in Section 15 of the Corporate Income Tax Act with the
claimant as the parent company. This structure ensures that the interest
charges on the loans with which the acquisition of the [N] was financed and the
result of that group form part of the same fiscal result. The circumstance that
this consolidation, because of the size of the costs with which the acquisition
was financed, leads to a negative result for years (see item 21), does not
mean, in the opinion of the Court, that the interest owed on the Loan Notes is
not businesslike. The fact that this interest is payable on a commercial basis
must also be assessed in the light of the value and the value development of
the assets financed by means of the Loan Notes. As the plaintiff rightly
argues, when assessing the commerciality it should be
taken into account that the enterprise of the plaintiff is aimed at achieving
capital gains with the sale of the [N] and that the concept of "going
concern" in that respect should be interpreted differently. The subsequent
sale of the [N] in 2015 shows - as is not in dispute between the parties - that
the value development of the [N] in the years 2011 - 2015 was very profitable
(see section 30).
c.
It is
not disputed that the acquisition of the [N] in itself is
a commercial legal act. To that extent, the interest burden of plaintiff
related to that acquisition also serves a business purpose. The question
whether the conditions under which the Loan Notes were concluded are arm's
length will be discussed in sections 69 et seq. below. Assuming that these
conditions are also arm's length and subject to the application of Section 10a
of the Dutch Corporate Income Tax Act, Section 10d of the Dutch Corporate
Income Tax Act or the special legal remedy of fraus legis, the total profit concept does not limit the ratio of
loan capital or equity capital with which a taxpayer finances its activities.
The extent to which it was chosen in the present case to finance the
acquisition of the [N] partly through shareholders' equity and partly through
borrowed capital (including the Loan Notes) is not limited by the Act.
Article
3.8 of the Wet IB 2001. After all, the system of the Corporation Tax Act
enshrines that a taxpayer has freedom of choice in the form of financing of a
company in which it participates (HR 5 June 2015, no. 14/00343,
ECLI:NL:HR:2015:1460, BNB 2015/165, paragraph 3.1.3; this judgment will be
referred to below as BNB 2015/165).
d.
It
follows from the above that the decision of the plaintiff to issue the Loan
Notes falls within the (aforementioned) freedom of choice to which it is
entitled. The statements of the defendant to the effect that deduction is not
possible because the costs were incurred for shareholders' motives, fail."
4.3.2.On appeal, the Inspector maintains his
position based on, among other things, the judgment in HR 14 June 2002,
ECLI:NL:HR:2002:AB2865, BNB 2002/290 (hereinafter
referred to as the 'Reindeer Horses Judgment'), that the party concerned did
not act commercially - and only for the benefit of the shareholders - by taking
out the loans.
4.3.3.On appeal, the interested party maintains
what she argued in the first instance and follows the decision of the district
court.
4.3.4.1.
The
Court of Justice put first and foremost - as also considered by the District
Court - that the interested party is, in principle, free to finance its assets
with loan capital or with own capital. Furthermore, since all assets of the
party concerned must be deemed to belong to its business assets, these starting
points mean that the choice to finance the assets partly with the Loan Notes is
in principle an objective choice.
4.3.4.2.
Contrary
to what the Inspector has argued, it does not follow from the Renpaarden-arrest (and comparable judgments) that the provision of the Loan Notes is not
businesslike. In the Renpaarden-arrest the question
was whether costs incurred by a company for advertising, which costs were by
their nature - seen in relation to the business activities of the interested
party - of a business nature, were fully deductible.
In the aforementioned judgment, the Supreme Court ruled that the
expenses incurred have no business character and therefore cannot be charged to
the profits if and to the extent that they have been incurred in satisfying the
personal needs of the shareholder. In view of what has been considered in
section 4.3.4.1, a 'racehorse' test with regard to the
provision of the Loan Notes cannot be imagined. Acting in the apparent tax
group interest cannot be equated with satisfying the shareholders' personal
needs as such, as was the case in (inter alia) the Renpaarden
judgment (cf. Court of Appeal of The Hague 2 October 2019, ECLI:NL:GHDHA: 2019:2830, para. 5.2, and Advocate General Wattel, opinion of 3 July 2020, ECLI:NL:PHR:
2020:672, pt. 5.9).
The fact
that the choice made in respect of the assets means that interest is deducted
from the result subject to tax in the Netherlands and that this interest is
enjoyed by bodies established in Guernsey which are not subject to a
(compensatory) levy in respect of this interest, does not make this any
different. Leaving aside all this, whether there is any room for applying the Renpaardenarrest in respect of the provision of the Loan
Notes, besides the - according to established case law - as limitative
exceptions to the rule that the civil law qualification of a provision of money
is leading for the tax consequences to be connected thereto (HR 27 January
1988, no. 23.919, ECLI. 23.919, ECLI:NL:HR:1988:ZC3744,
paragraphs 4.2 through 4.4; cf. Advocate General, opinion of 17 December 2020,
20/02096, ECLI:NL:PHR:2020:1198, under 1.8, 1.9, 5.11 and 5.12).
4.3.4.3.
If,
instead of the Loan Notes, a larger part of the required financing could have
been obtained from the financing facility provided by the syndicate of banks
(judgment of the Court under 17), the Inspector should have made it plausible
that the Loan Notes were (partly) provided with the purpose of satisfying the
personal needs of the (ultimate) shareholders of the Guernsey Limiteds and of [Aj]. Facts and
circumstances that justify this, such that no reasonable thinking entrepreneur
would have chosen to (partly) finance the [N] with Loan Notes, have in the
opinion of the Court of Appeal not become plausible.
In this
connection, the Court of Appeal assumes - in so far as necessary - that the
total financing requirement of the interested party amounted to € 426,300,000
and that this was provided for by share capital (€ 81,300,000), financing by a
syndicate of banks (€ 210,000,000) and Loan Notes (€ 135,000,000); cf. the
overview on p. 11 of the Final Report [X] BV ("Assessment of Takeover
Financing 2011") of the Inspector dated 2 March 2016, as mentioned under
2.7. This set-up does not seem to leave room for the substitution of Loan Notes
by the facility of the Bank Syndicate as claimed by the Inspector.
4.3.4.4.
Another
issue concerns the question whether the conditions
under which the Loan Notes were provided are at arm's length. In answering
this question, the Court of Appeal sees no function for the Renpaardenarrest
(also), since the assessment of the commercial character of the conditions of a
loan is governed by (in particular) the jurisprudence on non-business loans.
The assessment of the Loan Notes against the criteria developed in this case
law is described below in paragraph 4.4.1 and following.
Are the Loan Notes loans with an impaired receivables
risk
4.4.1.
The
court assessed the question of whether the Loan Notes were non-cash loans as
follows.
“69.1. The
Respondent states that the Loan Notes between third parties, under otherwise
equal circumstances, would not have been concluded under the same conditions.
The Mezzanine Facility of approximately € 36 million at an interest rate of 12%
above Euribor cannot in principle lead to a 'comparable', according to the
Respondent, because it was advised against by the provider [Am] and ultimately
also did not go ahead. F] also considered the Mezzanine financing to be
unprofitable, while the amount of this facility is much lower than the
subordinated loans. Moreover, [Ad] B.V. acted as contracting party and not as
plaintiff, so that the comparison does not hold for that reason either. The
" [X] B.V. - Interest benchmark analysis" of [As] was made after the
fact, does not contain any comparables and it is not clear to the Respondent
whether the correct credit rating was arrived at with CCC (junk bond status) in
the analysis of [As]. A third party will not enter into
a transaction whose consequence is to sell its business to pay the interest.
The Intercompany Loan Agreements are further very sketchy in relation to the [AmA] and customary loan terms, such as financial covenants,
equity cures and debt-for-equity swaps, are absent according to the Respondent.
In this regard, the defendant submitted various calculations and projections
('bank base case', 'management case' and 'debt cover ratio'), from which it
would follow that such a loan would not have been agreed upon between third
parties - non-affiliated parties. Finally, the comparison of interest rates
between the [AmA] and the internal Loan Notes shows
large differences. The (partly) undrawn additional Capex Facility and Revolving
Credit Facility are still more advantageous than the cheapest internal loan at
11.5%. A third would not have repaid the relatively cheap bank loans in the
interim, leaving the relatively expensive financing with the Loan Notes
unchanged. According to the Respondent, the 'at arm's length principle' of the
Loan Notes results in the interest on the Loan Notes not being deductible.
69.2. The Respondent further argues that the Loan Notes are
non-cash loans, because no third parties could be found who would be willing to
provide the funds under the same conditions. According to the Respondent, it is
unthinkable that a third party would provide a 10-year loan with a fixed
interest rate, without securities or the possibility of interim intervention on the basis of financial covenants and with subordination
to all other creditors. If such a third party could be found, it would demand a
profit-sharing remuneration. On the basis of the
guarantee analogy, according to the Respondent, no 'normalised'
interest rate can be found for the non-bankrupt loans. The Respondent argues
that by eliminating the risk of nonpayment, an interest rate of 2.5%, i.e. the interest rate on a 10-year German government bond
as at 24 November 2010, should be taken into account. The defendant furthermore
argues that the fair value of the credited interest should be set at nil, so
that no interest is deductible.
70.1.
The
claimant disputes that the Loan Notes were not agreed upon at arm's length
conditions. It has had transfer pricing documentation drawn up for this purpose
(see section 20 of this judgment). No comparables of similar loans between
unrelated parties have been found. According to the claimant, this is because
the Bloomberg database does not contain comparables for loans with a credit rating
of CCC. According to the claimant, this does not mean that there are no
comparables, which according to the claimant is also evident from the offer for
additional Mezzanine financing. Mezzanine loans also often contain an interest
component that is only due at redemption and increases over the term of the
loan. In addition, third party financiers also provide so-called
Payment-In-Kind ('PIK') loans whereby all interest is only due upon repayment
and the interest accrues during the term of the loan. According to the
claimant, the subordinated loans are comparable to PIK loans. Because PIK loans
are subordinated to senior bank financing and mezzanine financing and all
interest is only repaid upon repayment, the interest rate at issue is higher
than for mezzanine loans. Plaintiff further points out that in December 2015
[W] B.V. was sold to a third party. Thereby the subordinated loans were repaid
including the added interest charges. According to the claimant, this is in
accordance with the forecast (Base Case Assumptions or forecast) drawn up by
the subordinated loan providers at the time the subordinated loans were
granted, which shows that a positive net profit remains even after deducting
interest charges and taxes.
70.2.
The
claimant furthermore disputes that this is a non-cash loan and that no third
parties could be found who would have been willing to accept the default risk
associated with the Loan Notes. For this purpose, the claimant also refers to
the aforementioned transfer pricing documentation, the
aforementioned forecast and the offer for the Mezzanine financing at an
interest rate of Euribor plus 12 percentage points. Since the conditions for
this were less favourable, it was decided to finance
the acquisition with subordinated loans. Insofar as the Respondent has argued
that the Loan Notes should be regarded as a provision of capital, this is,
according to the Claimant, contrary to the established case law of the Supreme
Court which states that there are only three exceptions to the rule that the
civil law form is decisive for the qualification of a provision of money as
either a loan or a provision of capital. The plaintiff refers in this respect
to the judgment BNB 2012/37.
71.
Insofar as the Defendant, with its assertion that the Loan Notes are notzakelijk, intended to argue that this provision of money
is (essentially) not a loan, but a provision of capital, the Court refers to
what has been considered in this respect above regarding the sham loan and the
participation loan. As the plaintiff rightly argues, there is no fourth
exception possible to the rule that the civil law form is decisive for the
qualification of a provision of money as either a loan or a provision of
capital. Insofar as the Respondent, within the framework of the assessment of
the commercial character of the (conditions of the) loans, argues that a
reasonable entrepreneur would not have assumed the interest charges as at issue
here and that there are shareholder motives, the Court refers to what has been
held above under the heading 'Commercial character of interest charges (Article
8 Vpb Act in conjunction with Article 3.8 IB 2001
Act)'. The question now is whether the conditions of the Loan Notes would have
been agreed upon between unrelated parties (at arm's length) or must be
regarded as imprudent conditions.
72. In the
opinion of the District Court, it has not become plausible that no third
parties could be found who would have been prepared to issue the Loan Notes on
the same conditions and under the same circumstances. In the opinion of the
District Court, the conditions are at arm's length. For this purpose, the Court
points to the return prognosis that was made at the time of the provision of
the subordinated loans, the transfer pricing documentation that the plaintiff
has submitted and the offer at the time for a Mezzanine financing at an
interest rate higher than that of the subordinated loans. The fact that the
transfer pricing documentation is dated 15 December 2014 and was therefore drawn
up after the event does not lead the court to make a different judgment. The
fact that the conditions for the subordinated loans are at arm's length is
confirmed by the actual course of events at the sale of the interest in the [N]
in 2015, whereby the Loan Notes, including the accrued interest, were redeemed
while, in addition, a substantial return was realized on the shares.
In light of all
this the defendant has not brought forward enough to reach a different opinion.
Also in this context it should be kept in mind that
the claimant's business operations are aimed at achieving capital gains from
the sale of the [N]. In the opinion of the Court, the defendant did not
sufficiently take this into account in its statements and prognoses.
73.
In
view of what has been considered above, the Court does not consider the
question of which (commercial) interest should be taken into
account if the Loan Notes should be regarded as non-business loans (cf.
the BNB 2012/37 judgment, paragraph 3.3.4). Incidentally, it should be noted
that the question of whether or not loans are
non-bankrupt loans arises in the context of the question of whether claims
arising from loans may be impaired, rather than in the context of the question
of whether the interest may be deducted."
4.4.2.
The
Inspector also argues on appeal that the Loan Notes are non-correlated loans.
According to the Inspector, in ruling on this point of contention, the District
Court erred in assigning importance to facts and circumstances that occurred
after the loans were made, such as the profit realized in 2015 on the sale of
the [N] and the benchmarking report of [As] prepared (in retrospect) in 2014.
According
to the Inspector, the reference to the Mezzanine financing does not
substantiate the commercial character of the Loan Notes, because these - with regard to their term, size and (as far as the Loan
Notes are concerned) the subordination, the link to the share capital and the
crediting of the interest - are not comparable to the Loan Notes. Moreover, the
Mezzanine was at the time considered by [H] to be too expensive and for that
reason also not contracted, according to the Inspector.
4.4.3.
On
appeal, the interested party maintains its position as stated in the first
instance and follows the decision of the District Court. According to it, the
reasonableness of the interest agreed in connection with the Loan Notes was
assessed at the time the loans were contracted. At that time, according to the
interested party, a forecast (return prognosis) was drawn up showing that the
principal amount and the accrued interest could be repaid at the time of
refinancing or an exit. The interested party refers in this regard to paragraph
72 of the court's ruling.
According
to the interested party, the aim of its business operations was precisely to
hold the shares in the [N] company for a certain period and then to sell them
at a profit. According to the interested party, this was taken
into account when it contracted the loans, which, according to it, were
repaid in full by the interested party, including the interest credited to
them.
4.4.4.
The
Court of Appeal first notes that in its judgment of 25 November 2011,
ECLI:NL:HR:2011:BN3442, BNB 2012/37, the Supreme Court considered, inter alia,
the following:
“3.3.2. If, in
the case of a loan between related parties, the interest rate has not been
determined in accordance with the 'at arm's length' principle, for the purposes
of calculating the taxable profit an interest rate will have to be used that
does meet this criterion. In doing so - except for the interest rate - the
parties' agreements will have to be taken into account
(such as those relating to security and the term of the loan). It is not
consistent with that principle to adjust the interest rate in such a way that
the loan essentially becomes profitable. That would undermine the nature of
what the parties had agreed.
3.3.3. If, with due observance of the considerations set out
in 3.3.2 above, no interest rate can be determined at which an independent
third party would have been prepared to grant the same loan to the party
affiliated with the company, subject to otherwise the same conditions and
circumstances, it must be assumed that, when granting such a loan, the company
will run a risk of default that this third party would not have taken. In that
case - barring special circumstances - it must be assumed that the company
concerned accepted this risk with the intention of serving the interests of the
company affiliated with it in its capacity as shareholder or subsidiary. As a
result, any loss on the loan cannot be deducted from the company's profits (cf.
HR 9 May 2008, No. 43849, LJN BD1108, BNB 2008/191). Hereinafter, such a loan
will be referred to as a non-cash loan.
4.4.5.
The
burden of proof for the assertion that, when the Loan Notes were entered into,
a remuneration could not be determined without these loans essentially becoming
profit-sharing lies with the party making that assertion, in this case the
Inspector (cf. HR 13 January 2012, ECLI:NL:HR: 2012:BP8068,
BNB 2012/79, section 3.2-3.3 and HR 20 March 2015, ECLI:NL:HR:2015:645, BNB
2015/141, sections 2.3.1 and 2.3.2).
4.4.6.
In the
context of the investigation carried out by the Inspector into (among other
things) the commercial character of the Loan Notes, the interested party
referred the Inspector, at his request, and in order to substantiate the manner
in which the conditions of the Loan Notes had been created at the time of their
conclusion, to a Mezzanine (hereinafter: the
Mezzanine) offered by [Am] in 2010.
4.4.7.
In his
'Final Report [X] BV' dated 2 March 2016, the Inspector stated the following
about the Mezzanine:
"The
Mezzanine Facility, which the offeror [Am] advised against, has not come to
fruition and therefore cannot, in principle, serve as a comparable. From the
summary documentation it appears that the Mezzanne
Facility would slightly reduce the available Senior Facility, which would make
the total fecility too expensive. Since apparently a
Mezzanine Facility of approximately € 36 million at an interest rate of 12%
above Euribor is not expected to increase the Internal Rate of Return
(hereinafter: IRR), it is difficult to understand why the internal loans of in
total € 135 million at a comparable interest rate are considered attractive
financing from which a higher IRR can be expected. According to sector reports,
the IRRs of private equity funds are on average around 16% per year.
4.4.8.
Furthermore,
in the 'Final Report [X] BV' of 2 March 2016, the following is stated (p. 19):
"I
note that of the internal decision-making process about the financing at [H] or
the buyer - except for the aforementioned email [Court: meant is the email from [Am] to (among others) Equity
Partners of 27 October 2010] - no documents have been submitted. - no documents
have been submitted. The loan notes do not contain the usual loan conditions,
such as financial covenants, equity cures and debt-for-equity swaps, also
customary at Mezzanine Facilities. The loan agreements consist of 12 pages,
whereas the banks need 289 pages to describe the conditions for the [AmA].
I have
built the Financial Covenants of the [AmA] into the
(conservative) bank case and the (optimistic) management case of the [N] . Even in the management case, due to the interest charges
on the intercompany loans, the [N] would end up with ratios that belong to
companies with credit rating CCC (non-investments grade, extremely
speculative). In this case, unaffiliated lenders would demand measures such as
debt-for-equity swaps.
The
projections show that despite the expected EBITDA increase, interest costs rise
disproportionately due to the interest-on-interest effect. In an unrelated
context, the EBITDA increase would be a reason to refinance the debts and to
negotiate better conditions / lower interest margins with the banks. At the [N]
the excessive financing with internal loans leads to ever higher interest costs
and only a marginal improvement of the interest coverage ratio. Only the
shareholder who also provides the internal loan would opt for such financing at
the expense of his return on the ordinary shares."
4.4.9.
Like
the Inspector, the Court of Appeal considers it plausible, on
the basis of the arguments put forward by the Inspector and including
his explanations at the hearing as mentioned under 2.13.2, that the credit
rating of the Loan Notes in 2011 did not exceed CCC, partly because the
creditors were satisfied with an ICR that was lower than that which the banks
would accept. That lower ICR seems to be partly due to the fact that the
interest is credited every year, while it is hard to imagine that, in the same
circumstances - i.e. that, in addition, facilities
have already been made available by third parties under security and annual
interest payments - the banks would be satisfied with that. The Court of Appeal
deems it plausible that for such a low valued loan, according to the Inspector,
no - good - 'comparables' can be found on the basis of
which an arm's length determination of the amount of the interest payment can
be made; it has become apparent that for such a loan, no relevant information
can be derived from Bloomberg data.
4.4.10.
The
investigation by the Inspector into the acceptability of the deduction of the
interest owed by the interested party on the Loan Notes revealed that there is
little information available as to how and on the basis of
which basis the amount of the interest was determined at the time the loans
were granted. It comes down to the fact that the interested party refers to an
offer made by [Am] (as the Court understands it) in March 2010 of the Mezzanine
which was not accepted (see under 2.5). What the conditions of this loan
facility were is not known, except that it concerned an amount of € 36.2
million at an interest rate of 12% above Euribor.
From the
correspondence submitted by the parties in the first instance, the Court
concludes that there is no further information on the conditions of the Loan
Notes at the time they were concluded. The statement of the interested party at
the hearing of the Court confirms this picture (see under 2.13.1).
4.4.11.
With
what has been considered above under 4.4.6 up to and including 4.4.10, the
Court of Appeal considers that the Inspector has in principle succeeded in
making it sufficiently plausible that no commercial interest can be found for the
Loan Notes, without these loans essentially becoming profit-sharing. Under
these circumstances, it was up to the interested party to make it plausible
that a commercial interest rate could be found for the Loan Notes, without
these loans essentially becoming profit-sharing.
4.4.12.
Interested
party considered the information provided by it sufficient in
light of the documentation requirement of section 8b of the Act and
added a benchmark report prepared in 2014.
4.4.13.
In the
opinion of the Court of Appeal, the Mezzanine does not substantiate the
reasonableness of the interest of the Loan Notes. To this end, the Inspector
correctly pointed out the much smaller loan amount of the Mezzanine, while the
interest on the Mezzanine of 12% above Euribor - assuming an annual Euribor for
2010 of 1.5% (in the report mentioned under 23.1 of the judgment of the Court,
a three-month Euribor for 2011 of 1.38% on average was mentioned) - was higher
than that of the Loan Notes, as mentioned in the judgment of the Court under 15
(with the exception of that of 'Facility C').
Moreover, it is not, at least not automatically, plausible that the Mezzanine
would have been subordinated, that the interest debt would always be credited
and that no securities would have been stipulated by [Am]. Furthermore, it has
remained unclear to which company in the structure the Mezzanine would be
provided.
On the
other hand, the Loan Notes are subordinated to the financing by the banking
syndicate and no security has been stipulated by the lenders.
4.4.14.
The benchmark
report that the interested party had drawn up in 2014 - as part of the
investigation conducted by the Inspector - is one of the means of evidence
available for assessing the commercial character of the Loan Notes. Contrary to
what the Inspector stated, the Court of Appeal does not reject this report
beforehand as evidence of the interest rate agreed in 2011 for the Loan Notes,
arguing that the report does not date from 2011 and was therefore drawn up
after the fact. In principle, a report drawn up retrospectively can also
substantiate the arm's length nature of an interest rate agreed in an earlier
year between related parties.
4.4.15.
Under
3.1 of the benchmark report, it is noted that the
credit facility granted to the interested party by a consortium of six banks is
not comparable. Furthermore, the report notes that the credit rating of the
interested party is so low (CCC+) that the information company Bloomberg does
not publish any comparative data for it. This led the authors of the report to
determine the interest rate that would be appropriate for a creditworthiness of
CCC+ by extrapolation on the basis of data that is
otherwise known about higher ratings. It was pointed out that a linear
extrapolation would probably underestimate the level of interest that a CCC+
rated company would have to pay in third-party relations. Furthermore, the
benchmark report did not state whether the subordination to the credit facility
of the syndicate of banks was also taken into account
in the CCC+ valuation (cf. the judgment of the court under 18). The benchmark
report concludes, based on linear extrapolation, that the commercial interest
rate of the Loan Notes is 10.64%.
In view of
what has been mentioned above, the interest of 12% above Euribor that would be
due for the Mezzanine, (as far as already known) the disadvantageous
differences of the Loan Notes compared to the Mezzanine (such as the size of
the loan and the subordination of the Loan Notes), the lack of objective
comparables and the doubts expressed in the bench mark report regarding the
method used, the bench mark report does not, in the opinion of the Court of
Justice, provide any foundation for the interest rate agreed upon with regard
to the Loan Notes.
4.4.16.
Also, taking into account what has been considered above under
4.4.6 up to and including 4.4.11, the Interested Party has not provided any
evidence for the commercial character of the interest agreed upon in connection
with the Loan Notes or that a commercialization of that interest would be
possible without the Loan Notes essentially becoming profitable. On the basis of the above considerations, the Court of
Appeal will hereafter assume - contrary to the District Court's opinion - that
the Loan Notes are non-cash loans.
4.4.17.
If the
Loan Notes are notzakelijk, the interest to be taken into account when determining the profit of the
interested party must be set at the interest that would be owed to a third
party if the lending company had stood as guarantor (guarantor analogy; cf. HR
25 November 2011, no. 08/05323, ECLI:NL:HR: BN3442, BNB 2012/37, section
3.3.4). To this end, the Inspector, eliminating the default risk from the
interest rate, considered the risk-free interest rate to be normative and based
himself on the interest rate on German 10-year government bonds. This interest
rate was 2.5% at the time.
Assuming
that the Loan Notes are not commercially viable, and
given that the interested party has not objected to this percentage, the Court
of Appeal will also assume this percentage.
4.4.18.1.
The Inspector
furthermore argued that of the interest - as determined above - only the fair
market value - set by him at nil - of the interest instalment is deductible at
the time it becomes apparent periodically. The Inspector's position here is
that what was considered in paragraph 3.5 of the judgment in HR 15 March 2013,
11/02248, ECLI:NL:HR:2013: BW6552, BNB 2013/149 (hereinafter: the BNB 2013/149
judgment), applies in reverse order to the debtor (the interested party in the
present case).
4.4.18.2.
The
Court of Appeal does not follow the Inspector in his opinion that of the
interest set at 2.5%, only the fair market value of the interest instalment -
which the Inspector claims is lower - can be deducted at the time it becomes
periodically visible (as a result of interest
deductions from the creditor). In the opinion of the Court of Appeal, BNB
2013/149 relates to a year in which a (non-deductible) write-off (in the
capital field) took place. In this situation, the facts and circumstances
prevailing in the year to which the judgment pertained led to a write-down (in
the commercial accounts) of the non-cash loan and, on the
basis of these circumstances, also to not taking the imputed interest
into account for a higher amount than its market value. In this situation the lower
value of the imputed interest followed from the facts and circumstances that
made it necessary to write down the non-cash loan (in the capital sense).
However, paragraph 3.5.2 of the BNB judgment 2013/149 does not automatically
imply that, in a year in which the non-cash loan is granted and in which there
is (evidently) no reason in itself to write it off, a
difference arises between the (nominal) value of the imputed interest and its
market value. Since the Inspector, in addition to his legal reliance on the
mirror-image application of section 3.5.2 of BNB 2013/149, has not, or at least
has insufficiently, substantiated with facts and circumstances why the interest
to be imputed to creditors in the current year would have a value lower than
its nominal value (2.5%), the Court sees no reason to set the interest to be taken into account by the interested party at an amount
lower than 2.5%.
If, as
argued by the Inspector, paragraph 3.5.2 of the BNB judgment 2013/149 should be
extended to the debtor in a mirror image, on the understanding that the debtor
would then not owe any interest higher than the market value of the imputed
interest, this will therefore not lead in the present case to a lower interest
deduction than on the basis of an interest rate of 2.5%.
4.4.18.3.
Furthermore,
the Court of Appeal does not consider what was considered in paragraph 3.5.2 of
the BNB 2013/149 judgment to apply mirror image to the determination of the
debtor's taxable profit (cf. Advocate General, opinion of 17 December 2020,
ECLI:NL:PHR:2020: 1198, para. 6.21). The debtor is
liable for interest, regardless of its own creditworthiness. Barring extreme
circumstances, which have not occurred in the present case, the debtor should
take the nominal value of the debt and the related obligation to pay the
(accumulated) interest due on it in due course.
4.4.19. The numerical consequences of this opinion also depend
on the answer to questions 4, 5 and 6, as mentioned in section 3 (Dispute on
Appeal). If the interest on the Loan Notes is not deductible by virtue of
Article 10a or Article 10d of the Law, or by virtue of the application of fraus legis, this also applies to
the difference between the interest agreed upon in respect of the Loan Notes
and the - as considered above - 2.5% interest. In addition, that 2.5% interest
is also not deductible.
Application of Article 10a of the Act
4.5.1. The
court assessed the question of whether the deduction of the interest due on the
loans is prevented by section 10a of the Act as follows
Article 10a Corporate Income Tax Act; affiliated
entities
74.
For
the application of the interest deduction limitation of Section 10a of the
Corporate Income Tax Act, the first paragraph of that provision requires, among
other things, that the interest relates to debts which are directly or
indirectly owed, de jure or de facto, to an affiliated entity. According to
Section 10a(4), opening words and (b) of the Corporate
Income Tax Act, an entity is deemed to be affiliated with the taxpayer:
"an entity which holds at least one-third of the shares in the
taxpayer". It is not disputed that none of the subordinated loan providers
([W] , [Aa] , [Ab] and [Ag] , [Aj]
B.V. and managers) has at least a one-third interest in the shares of the
claimant, so that prima facie the affiliation requirement of Section 10a of the
Corporate Income Tax Act is not met. The Court agrees with this (see also
paragraphs 6, 12, 13 and 15 of this judgment). However, the defendant has
argued that in the present case and despite the division of the shares, the
affiliation requirement has been met.
75.
According
to the respondent, the affiliation requirement is met in a case such as the
present because there is a cooperating group. The respondent also argued that
the affiliation can be established on the basis of the
attribution of the control - as the court understands it: of the LPs - to the
General Partner or, as the case may be, the management company. [F] represents
the investors of the LPs and has all voting rights in respect of the
investments held by the LPs. All LPs have the same objective and the same
investment policy and this was implemented by [F].
According to the Respondent, these are identical sub-funds investing in
parallel. According to the Respondent, the fact that the LPs have different
investors and that there are different Limited Partnerships in
order to meet the specific requirements of the investors does not change
this. According to the Respondent, [Aj] B.V. also
belongs to the cooperating group because it invests in parallel with the LPs.
According to the Respondent, [F] is the General Partner, administrator
and manager of the fund. The interest held through the various LPs is regarded
by [F] as a single investment. In its conclusion of rejoinder @18, the Respondent
additionally notes that according to Article 1.1, section bb, of the LPAs, '[F]
' means [T] and its employees. [T] manages and controls [H] ,
because as an Investment Advisor - after the mandatory consultation of the
Investment Advisory Committee (IAC) staffed by [F] - she advises on the
acquisition, management and business operations and sale of portfolio
companies.
Directors/partners
of [T] were appointed as directors of [H] Limited, the General Partner of [H] . Although [AN] and [AM] formally took the decision to buy
the targets on behalf of [H] Limited, both are or were also linked to [T], as
can be seen from their CVs. Materially, [T] controls and manages the investment
fund [H] which was also communicated to the investors, according to the
defendant.
76.
According
to the defendant, the present structure leads to [H] taking all decisions for
the investors, including setting up the legal (fund) structure, dividing the
investors among the various bodies or sub-funds, taking the managerial
decisions, determining the acquisition and financing
structure and determining the strategy of the target. According to the
Respondent, in substance, the situation is that the investors contribute money
and [H] then sets to work to acquire the right targets and make them
profitable. According to the defendant, through [H] there is a connection
between the cooperating subfunds.
77.
The
defendant further submits that [J] and [Ae 2] should be identified with each
other. [Ae 2] acts only as an economically non-autonomous 'sidecar' of [J]. The
artificial split between [J] and [Ae 2] has no significance beyond its tax
implications. These LPs taken together have a larger interest than one third in
plaintiff, so that - even without the cooperating group concept - they must be
considered affiliated entities and fall under the scope of application of
Section 10a of the Corporate Income Tax Act.
78.
The
claimant disputes that the LPs can be regarded as a cooperating group. In
levying corporate income tax, the primary consideration should be that each
company is an entity in its own right. According to
the plaintiff, neither case law nor the statutory system provides room for the
identification advocated by the defendant. In addition, the voting rights of
the shares in the claimant are exercised by the General Partner 'on behalf of'
the LPs/investors and limitations are included in the LPAs with
regard to the role of the General Partner. The LPAs provide that the
General Partner must observe the investment policy guidelines of Article 6 of
the LPAs and that LPs may remove the General Partner from his position under
circumstances (Article 10.2 of the LPAs).
79.
In its
assessment of the question of whether the affiliation requirement is met, the
Court put first and foremost that the text of Section 10a, subsection 4, of the
Corporate Income Tax Act as it applied to the year 2011 does not offer any room
to consider the LPs/ [W], [Aa], [Ab] and [Ag] and [Aj]
B.V., given the division of the shares in the claimant among these entities, as
affiliated entities with the claimant in the form of a 'cooperating group'. The
case law cited by the defendant does not refer to the provisions in Section 10a
of the Vpb Act and offers insufficient leads to
consider affiliated entities in the case of a cooperating group for the
application of Section 10a of the Vpb Act. Nor can
there be any question of affiliation on the basis of
the attribution of control of the LPs to [F] and/or the General Partner, as
alleged by the Respondent. This attribution is precluded by the fact that the
role of the General Partner is subject to limitations under the LPAs. Although
it follows from the General Partner's position that she can represent LPs, it
does not yet follow that she can be identified with those LPs and that, on that
basis, affiliation in relation to the claimant could be concluded. The
investments in the LPs are also not attributable to the General Partner, nor
are the interests in claimant acquired indirectly by the LPs and her (indirect)
shareholdings.
80.
Nor
does the fact that [J] and [Ae 2] have the same investors mean that they are to
be regarded as related entities. They are also to be regarded as separate
entities in that regard. The contentions put forward by the Respondent are that
the division into [J] and [Ae 2] is artificial and that the 'sidecar' has no
meaning outside the motive of tax saving. The court will deal with these
contentions below in the context of the reliance on fraus
legis.
81.
At the hearing, the Respondent indicated that
[H] itself is not to be regarded as a limited partnership; the statement about this
in section 4.1.1 of the Defence is to be regarded as
a mistake. However, the Respondent has taken the further position that [H] is
to be regarded as an open-end fund on joint account. The plaintiff contested
that [H] should be regarded as a fund on joint account or an entity within the
meaning of the Vpb Act. The legislator has precisely
codified the concept of a cooperating group in order to
bring such cases within the scope of Section 10a of the Vpb
Act.
82.
In light of the plaintiff's substantiated rebuttal, the defendant
has not made it plausible that [H] should be regarded as an open fund on joint
account or a body within the meaning of the Vpb Act. In order to be able to speak of a fund on joint account,
there should, among other things, be negotiable proof of participation (Article
2(3) of the Vpb Act). This is not the case. From the
mere fact that there is no deed of incorporation for [H], it cannot be inferred
that there is such a legal form. It was neither stated nor demonstrated that
there was a foreign legal form comparable to an open-ended mutual fund, such as
a special-purpose fund or any other body within the meaning of the Vpb Act. Also in that respect
there is no question of affiliation between plaintiff and the subordinated loan
providers/ [H]."
4.5.2.1.
The
Inspector argued on appeal that the District Court erred in failing to take into account the case law on the concept of
'cooperating group' on which it relied in the first instance and from which it
follows, in its view, that the 'cooperating group' is a general doctrine that
also has significance for Section 10a of the Corporation Tax Act 1969 ('the
Act'; text 2011).
In this
respect, the Inspector pointed out that the investors had invested in [J] (the
Court follows the abbreviations of the Court's decision) and that the
participation in - the (so stated by the Inspector) non-independent with
respect to [J] - [Ae 2] without participation in [J] is impossible under civil
law. Moreover, all legal acts in respect of [Ae 2], as well as those of the other
Limited Partnerships (hereinafter also referred to as: the LPs), were performed
by [H] (General Partner) LP (hereinafter: the General
Partner). According to the Inspector, it follows from the case law mentioned by
him in his statement of defence at first instance
regarding 'cooperating group' (including HR 19 April 1967, BNB 1967/135 and -
as most recently mentioned - HR 23 February 2000, BNB 2000/149) that:
a.
a
cooperating group may be implicitly present or assumed to be present.
b.
a
cooperating group must be defined by purpose; a cooperating group need not
therefore cooperate in all areas, and
c.
one
group member can work for the whole group, but the work can also be divided
within the group.
The
Inspector added that the 'cooperating group' referred to by him in this context
is a different concept than the concept of 'cooperating group' which appeared
in Section 10a(4) (old) of the Act and the group
concept of Section 2:24 of the Dutch Civil Code.
4.5.2.2.
In the
present case, the LPs, assessed separately, hold less than one-third of the
shares in the interested party. According to the tax inspector, there is
nevertheless an affiliation, because the LPs can be regarded as a cooperating,
parallel investing, group. According to the inspector, all LPs have the same
objective, in the execution of which the General Partner - in brief - plays a
central and all-determining role.
4.5.2.3.
According
to the inspector, [Aj] B.V. also belongs to the
cooperating group, because it invests in parallel with the LPs and has the same
goal in mind with these LPs.
4.5.2.4.
The
Inspector has stated that the LPs belong to the Fund and that this entity is a
(formless) common account fund.
4.5.2.5.
If no
'cooperating group' is deemed to be present, the Inspector invokes
'attributable control', because according to the Inspector a material situation
arises whereby investors have provided capital and the General Partner
subsequently uses this capital to acquire the right 'targets' and to optimise the return on the acquired 'targets'. Since the
General Partner 'has a financial interest in a (large) controlling interest'
and since the control also lies entirely with the General Partner, there is a
connection between the cooperating subfunds through
the General Partner, according to the inspector.
4.5.2.6.
Furthermore,
the Inspector argued that [J] and [Ae 2] should be identified with each other,
as [Ae 2] acts as no more than an economically non-independent sidecar of [J],
so that together they should be considered as a related entity (as referred to
in Article 10a(4) of the Act).
4.5.2.7.
Since,
according to the Inspector, the Loan Notes are tainted within the meaning of
Section 10a of the Act and, in his view, they were provided by affiliated
entities, it was incumbent on the Interested Party to demonstrate that the Loan
Notes and the related legal transaction (the acquisition of the [N]) were
predominantly based on commercial considerations or that the interest burden
resulting from the Loan Notes for the Interested Party was offset by a
compensatory levy. According to the Inspector, the interested party did not
meet this burden of proof, so that the interest burden could not be deducted by
the interested party pursuant to Section 10a of the Act.
4.5.3. Interested party agrees with the opinion of the court
on the application of article 10a of the Act and disputes that [H] is an open
fund on joint account.
4.5.4.1.
The
Court agrees with the opinion of the District Court in legal considerations 74
through 82 of its judgment. What the Inspector has put forward on appeal on
this point does not lead to a different judgment.
4.5.4.2.
The
Court of Appeal sees insufficient grounds for identifying [J] and [Ae 2] in
this respect, because this is precluded by the fact that these are two legally
separate companies which, as far as relevant, and in view of their articles of
association, would also be separately liable to pay corporate tax according to
Dutch standards.
Application of Article 10d of the Act ((old) thin cap
rules)
4.6.1.
The
court assessed the question of whether Article 10d precludes the deduction of
the interest owed on the loans as follows.
83. With
an appeal to Section 10d of the Corporate Income Tax Act (old), the defendant
takes the position that the plaintiff has been financed excessively with loan
capital and that the deduction of interest is therefore limited. This deduction
limitation, in view of the third paragraph of said article, relates to interest
in respect of money loans that are directly or indirectly owed to entities
affiliated with the taxpayer. It follows from the above that the claimant and
the subordinated loan providers are not affiliated entities as referred to in
Section 10d(3) of the Act (old). The Court therefore
concludes that Section 10d of the Turnover Tax Act (old) is not applicable. The
Court does not consider the question of whether invoking the group test
(Article 10d(5) and (6) of the Corporate Income Tax
Act (old)) offers the plaintiff any relief."
4.6.2.
On
appeal, the Inspector did not raise a specific complaint against the District
Court's ruling on the application of section 10d of the Act. As the Court
understands it, the Inspector also assumes on appeal that for the purposes of
section 10d of the Act, interest on the Loan Notes is payable by the Interested
Party to affiliated entities (section 10d(3) of the
Act).
4.6.3.
Interested
party agrees with the opinion of the court on the application of article 10d of
the Act.
4.6.4.
The
Court of Appeal agrees with the opinion of the District Court in paragraph 83
of its judgment, on the understanding that where in this paragraph reference is
made to 'the foregoing', the Court of Appeal is referring mutatis mutandis to
what it has considered under 4.5.4.1 and 4.5.4.2.
Fraus Legis
4.7.1. The
District Court assessed the question of whether application of the doctrine of fraus legis prevented the
deduction of the interest owed on the loans as follows:
"Fraus legis
84.1.
The
defendant took the position that by deducting a substantial interest charge
from the result of the [N], the plaintiff acted in fraudem
legis. [F] used the acquisition of the [N] to reduce the tax base in the
Netherlands for many years with the interest on the Loan Notes. According to
the defendant, there are no business reasons for taking out the loans. The
defendant also points out that setting up the 'side car' [Ae 2] is an
artificial construction. According to the Respondent, allowing interest
deduction is contrary to the purpose and scope of the Vpb
Act.
84.2.
The
claimant is of the opinion that the doctrine of fraus
legis cannot be applied. For this purpose
the claimant argues that Section 10a of the Corporate Income Tax Act applies to
intra-group financing transactions, that here there is a question of setting up
a group and that therefore at the time of the initial financing there can be no
question of converting equity capital into loan capital within the group.
Furthermore, financing can only be provided once at the creation of the group,
so also the so-called criterion of repeatability is not met according to the
claimant. For the rest, the defendant has not sufficiently stated, let alone
substantiated, fraus legis,
according to the claimant.
84.3.
The
District Court considered the following about the question whether this
doctrine is applicable in this case.
85. It
follows from the judgment of HR 1 June 2012, no. 11/00009,
ECLI:NL:HR:2012:BW7073, BNB 2012/213, that fraus legis can be applied in addition to 10a of the Dutch
Corporate Income Tax Act. It also follows that it cannot be inferred from the
legislative history that, by introducing Section 10a of the Dutch Corporate
Income Tax Act, the legislature intended to create a limitative regime for
unacceptable soil erosion, but rather that the legislature intended to codify
existing case law. The Court also deduced from the aforementioned judgment that
fraus legis may be at issue
if a company, by means of a combination of (legal) acts, can arbitrarily and,
if desired, repeatedly charge substantial amounts as interest to the taxable
result, and thus be able to avoid the levy of the corporate income tax in whole
or in part by repeating a similar combination of (legal) acts (the so-called
requirement of repeatability; see also HR 21 April 2017, nos. 15/05278 and
15/05578). 15/05278 and 15/05349 through 15/05356, ECLI:NL:HR:2017:638, section
3.2.3.7).
86. The
District Court furthermore considered that during the parliamentary debate on
the Act on Working Profits the Minister of Finance confirmed that fraus legis can only be applied
in addition to Article 10a of the Corporate Income Tax Act in exceptional
situations, where the limit of permissible tax savings has clearly been
exceeded, and that in practice the application of fraus
legis with respect to interest deduction will not
occur quickly (Parliamentary Papers II 2005/06, 30 572, no. 8, p. 1).
45):
The
members of the VVD group ask whether, after the scrapping of Section 10a with
respect to the limitation of interest deduction, there is still room for
application of the doctrine of fraus legis if Section l0a, l0d or another statutory provision
regarding interest deduction is not applicable. It is not excluded that fraus legis could apply to
interest deduction. This would have to be an exceptional situation in which the
boundary of permissible tax savings has clearly been exceeded. Because such
cases have already been codified to a large extent, particularly in Article
10a, application of fraus legis
with respect to interest deduction is unlikely to occur in practice.
87.
In order to apply fraus legis, there must be a combination of (legal) acts that is
predominantly motivated by tax-avoiding motives (motive requirement). It must
also be established that the combination of (legal) acts (in this case the
interest deduction) would be contrary to the objective and purport of the
Corporate Income Tax Act (standard requirement). In the examination of the
motive requirement, it is important that the system of the Corporate Income Tax
Act stipulates that a taxpayer has freedom of choice in the manner/form of
financing a company in which it participates (BNB 2015/165, paragraph 3.1.3,
BNB 2016/197, paragraph 2.6.3 and HR 21 April 2017, no. 16/03669,
ECLI:NL:HR:2017:640, paragraph 2.4.5.2). In principle, there is a loan which is
predominantly based on business considerations if there is no diversion of
funds used for the acquisition. In the case of direct financing, it is inherent
in the taxpayer's freedom of choice that the legislator has accepted possible
tax considerations underlying the financing chosen as appropriate within that freedom.
88.
It
follows from the established facts that the investors made risk-bearing equity
capital available to [H] (the LPs and [V] , [W] , [Aa]
, [Ab] and [Ag] ). Subsequently, that equity was made available by [V] , [W] , [Aa] , [Ab] and [Ag] through [Ac] UA and the
claimant to finance the acquisition of the [N]. This equity was partly paid
into Claimant by [V] , [W] , [Aa] and [Ab] as equity
through [Ac] UA and partly made available to Claimant by [W] , [Aa] , [Ab] and
[Ag] in the form of the Loan Notes (subordinated loans) as debt. Subsequently,
capital contributions were made to [W] B.V. and [Ad] B.V. With these monies and
an external loan from the banks on the basis of the [AmA], the [N] ([P] B.V. with participating interests) was
then taken over by [Ad] B.V. In doing so, capital that was available as equity
for the acquisition was converted at the level of the claimant into loan
capital and finally paid as equity into the acquisition company [Ad] B.V.
89.
It is
also an established fact that after acquiring the [N], the claimant entered into a fiscal unity with [W] B.V., [Ad] B.V., [P]
B.V. and the rest of the [N] that qualified for it. This ensured that the
interest payable to the [W], [Aa], [Ab] and [Ag] was charged directly to the
[N] profits for tax purposes. In the years following the acquisition, this led
to a significant erosion of the Dutch tax base. The court refers in this regard
to the consolidated losses in the years 2011-2014 shown in section 21.
90.
The
District Court furthermore considered that more than 70.5% of the subordinated
loans were provided to the claimant by [Ae 2] / [Ag]. If these loans had been
provided through [J] / [V], then - due to the fact that
[V] had an indirect interest of more than one third in the claimant - there
would have been interest payable to an affiliated company and the interest
would have come within the scope of Section 10a of the Dutch Corporate Income
Tax Act. It also follows from the letter of 26 November 2010 from the General
Partner to the investors of [J], reproduced in section 8.7 of this judgment,
that [Ae 2] was incorporated on tax advice, that the investment via this side
car has no independent meaning and that this investment is economically
regarded as if it were an investment of [J]. Also from
the minutes of the board meeting of the General Partner of 14 January 2011 (see
subsection 8.8 of this judgment) follows that the investment with loan capital
via [Ae 2] is based on fiscal motives. Therefore, the District Court deems it
plausible that the subordinated loans were provided via [Ae 2] / [Ag] with the
intention of avoiding the interest on these loans being excluded from deduction
pursuant to the provisions of Section 10a of the Vpb
Act.
91.
The
court further considered that the interest payable to [W] ,
[Aa] , [Ab] and [Ag] was accounted for as income in the annual accounts of
these companies, that the companies in Guernsey were considered to be fiscally
non-transparent companies, that the companies there were subject to a
corporation tax and that this income was taxed in Guernsey at a rate of 0%.
92.
In the
opinion of the court, within the structure there is a conversion of equity into
loan capital. The funds were not provided directly by [H] to the claimant but
through the intermediary of LPs, [V], [W], [Aa], [Ab], [Ag] and [Ac] UA and the
loans were divided among the subordinated loan providers. This distribution
ensured that the loan providers each had an interest of less than one-third in
Plaintiff. To this end, the court takes particular account of the fact that [Ae
2] was established as a so-called Side Car Vehicle and over 70.5% of the
subordinated loans were made through this side car and not through [J] .
93.
In the
District Court's opinion, the described combination of (legal) acts has the
character of a so-called 'diversion'. When applying Section 10a of the Dutch
Corporation Tax Act, possible tax considerations in such a case cannot be
deemed to be inherent in the plaintiff's freedom to finance its activities in
the manner it sees fit (BNB 2015/165, paragraph 3.1.3). In the District Court's
opinion, this applies not only to the direct application of Section 10a of the
Corporation Tax Act, but also to cases in which the standard underlying that provision
is at issue (cf. Amsterdam Court of Appeal 18 April 2019, nos. 18/00018 and
18/00019, ECLI:NL:GHAMS:2019:1504, para. 4.22.9).
94.
The
plaintiff argues that there can be no question of a diversion because the
structure was set up at the time the subordinated loans were granted, so that
there is no question of converting equity into debt within a group. The court
cannot follow the plaintiff in this since the acquisition structure in which
the interest was created, already existed before the [N] was taken over. The
Court notes that the interest charges thus created were set off against profits
of the acquired [N] by forming a fiscal unity, which is precisely an indication
that tax avoidance was the decisive motive for taking out the subordinated
loans and the diversion.
95.
The
claimant further argues that there is no question of an intra-group diversion
because the LPs, the subordinated loan providers ([W], [Aa], [Ab] and [Ag], [Aj] B.V. and managers) and the Limited Partners (investors)
are not part of the group or of the same group. In terms of Section 10a of the Vpb, according to the claimant there is no question of a
non-corporate diversion within the group and no resources have been withdrawn
from the group's equity. According to the claimant, the group starts with [Ac]
UA. [Ac] UA also draws up consolidated annual accounts and should be regarded
as the head of the group.
96.
Leaving
aside whether the structure prior to the acquisition can be characterized as a
group, the Court stated first and foremost that the absence of business
considerations could not be said to exist only if the relevant resources within
the group had first been withdrawn from the equity of the Dutch part of the
group (BNB 2015/165, paragraph 3.1.3). Moreover, the question as to what should
be understood as a group in this context must be answered when assessing
whether the so-called standard requirement has been met (see below). In that
context it is important whether the avoidance of the requirement of affiliation
set out in Section 10a of the Corporate Income Tax Act with the aforementioned combination of legal and other acts, in which
there may be a cooperating group of entities or a situation that can be equated
with one, can result in a conflict with the objective and purport of the
Corporate Income Tax Act. The question is therefore whether in that context the
group concept mentioned by the plaintiff applies in full.
97.
To the extent that the claimant argues that
financing can only be provided once at the creation of the group and that the
criterion of repeatability is not met, the court does not follow her either.
After all, it is an established fact that [H] has made use of a comparable
structure, on the understanding that the legal forms concerned were designated
as '[AJ] ' instead of '[X] ' (see section 29 of this judgment). Moreover,
within the existing structure, interest-bearing loans could again be created
for other acquisitions, which would in the same way have eroded the tax base.
[H] was - also in view of the Private Placement Memorandum (see section 1.3 of
this judgment) - focused on achieving capital gains with investments in
companies, so that repeatability is inherent in the business of [H].
98.
It has
not become plausible that the distribution of the Loan Notes over the
subordinated lenders in the manner described above is based on commercial
considerations. The Court deems it plausible that the avoidance of Section 10a
of the Vpb Act has been the decisive motive in this
respect. The claimant's assertion that the various LPs were created as
sub-funds in order to meet specific requirements for
the various (groups of) investors, is considered by the court to be of
insufficient weight to consider the chosen allocation businesslike. This
assertion does not alter the opinion that the distribution of the Loan Notes
among the various sub-funds was made with a view to saving tax (cf. Court of
Appeal of Amsterdam 18 April 2019, nos. 18/00018 and 18/00019, ECLI:NL:GHAMS:2019:1504, r.o. 4.22.12).
In the District Court's opinion, there are no objective reasons either for the
conversion of the equity capital into loan capital at the level of the
claimant. The claims of the plaintiff that investment with a limited amount of
equity can increase the strength of the fund, the use of leverage makes it
possible to make more acquisitions and a high leverage leads to a more
result-sensitive remuneration on the equity of the Limited Partners, are not
considered relevant by the Court. Indeed, from [H]'s perspective, the Loan
Notes are considered equity and no distinction is made economically between the
form in which that equity was made available to Plaintiff. The financing of the
claimant with the Loan Notes lacks a business purpose and has no meaning apart
from the tax motives. The Court deems it plausible that the avoidance of the Vpb was the decisive reason for providing the Loan Notes.
99.
In the
District Court's opinion, the above means that the motive requirement of fraus legis has been met in this
case. This does not alter the fact that the acquisition of the [N] by [H] was,
as such, based on business reasons (cf. HR 6 September 1995, 27 927,
ECLI:NL:HR:1995:AA1683, BNB 1996/4, paragraph 3.2.4).
100.
For
this purpose, the Court ruled that Section 10a of the Corporate Income Tax Act
was not applicable because the affiliation criterion had not been met. This
judgment does not preclude examination of whether in that case there is a violation of the objective and purpose of the Corporate Income
Tax Act, in particular of Article 10a of the Corporate Income Tax Act.
From the circumstance that there is no connection as referred to in Section 10a(4) of the Vpb Act does not
follow, contrary to the claimant's argument, that the manner in which the
acquisition of the [N] was structured is also permissible. After all, the
doctrine of fraus legis is
intended precisely for situations in which the possibilities of the usual ways
of interpreting the law have been exhausted and a case arises in which an
interested party has attempted, by means of subterfuges (intervening companies
and creating a loan), to evade the effect of an anti-profit-drainage provision.
Such a case has arisen here. Hereafter, the Court will examine whether there is
a conflict with the objective and purport of Section 10a of the Dutch Corporate
Income Tax Act and - more generally - with the rationale partly underlying this
provision (cf. Court of Appeals of Amsterdam 18 April 2019, nos. 18/00018 and
18/00019, ECLI:NL:GHAMS:2019:1504, section 4.22.15 et
seq.)
101.
The
court is of the opinion that [H] , the LPs, [V] , [W]
, [Aa] , [Ab] and [Ag] form one joint venture. In this respect, the court has taken into account that the LPs have the same general
partner and function as parallel sub-funds of [H], as follows from, inter alia,
the financial report of [H] of 2011 (see section 1.5 of this judgment). The LPs
were established under similar conditions, invest in the same company and under
the same conditions and have the same investment strategy, as follows from the
Private Placement Memorandum referred to in section 1.3 of this judgment. In
this respect, reference should also be made to the [H] Co-Investment Deed
(section 4.1 of this ruling) in which agreements were made about cooperation
within the fund.
102.
The aforementioned joint venture comes very close to the
affiliation referred to in Section 10a of the Vpb
Act, so that in the present case the interest burden created can also be
regarded as contrary to the intention of Section 10a of the Vpb
Act. The Court does not consider it important that the funds are separate
sub-funds since they are almost identical and invest in the same company in
parallel. The circumstance that the shares in plaintiff are divided over the
LPs/ [V], [W], [Aa] and [Ab] does not change this either, because the business
motive for this division has not become sufficiently plausible. The claimant
has brought forward that a comparison should be made with the situation that
the Limited Partners (investors) had directly held the shares in and the
subordinated loans granted to the claimant. In that case none of the Limited
Partners (investors) would have had an interest that would lead to affiliation
within the meaning of Section 10a(4) of the Corporate
Income Tax Act. The Court does not follow the plaintiff in this,
since there is a partnership at the level of [H] and the said sub-funds
or intermediary entities. The investors mentioned are
not part of this.
103.
The
claimant argues that in various judgments the Supreme Court has ruled on the
application of fraus legis in
the case of quantitative thresholds comparable to the affiliation criterion in
Section 10a(4) of the Dutch Corporation Tax Act (HR 11
May 1988, no. 24 918, BNB 1988/289, HR 8 July 1992, no. 28 211). 24 918,
ECLI:NL:HR:1988:ZC3832, BNB 1988/289, HR 8 July 1992,
no. 28 211, ECLI:NL:HR:1992:ZC5034, BNB 1992/308 and HR 5 February 2010,
ECLI:NL:HR:2010:BI8506, no. 08/04451, BNB 2010/148). If such thresholds have
been laid down by law, the legislator has accepted the possibility that a
taxpayer may set up a structure in such a way that it remains below the
thresholds, as the claimant deduces from the aforementioned
judgments. Thus, according to the plaintiff, there cannot be a conflict
with the objective and purport of Section 10a of the Corporate Income Tax Act.
104.
The
Court does not follow the claimant in her argument. The judgments cited by the
plaintiff relate to other statutory provisions, namely Section 39 of the Income
Tax Act 1964 concerning the substantial interest and Section 4 of the Legal
Transactions Tax Act 1970 concerning real estate property entities. Contrary to
the legislative history of these legal provisions, it cannot be deduced from
the legislative history of Article 10a of the Vpb Act
that the legislator consciously accepted the avoidance of the affiliation
requirement. As the Court has already considered, it follows from the aforementioned judgment BNB 2012/213 that fraus legis can be applied in
addition to Article 10a of the Corporate Income Tax Act and that it cannot be inferred
from legislative history that, by introducing Article 10a of the Corporate
Income Tax Act, the legislator intended to create a limitative regime for
unacceptable loss of profits, but rather that the legislator intended to codify
existing case law.
105.
In the
context of testing against the standard requirement, the Court furthermore
points to the provision included as of 2017 in Section 10a(6)
of the Corporate Income Tax Act and the concept of "cooperating
group" introduced therein. It can be deduced from the legislative history
in this respect that, with this paragraph, the legislator intended to codify an
existing standard and not to broaden the purpose and scope of Section 10a of
the Corporate Income Tax Act. The legislator notes that by laying down explicit
statutory provisions that the required 'affiliation' also exists in the
presence of a cooperating group, tax base collusion with certain structures can
be combated more effectively (Explanatory Memorandum, Parliamentary Papers II
2016/17, 34 552, no. 3, p. 29). With this provision, the legislator wanted to
provide more clarity on the interpretation of the concept of interest in
Section 10a(4) of the Dutch Corporate Income Tax Act
(Explanatory Memorandum, Parliamentary Papers II 2016/17, 34 552, no. 3, p.
55):
In
practice, it regularly occurs that different parties make a joint investment,
for example in the framework of an acquisition structure in the case of a
private equity investment, in which each of these parties individually has an
interest of less than one third in the acquired company. In such a situation,
however, there may be a material link between the acquired company and the
investors for the application of Section 10a of the 1969 Corporate Income Tax
Act if there is a coordinated investment by a cooperating group. In such a
situation, too, there may be artificial (non-corporate) financing with loan
capital, which is the subject of Section 10a. In the new paragraph 6, it is
proposed to make this interpretation of the term "affiliation" for
the application of Section 10a of the 1969 Corporate Income Tax Act more
explicit. This provides more clarity on the interpretation of the concept of
interest in Article 10a(4) of the 1969 Corporate
Income Tax Act. Whether there is a cooperating group depends on the facts and
circumstances of the individual case.
106.
In
particular, the legislator's answer to the question of respect for existing
situations indicates that, in the eyes of the legislator, the provision of the
cooperating group was a definition of an existing standard. In the Explanatory
Memorandum, the following is noted in this regard (Parliamentary Papers II
2016/17, 34 552, no. 3, p. 31):
In view of
the proposed amendment to the interest deduction limitation aimed at combating
profit-draining, a number of interested parties have
asked for a deferral of the effects of the amendment on existing situations. By
granting a retroactive effect, the current regulation would continue to apply
to existing legal positions and relationships.
The basic
principle is that new statutory regulations do not only apply to matters
occurring after they enter into force, but also to matters existing at the time
of entry into force. In principle, new statutory regulations have immediate
effect (...) The above does not affect the fact that this immediate effect -
following a balancing of interests - may be set aside for existing legal
positions and relationships. In this balancing of interests, as is evident from
the Instructions for Regulations, the existence or non-existence of legitimate
expectations regarding the continuation of a regulation plays a role, and it is
important whether there is a major break with the old legislation.
If these
principles are applied to the amendment to the interest deduction limitation
aimed at combating profit-draining, the Cabinet makes the following assessment.
In this case, the provision of a deferred tax regime would result in the
continued use of artificial structures whereby interest charges are created
that erode the Dutch tax base, which is precisely what the Cabinet wishes to
combat. In addition, the possibility of considering a group of shareholders who
cooperate unanimously with regard to a certain
objective as a cooperating group is not new. This view has already been
confirmed in case law of the Supreme Court. [See also BNB 1994/88, paragraphs
3.3 et seq. and BNB 1998/128, paragraphs 3.3 et seq.] During the discussion of
the Bill to Introduce Simplification and Flexibilization of BV Law, it was
furthermore indicated, in the context of interest deduction aimed at combating
profit-draining, that under certain circumstances also in the case of a group
of cooperating shareholders - for each of those shareholders - there can be a
qualifying interest. [footnote 24: Parliamentary Papers II 2010/11, 32 426, no.
7, p. 10.] In addition, the position is also taken by the Tax Authorities in
practice, as and when appropriate. In view of the foregoing, the Cabinet is of
the opinion that the users of this deduction, also in view of the very explicit
constructions that have been applied, could have realised
that they were going beyond the legislator's intentions, as a
result of which a justified expectation cannot be the issue. In this
sense there is no major break with current law.
It is then
pointed out that offering a retroactive effect would result in a significantly
lower budgetary yield in the first few years'.
107.
This
is also expressed in the Memorandum following the report (Parliamentary Papers
II 2016/17, 34 552, no. 14, p. 51):
The
possibility of considering a group of shareholders who act in concert with regard to a certain objective as a cooperating group is
not new. During the debates on the Bill to Introduce Simplification and Flexibilisation of BV Law, it was indicated that, in the
context of Section 10a of the 1969 Corporate Income Tax Act, in certain
circumstances a group of cooperating shareholders, each of whom has a
qualifying interest, may be regarded as such. [Furthermore, this position is
also taken by the Dutch Revenue in certain cases. In addition, this position
has already been confirmed in the case law of the Supreme Court. [footnote 54:
See for example BNB 1994/88, paragraphs 3.3 et seq. and BNB 1998/128,
paragraphs 3.3 et seq.] The NOB also asked a question about case law cited in
this context. From these judgments it appears in general terms that a group of
shareholders who cooperate in unanimity with regard to
a certain objective can be regarded as a cooperating group. These judgments
illustrate that the phenomenon of a "cooperating group", albeit in a
different context, has also been used before. It is not the intention to give a
specific interpretation of the criterion of a cooperating group for the
application of article 10a of the Corporation Tax Act 1969 as such.
108.
During
the parliamentary debate on the Bill to introduce the simplification and
flexibilization of the BV Act, the legislator even seemed to assume that
Section 10a of the Vpb Act was an 'open standard'. In
this respect the following has been noted - insofar as it is relevant here
(Parliamentary Papers II 2010/11, 32 426, no. 7, p. 9-10):
The 'related
party' concept of Article 10a of the 1969 Corporate Tax Act refers, in brief,
to an 'interest' of one third or more in another company. In assessing whether
an entity has a qualifying interest in another entity within the meaning of
Article 10a(4) of the 1969 Corporate Income Tax Act,
both the control in or over the latter entity and the financial interest
therein are relevant. The concept of interest involves a substantive criterion,
the interpretation of which depends on the facts and circumstances of the case.
In the case of shares to which different control and equity or profit rights
are attached, the relative control and the relative financial interests in the
entity must be quantified. [Footnote 1: Under circumstances, however, the
position is taken that in the case of a group of cooperating shareholders there
can also be a qualifying interest in each of these shareholders]. As with other
open standards, the exact interpretation of this ultimately takes place through
practice and case law.
The
members of the CDA group then asked what the government meant by the statement
"In this context, one could also look at the rationale of the underlying
regulation for which the affiliation criterion is important in that
situation".
The tax
legislation has a large number of articles of law that
are related to the relationship between entities or between individuals and
entities. The objective of these articles and the description of the required
relatedness can differ. Each provision must be assessed on its own merits. It
is in this context that the remark in the explanatory memorandum referred to by
the members of the CDA group should be viewed.
109.
Article
10a of the Corporate Income Tax Act is not the only connecting factor when it
comes to the question of what constitutes the breach of the standard required
to invoke fraus legis. The application of fraus legis to situations in
which profit is drained by means of interest deduction does not therefore
coincide one-to-one with the conditions for application of section 10a of the
Corporate Income Tax Act. The Court also considers fraus
legis possible outside the (direct) application of
Section 10a of the Corporate Income Tax Act in situations that constitute a
violation of the standard underlying that provision. The genesis of article 10a
of the Corporate Income Tax Act is rooted in the judgments in HR 26 April 1989,
no. 24 446, ECLI:NL:HR:1989:ZC4024, BNB 1989/217, HR
23 August 1995, no. 29 521, ECLI:NL:HR:1995:AA1681, BNB 1996/3, HR 6 September
1995, no. 27 927, ECLI:NL:1995:AA1681, BNB 1996/3. 27 927, ECLI:NL:HR:1995:AA1683, BNB 1996/4, HR 20 September 1995, no. 29 737,
ECLI:NL:HR:1995:AA1682, BNB 1996/5 and HR 27 September 1995, no. 30 400,
ECLI:NL:HR:1995:AA1668, BNB 1996/6. The essence of these judgments is that the
legislator intended to allow interest to accrue on loans which - unless tax is
avoided - would have been
- do not
have a real (business) function, should not be allowed as a deduction. This
standard has been violated in the present case, so that also in this respect
the conditions for the application of fraus legis have been met.
110.
In BNB
1996/5, the Supreme Court added to the required breach of standards as a
sub-rule that the deduction limitation for interest on a useless loan does not
apply if, in the country of residence of the party against whom the debt is
owed, tax is levied that can be considered reasonable according to the
standards applicable in that country. This sub-rule is not applicable in the
present case. The defendant has stated, with good reason, that the interest is
taxed at a rate of 0% in the case of [V], [W], [Aa], [Ab] and [Ag] established
in Guernsey. It was furthermore the plaintiff's responsibility to put forward
and substantiate any (reasonable) compensatory levy on the recipients of the
interest owed by the plaintiff. This has not been done insofar as it concerns
the subordinated loans provided by [W], [Aa], [Ab] and [Ag].
111.
The
Court considered the following in so far as the plaintiff is of the opinion
that a violation of the standard to be affected by fraus
legis does not occur in the present case, because the
interest expense in dispute relates to the financing of an external
acquisition: the acquisition of a group that previously did not belong to the
group to which the plaintiff belongs. The aforementioned case
law concerned so-called 'relocations', whereby a company was transferred within
a group and an interest charge was created. This restriction was initially also
part of the codification of this case law with Section 10a of the Corporate
Income Tax Act. However, with effect from 2007 the scope of Section 10a has
been extended to include interest expense relating to external acquisitions
(Bulletin of Acts and Decrees 2006, no. 631). It must therefore be assumed that
the avoidance of taxation by the creation of an interest charge with the
overriding objective of avoiding taxation, which relates to an external
acquisition, also falls within the standard to which the application of fraus legis relates. In this
respect, the District Court considers the judgment in HR 17 December 2004, no.
39 080, ECLI:NL:HR:2004:AP6652, BNB 2005/169, no
longer relevant.
112.
On the basis of the above considerations, the Court concludes that
the interest burden owed on the Loan Notes is not deductible by application of fraus legis. The limit of permissible tax savings has
clearly been exceeded in the present case and the deduction of interest leads
to unacceptable soil erosion. Application of fraus legis does not extend to the interest on the subordinated
loans provided by [Aj] B.V. and managers, since it
has not become plausible that they belong to the joint venture of [H] and to
that extent it may be assumed that there is sufficient compensatory taxation of
the interest income. For this reason, the deduction of an amount of € 2,478,638
was wrongly corrected when adopting the assessment. To this
extent, the appeal is well-founded."
4.7.2.1. The interested party takes the position
that, for the application of fraus legis, it is required that the structure to be affected can
occur repeatedly; it refers in this respect to the judgment of 17 December
2004, ECLI:NL:HR:2004:AP6652, BNB 2005/169. According
to the interested party, the (required) repeatability is lacking in the present
case within the structure to which the interested party belongs, because use
was made of newly established legal entities on
Guernsey and in the Netherlands.
4.7.2.2. According to the interested party, when
examining whether the motive requirement for application of the law is met, the
entire structure should be taken into account,
including the ultimate investors. According to the interested party, the mere
provision of loan capital from one's own capital cannot be a reason to consider
it plausible that the motive requirement has been met.
4.7.2.3. The interested party pointed out that the
'ultimate investors' were pension funds (32,29%), insurance companies (24,25%),
family offices (7,50%) and [T] (10%); and that, in its view, pension funds and
insurance companies had to invest the premiums they received in
order to meet their obligations in the future.
4.7.2.4. The interested party assumes that the
ultimate investors (pension funds and insurance companies) are financed to a
greater extent than 50 % by debt. Against this background, the interested party
argues, there is no reason why it should not be allowed to freely choose the
extent to which it wishes to be financed with equity or debt capital. According
to the interested party, this freedom of choice also applies to the investors.
In this context the interested party refers to the judgment in HR 23 August
1995, ECLI:NL:HR:1995:AA1681, BNB 1996/3 (hereinafter:
the BNB 1996/3 judgment), because, as was the case in that judgment with the
income of a fiscal investment institution, the income of the LPs and of the
Guernsey Ltds would also ultimately be transferred to
the underlying investors in the present case. At the time when the shares in [Ad]
BV were sold at the end of 2015, according to the interested party, all sale
proceeds on the shares and the repayment of the Loan Notes (via the Guernsey Limiteds) were paid to the LPs.
As in BNB
1996/3, this income was subsequently taxed at LP level. According to the
interested party, a compensatory levy would therefore also be imposed in the
present case at the level of the participants in the LPs. According to the
interested party, it can be assumed that the underlying policyholders of the investing
pension funds and insurance companies are subject to
taxes comparable to Box 1 of the 2001 Income Tax Act. On this basis, too, there
is a compensatory levy according to the interested party.
4.7.2.5. When it comes to the concept of a group, as
it appears in the judgment of HR 5 June 2015, no. 14/00343,
ECLI:NL:HR:2015:1460, BNB 2015/165 (hereinafter: the judgment of BNB 2015/165),
according to the interested party this should include 'affiliated entities'
within the meaning of Section 10a(4) of the Act. According
to that criterion, [Ac] U.A. belongs to a group; and at most [J] and [V] as
well. Since these two (latter) entities have not provided Loan Notes, there can
be no so-called 'diversion' in relation to those entities. The fact that the
investment was made through the LPs and the Guernsey Limiteds
does not, according to the interested party, imply the presence of a
(non-businesslike) 'diversion'.
4.7.2.6. The Guernsey Limiteds,
according to the interested party, have a function by blocking any attribution
of the Loan Notes and the shares to the LPs and by preventing the LPs from
becoming a party to the Loan Notes.
4.7.2.7. According to the interested party, the Loan
Notes were not distributed among the Guernsey Limiteds
in order to prevent the lenders from having an interest
of more than one third in the interested party. The LPs and the Guernsey Limiteds had already been set up in 2007, according to the
interested party.
4.7.2.8. According to the interested party, the
legislature made a deliberate choice not to base Section 10a of the Act on the
concept of a 'cooperating group' (also for the year in question). The
parliamentary debate on the amendment of section 10a of the Act as of 1 January
2017 has no significance for the interpretation of section 10a of the Act in
the current year, according to the interested party.
In the
opinion of the interested party, compensating for the absence of the element
'cooperating group' in Section 10a of the Act before 2017 by means of the
application of fraus legis
is going a step too far. In addition, according to the interested party, the
concept of 'cooperating group' included in Section 10a of the Act as of 1
January 2017 - in the absence of an 'interest' in the interested party - does
not apply to [Ae 2] and [AH].
4.7.2.9. According to the interested party, the
final investors made their investment in the form of equity and loans, which it
considers to be a perfectly acceptable design.
According
to the interested party, this structure does not disregard the objective and
purpose of the law, whatever the subjective reasons of those concerned. It
therefore considers that there is no need to apply the principle of fraud.
4.7.3.1. In response to the interested party's
challenge of the repeatability of the acquisition structure, the Inspector
stated that the point is not whether a certain combination of legal acts is
repeated, but whether that combination of legal acts can be repeated if so
desired. It is not required that the same companies are used repeatedly.
Therefore, the Inspector did not consider the circumstance that for the
acquisition of the [AJ] (as mentioned under 29 and 30 of the Court's judgment) a number of new companies had been used relevant.
Moreover,
according to the Inspector, the sidecar structure with [Ae 2] was set up
precisely so that it could be used repeatedly; for example, according to the
Inspector, it was also used in the acquisition of the [AJ]. Furthermore,
according to the Inspector, the repeatability may consist of issuing even more
Loan Notes, thereby increasing the interest expense.
4.7.3.2. According to the Inspector, the District
Court ruled on good grounds that there was a 'diversion of funds'. In this
regard, the Inspector refers to, inter alia, sections 5.38 through 5.43 of the
Opinion of the Advocate General of 31 January 2020, ECLI:NL:PHR:2020:102.
The Inspector considers it 'perhaps correct in principle' that, when applying fraus legis, the total
acquisition structure including the underlying investors/participants should be
assessed, as argued by the interested party; however, the starting point is the
provision of equity by investors (including pension funds and insurance
companies) to [H]. The Inspector does not consider it relevant in this context
how the investors obtained the funds made available to the Fund as equity.
According to the Inspector, the funds thus made available were provided to the
interested party through the Loan Notes exclusively for tax purposes, even
though the four LPs were created before investing in the [N]. The Inspector
sees the tax motive of this method of financing, as alleged by him, confirmed
in (among others) the establishment of [Ae 2] (the sidecar body) and the
establishment of the Guernsey Limiteds.
4.7.3.3. Unlike the interested party, the Inspector is
of the opinion that the evasion of the affiliation requirement of Article 10a(4) of the Act also constitutes evasion of the law.
4.7.3.4. Furthermore, during the hearing of the
Court of Appeal, the Inspector argued that there is a (non-businesslike)
diversion, partly because - in brief - the [H] , the
LPs, the Guernsey Limiteds and the interested party
belong to a group or concern as referred to in the BNB 2015/156 judgment.
4.7.3.5. The Inspector pointed out that the
interested party had not disputed, even on appeal, that the Guernsey Limiteds were not subject to taxation, so that there was no
compensatory levy on the providers of the Loan Notes to offset the interest
deduction in the Netherlands.
4.7.3.6. According to the Inspector, the Interested
Party cannot benefit from the BNB 1996/3 judgment, because in that judgment,
the interest on a loan created by a fiscal investment institution with an
obligation to pass on was enjoyed; in the annual accounts of [H], no interest
on the Loan Notes to the Interested Party was accounted for. Moreover, the
Guernsey Limiteds are not subject to an obligation to
pass on the interest income received.
4.7.3.7. The Inspector disputes that there is a
compensatory levy at the level of what the interested party refers to as the
'ultimate investors' (or their underlying insured persons) (see above under
4.7.2.4) for the interest charged to the interested party.
4.7.3.8. In the alternative, the Inspector took the
position that the creation of the 'sidecar' ([Ae 2] )
and [Ag] constitutes fraus legis
of section 10a of the Act. Without this 'sidecar', [J] and [V] would fall
within the scope of section 10a of the Act, according to the Inspector.
4.7.4.1.
It is an established fact that in 2007 [H] (hereinafter: the [H] ) 'raised' € 1.2 billion from investors, including pension
funds and insurance companies, on the basis of the Private Placement Memorandum
mentioned under 1.3 of the court ruling, with the intention of using these
monies to acquire companies such as the [N] .
4.7.4.2.1.
The
Court has considered the assets made available to the (private equity) [H] as risk-bearing/own capital.
At the hearing of the Court, the interested party pointed out that the
financial contributions of the partners in the LPs belonging to the [H], as
also mentioned under 2.7.1, are also referred to as 'Partners' Loan Accounts'.
Insofar as the interested party meant by this to state that the
inlays/commitments from the investors in the [H]/the LPs were provided as loans
and not as risk-bearing/equity, this assertion was disputed by the Inspector,
who gave reasons.
4.7.4.2.2.
In the
opinion of the Court, it was incumbent on the interested party (as the most
diligent party) to substantiate this assertion (which was first put forward on
appeal) and to make the facts and circumstances on which it is based plausible.
This, also in view of the fact that the money loans
referred to do not bear interest, are subordinated and that their repayment
depends entirely on the result on the investments of the [H]. In this respect,
the Court refers to what is stated in the Limited Partnership Agreements: under
8.4 in conjunction with 7.1 of the [J] Agreement as mentioned under 2.3 (the
Court assumes that there are no substantial differences between the various LPs
in this respect), to the definition of Loans and what is stated in the Limited
Partnership Agreements about the General Partner's authority with respect to
repayment on the money loans to the LPs, under 4.2, sub (c) (repayment at the
discretion of the General Partner).
It is also
true that the investments of the [H]/LPs - as in this case through the Guernsey
Limiteds - are also financed by third parties/ banks,
which financing is subordinated to the provision of money by the investors in
the [H]/LPs; see court ruling under 10.2 and 18. It is also important that the
LP participants, as shown by the 'application form', stated that an investment
'in the Partnership involves substantial risks including the risk of a complete
loss of our investments (...)', were fully aware of the risky nature of their
investment (see under 2.4).
4.7.4.2.3.
The
documents before the court do not contain any facts or circumstances on the basis of which it can be assumed that the funds made
available to [H] were provided as a (civil) money loan. The existence of an
obligation to repay a certain principal amount has not become plausible. The
funds made available by the partners in the LPs serve to finance the targets
falling within the scope of [H], as (inter alia) stated in the Private
Placement Memorandum. An obligation to repay within the meaning of Section
7:129, subsection 1, of the Dutch Civil Code is in particular
not to be read in the provisions regarding repayment under 4.2, under
(c) of the [J] Agreement (see under 2.3); that provision does not contain a
right of repayment, but a possibility to repay the loan to the extent that it
remains unused, which is entirely at the discretion of the General Partner.
On this
point, the Court of Appeal refers to what was stated in section 4.1 of the
Court's judgment. The definition of 'commitment' in the PPM does not
distinguish between a 'Capital Contribution' and a 'Loan'.
On these
grounds, the Court of Appeal also assumes that the funds made available to the
Fund for the [H] and/or the LPs belonging to it - as also ruled by the District
Court - qualify as risk-bearing/own capital.
4.7.4.2.4.
In so
far as important, it should also be mentioned that the Loan Notes have been
financed by the Guernsey Limiteds with equity, as
appears inter alia from the balance sheet of [Ag] referred to under 2.8 (see
also 2.9.2).
4.7.4.3. It is an established fact that [H] consists
of [J] , [Ae 2] , [K] , [L] and [M] . It has remained
unclear what makes the LPs part of the [H] and what, in that respect, is the
legal form of the [H] - as the Court deduces from the Financial Report mentioned
below: established under the laws of Guernsey and located there. It is an
established fact that for the [H] and the LPs belonging to it a Financial
Report is jointly drawn up in which the joint assets, rights and obligations
are presented and accounted for; see also under 2.6.1. Apart from the fact that
the Financial Report mentions 'The [H] and the partners as a body' - the Court
understands this to mean: a partnership of the LPs - the Financial Report of
the [H] and the LPs drawn up in Guernsey (Channel Islands) does not provide any
further information about the legal form of the [H].
4.7.4.4. It is established that for all LPs one and
the same partnership acts as General Partner, namely [H] (General Partner) LP
(hereinafter also referred to as the General Partner), of which [H] Limited is
the General Partner. The directors of [H] Limited are [AM] ,
[AN] and [AO] . Given this structure, the Court assumes that the actual affairs
of the LPs are ultimately governed by the same (natural) persons/directors ( [AM] and/or [AN] and/or [AO] ). It has not been contested
in appeal that, as the District Court found (judgment of the District Court
under 101), the LPs were established under similar conditions, invest in the
same enterprise(s) and have the same investment strategy,
so that the Court also assumes this to be the case.
4.7.4.5. The LPs are each full shareholder of the
[V] to [Ag] Limiteds respectively ([Ae 2] of [Ag] ) and, as is apparent from the 2011 Financial Reports
appended to the documents, the directors of the Limiteds
include Mr [AM] and Mr
[AN].
4.7.4.6. On appeal, it is not disputed that the Loan
Notes provided by [W] , [Aa] , [Ab] and [Ag] to the
interested party were (indirectly) financed with the money loans that were made
available to [H] by the partners in the LPs (see also court ruling under 14).
4.7.4.7. Now that, as considered above, the
deduction of the interest owed by the interested party on the Loan Notes is not
limited by Section 10a of the Act, the Court will assess whether the District
Court was right in ruling that, except for the interest owed to [Aj] B.V., this interest is not deductible by application of
the doctrine of fraus legis.
4.7.4.8.
For a
successful reliance on fraus legis,
two criteria must be met (cumulatively):
(a)
the
prevention of the levying of - in this case - corporation tax was the decisive
motive of the interested party.
(b)
the
result thus sought by the interested party is contrary to the object and
purpose of the tax legislation.
4.7.4.9. In its assessment of condition (a), also referred
to as the motive requirement, the Court of Appeal took as a starting point that
- unlike when applying Article 10a of the Law - it is (primarily) up to the
Inspector to make it plausible that tax reasons were decisive for the interest
owed on the Loan Notes to be charged to the profit of the party concerned.
In the
opinion of the Court of Appeal, the Inspector has succeeded in this. The Court
of Appeal agrees with what the District Court considered in paragraphs 87 to 94
of its judgment.
This does
not detract from the fact that, as the District Court rightly considered in
paragraph 99, the acquisition of the [N] by [H] as such was based on business
reasons.
4.7.4.10.
Furthermore,
in the opinion of the Court of Appeal, the District Court correctly considered
that the distribution of the Loan Notes among the providers of the subordinated
loans (the Guernsey Limiteds, including [Ag]) was not
based on commercial considerations and that the avoidance of the affiliation
criterion of Article 10a of the Law had been the decisive motive. In this
respect, the Court of Appeal refers in particular to
the artificial insertion into the structure of [Ae 2], more specifically with
reference to what the District Court considered in paragraph 90 of its judgment.
In that respect it is important that the same parties participate in [J] and in
[Ae 2].
4.7.4.11.
In
this respect the Court of Appeal considers it important that the motion
requirement is related to both (a) the thwarting of the effect of article 10a
of the Act, and (b) the rule of law of which article 10a of the Act is a
codification (see further subsection 4.7.4.17). The fact that the legislator
initially gave a limited interpretation to this rule of law in Article 10a of
the Law, insofar as this provision did not apply before 2007 to an interest
expense relating to the financing of an external acquisition, does not lead to
a different opinion as to whether the requirement for a motion is met, because
this restriction no longer applies in the current year. In this sense, also
paragraph 111 of the judgment of the District Court.
Accordingly,
a decisive intention to avoid paying corporation tax may also arise if the
financing, which has no purpose other than to avoid paying corporation tax,
relates to an external acquisition. Such a situation arises in the present
case.
In this
connection it is irrelevant how the cash flow that flowed into the Fund/LPs was
distributed among the various companies within the group (the group) to which
the interested party belongs. That distribution provides no explanation for the
loan capital made available to the interested party of assets that were
initially made available to the [H]/LPs as equity capital/risk-bearing capital.
On this point, the Court refers to what the District Court considered in (the
last five sentences of) paragraph 98 of its judgment.
4.7.4.12.1.
Contrary
to what the interested party has stated, the position or role of the ultimate
investors need not be taken into account when
answering the question of whether the motive requirement has been met. In the
opinion that the funds made available by the ultimate investors functioned as
equity/risk-bearing capital of the [H] and/or the LPs (see under 4.7.4.2.3),
the position or role of the ultimate investors is not relevant when assessing
the motive requirement, regardless of the way in which those ultimate investors
(such as pension funds and insurance companies) were financed.
4.7.4.12.2.
The
comparison made by the interested party with the situation in the BNB 1996/3
judgment is not valid, in the opinion of the Court, since the interest due on
the Loan Notes, unlike in the BNB 1996/3 judgment, is received by the Guernsey Limiteds, which - according to the parties - are not
subject to a compensatory levy in this regard. It has not been argued or made
plausible that the profits of these Guernsey Limiteds
are subject to a pass-through obligation, as was the case with the fiscal
investment institution in the BNB 1996/3 judgment. Moreover, if on a later
disposal of the [N] by the [H], a positive result is obtained, that result is a
different result from the interest income obtained from year to year by the
Guernsey companies during the holding of the [N].
4.7.4.13. In
assessing whether the standard requirement has been met, the starting point is
that the system of the Act provides that a taxpayer has freedom of choice in
the form of financing of a company in which it participates (cf. HR 2 February
2014, no. 12/02640, ECLI:NL:HR:2014:224, BNB 2014/79).
However,
this freedom is not unlimited. An exception to this main rule is the situation
in which a (non-corporate) diversion occurs. A (non-corporate) diversion may
exist if the financial resources used to finance the affected loan have been
withdrawn from the equity of the group to which the acquired target belongs. In
this case, 'group' does not refer exclusively to the Dutch part of the group
(cf. the BNB 2015/165 judgment, paragraph 3.1.3).
4.7.4.14.1.
The
Court of Appeal does not follow the appellant in its assertion that, in the
assessment of the existence/absence of a (non-corporate) diversion, what
matters is whether the funds used to finance the contaminated loan originate
from the equity of affiliated entities as referred to in Section 10a(4) of the Act. As the Court of Appeal deduced from BNB's
judgment 2015/165, when applying section 10a of the Act - and therefore also
when applying the rule of law underlying section 10a of the Act, of which
section 10a of the Act is a codification - a distinction must be made between
the concept of 'affiliated entities' (on the one hand) and 'concern' or 'group'
(on the other hand). The concept of 'affiliated entities' in Section 10a of the
Act has a function in designating the entities involved (as debtor and
creditor) in an impaired loan: the Court refers in
this respect to the BNB 2015/165 judgment, paragraph 3.1.1, first sentence, and
paragraph 3.2.2, penultimate sentence. The (broader) concept of 'concern' or
'group', on the other hand, has a function in designating the entities that
were also involved in taking out the contaminated loan: the
Court refers in this respect to the BNB 2015/165 judgment, paragraph 3.1.1,
penultimate sentence, in conjunction with paragraph 3.1.3, penultimate
sentence, and paragraph 3.2.2, penultimate sentence.
The terminological
distinction made in these considerations of the BNB 2015/165 judgment means
that for the question of whether a (non-businesslike) diversion is present, it
is not sufficient to establish that the providers of - in this case - the Loan
Notes are not affiliated companies, as referred to in Section 10a(4) of the Act.
The group
of parties involved in an infected loan (such as the loan notes) may also
include the entities - outside the group of "affiliated entities"
within the meaning of Section 10a(4) of the Act - that
are otherwise affiliated within a group (cf. Court of Appeal Amsterdam 18 April
2019, nos. 18/00018 and 18/00019, ECLI:NL:GHAMS:2019:1504, para. 4.22.9, the
opinion of the Advocate General, ECLI:NL:PHR:2020:102,
pt. 5.22-5.44, Court of Appeal Amsterdam 26 May 2020, ECLI:NL:GHAMS:2020:1407,
para. 4.9.5.2, and Court of Appeal The Hague 21 October 2020, ECLI:NL:GHDHA:2020:2019, para. 5.23).
4.7.4.14.2.
It
does not follow from the intermediary role of - in the sense of Section 10a(4) of the Act - entities that are not affiliated, at least
not automatically, that there are business motives for financing the legal act
(the acquisition of the [N]), so that there would be no violation of the rules.
In other words, for the question of whether a (non-business) diversion is
present, the motives of all parties involved in the financing and the related
legal transaction must be taken into account (cf. BNB
2015/165, paragraph 3.1.2, last sentence).
4.7.4.15.1.
It is
an established private equity company and in 2007 it raised funds from private
and institutional investors to make acquisitions in (inter alia) companies in
Northern and Eastern Europe that are involved in logistics infrastructure
(court ruling under 1.3). By participating in one of the LPs of the [H], the
participants in that LP have made funds available to it. The use of these
monies, which are to be considered as equity of the [H] and/or the LPs,
constitutes a fraudulent diversion as referred to in the BNB 2015/165 judgment,
since these monies were lent to the interested party via companies established
in Guernsey - which are not subject to a (compensatory) levy there - and these
legal transactions took place within a group to which (among others) the [H],
the LPs, the Guernsey Limiteds and the interested
party belong.
This does
not concern a group of entities which are affiliated according to the standard
of section 10a(4) of the Act, but entities which - in
view of what is stated under 4.7.4.3 through 4.7.4.5 - are so closely connected
organisationally and administratively through
affiliation, management and control that they form a group as referred to in
the BNB 2015/165 judgment (see under 4.7.4.13). In this respect, the Court
points to the belonging to the [H] of the LPs (see under 2.2), the shareholder
relationship between the LPs and the Guernsey Limiteds
(court ruling at 5), the member relationship between the Guernsey Limiteds and [Ac] UA (court ruling at 6), the shareholder
relationship between [Ac] UA and the interested party (court ruling at 13), the
relationship between [J] and [Ae 2] (court ruling at 8.4 - 8.7), the control of
the General Partner (see, inter alia, clause 4.2 (c) mentioned under 2.3, and
see the judgment of the District Court under 4.1), the concentration of powers
among, in particular, [AN] and [AM] as directors of the General Partner and of
the Guernsey Limiteds (see under 2.7.1, 2.8, 4.7.4.4,
4.7.4.5 and the judgment of the District Court under 75); see also the judgment
of the District Court under 3.3, where it is mentioned that according to the
notification to the NMa, [H] acquires full control of
the [N].
4.7.4.15.2.
This
means that in this case a situation has arisen in which the exception to the
main rule referred to in section 4.7.4.13 applies. In this respect, too, the standard
requirement for the application of fraus legis has been met.
4.7.4.16.
The
considerations set out above in paragraphs 4.7.4.13 through 4.7.4.15 mean that
what the District Court considered in paragraphs 105 through 108 can be left
open. In view of the judgment on the application under 4.5.4.1, the Court does
not consider it correct to include the concept of 'cooperating group' in the
application of fraus legis
for the year under consideration. To this extent, the Court agrees with the
position of the interested party as stated under 4.7.2.8. However, this is of
no avail to it, because of what has been considered above under 4.7.4.13
through 4.7.4.15.
4.7.4.17.
As
stated above, Article 10a of the Act is not the only basis for determining what
constitutes the breach of the law required to invoke fraudulent preference. The
application of fraus legis
to situations in which profit is drained by means of interest deduction does
not therefore coincide one-to-one with the conditions for application of
Article 10a of the Act. The Court of Appeal also considers fraus
legis possible outside the (direct) application of
Article 10a of the Act in situations that constitute a violation of the norm
underlying that provision.
The
genesis of article 10a of the Act is rooted in the judgments in HR 26 April
1989, 24.446, BNB 1989/217, BNB 1996/3, HR 6 September 1995, 27.927, BNB
1996/4, HR 20
September
1995, 29.737, BNB 1996/5 and HR 27 September 1995, 30.400, BNB 1996/6. The essence
of these judgments is that the legislator intended not to allow the deduction
of interest on loans which - except for tax avoidance - have no real (business)
function. This norm developed in case law, of which article 10a of the Act is a
codification, has been violated in the present case, so that also in this
respect the standard requirement of fraus legis has been met.
4.7.4.18.
In BNB
1996/5, the Supreme Court added to the required breach of standards as a
sub-rule that the deduction limitation for interest on a useless loan does not
apply if, in the country of residence of the party against whom the debt is
owed, tax is levied that can be considered reasonable according to the
standards applicable in that country.
This
sub-rule does not apply in the present case because it is not in dispute that
the interest on the Loan Notes is not subject to a countervailing tax on the
part of the recipients of that interest (the Guersey Limiteds). On this point, the Court joins what the District
Court considered in paragraph 110 of its judgment.
4.7.4.19.
With regard to the argument of the interested party that, for the
application of fraus legis,
it is required that the combination of legal acts to be affected by that
judgment can occur repeatedly, the Court agrees with what the court considered
in paragraph 97 of its judgment. It is not required that - as the Inspector
rightly pointed out - the same entities are used again as were previously used
for a similar combination of legal acts, notwithstanding the fact that - as has
not been contested - the sidecar structure of [Ae 2] was used again at the
acquisition of the [AJ] by the [H] (Court decision under 29). The latter rather
constitutes a confirmation of the repeatability of the combination of legal
acts to which fraus legis
applies in the present case.
4.7.4.20.
The
above means that the interest on the Loan Notes that is owed by the interested
party to the Guernsey Limiteds is not deductible by
application of the doctrine of fraus legis. Whether
this is the interest agreed upon between the Guernsey Limiteds
and the interested party, or the interest of 2.5% mentioned under 4.4.17, does
not matter for this judgment.
4.7.4.21.
In the
opinion of the Court, the interest that the interested party owes to [Aj] B.V. is deductible, because it has not become plausible
that these lenders belong to the group of companies distinguished above under
4.7.4.15. This means that the interest deduction restrictions do not apply to
the amount of € 2,478,638. This means that the interest deduction restrictions
do not apply to an amount of € 2,478,638.
With regard to
this amount, the Inspector did not - in the further alternative - state that a
part of it should be corrected because (also) the loan in question is notzakelijk. Upon request the Inspector confirmed this
procedural position at the hearing of the Court for the year in question (see
under 2.13.2). The Court of Appeal will therefore follow the District Court's
opinion on this point in terms of figures.
The deduction of acquisition and financing costs
4.8.1. The
court assessed the deductibility of the costs of acquisition and financing of
the [N] (which were in dispute in the first instance) as follows:
"Financing costs
113.
Under
Section 13(1) of the Dutch Corporation Tax Act, 'the benefits from a
participating interest, as well as the costs relating to the acquisition or
disposal of that participating interest, shall not be taken
into account when determining the profit'. In its judgment of 7 December
2018, No. 17/01211, ECLI:NL:HR:2018:2264, BNB 2019/26, the Supreme Court ruled
as follows in this regard:
‘2.5.1.
(…). The wording of this provision, and in particular the phrase "in
respect of", makes it clear that a given cost item is covered by the
participation exemption only if there is a link between that cost item and the
acquisition or disposal of a shareholding.
In the
absence of further textual or historical legislative indications as to the
answer to the question as to which connection is required, the Supreme Court
applies the criterion of a direct causal link. Costs must be regarded as costs
relating to the acquisition or disposal of a participation if they are incurred
as a result of the acquisition or disposal of the
participation in question, in the sense that the costs would not have been
incurred without that acquisition or disposal. The existence of such a link
should be assessed by objective standards.
2.5.2.The legal text makes no distinction between
internal and external costs. Therefore, the deduction prohibition for purchase
and sales costs includes both types of costs.
2.5.3.From the use of the definite article 'the'
and the demonstrative pronoun 'those' in the text of Article 13(1) of the Law,
it must be concluded that only costs linked to the actual acquisition or
disposal of a specific shareholding are affected by the deduction prohibition.
A link as referred to above in Section 2.5.1 can therefore only exist if that
acquisition or disposal takes place.
2.5.4.It is conceivable that the sale of a
participating interest to an intended buyer is aborted, but that the interest
is sold to another party at a subsequent stage. In such a case, it must be
assessed to what extent the selling expenses incurred in that first phase would
also have been incurred if that phase had not taken place. Only to that extent
are those costs affected by the deduction prohibition.
2.5.5.In connection with the rules formulated in
paragraphs 2.5.3 and 2.5.4, sound business practice dictates that the taxpayer
includes an accruals-based asset item on the balance sheet for costs relating
to the intended acquisition or disposal of a participation within the meaning
of Article 13(1) of the Law and maintains it until it is certain that the
acquisition or disposal will indeed take place. At that moment, this asset item
must be written off and it must be determined to what extent the amount of the
write-off falls under the participation exemption.
114.
Following
this judgment, the plaintiff made a further calculation in its pleading of what
it considered to be deductible financing costs. In doing so, the so-called
exploration costs - insofar as they are not indirect financing costs, or
acquisition costs in the exploration phase - were still regarded as
non-deductible costs. In response to this judgment, the Respondent took the
further position in its pleading that when determining the assessment costs of
[Au] , [As] and [AA] (the notes referred to in
sections 1.c, 3 and 5 of the Respondent's report of 2 March 2016), amounting to
a total of € 330,781, were wrongly allowed as deductions. According to the Respondent,
costs that indirectly serve the financing are also not deductible on the basis of the aforementioned judgment. The Respondent
relies on internal compensation for this amount if and to the extent that the
Court grants the Claimant's appeal.
115.
It is
not disputed between the parties that the said exploration costs cannot be
deducted. The Court furthermore agrees with the plaintiff that the deduction
prohibition does not apply to the financing costs. In so far as the defendant
is of the opinion that the aforementioned indirect
financing costs fall under the deduction prohibition, the Court does not follow
him. The Court understands that it concerns mixed costs, namely costs that are
related to both the acquisition and the financing. The Court agrees with the
plaintiff that in view of the required direct link, these financing costs do
not fall under the deduction prohibition. The costs of due diligence and advice
regarding the acquisition and financing structure are also financing costs, since this due diligence and advice were - as has not
been refuted by the defendant - conditions precedent for obtaining financing
from the banks. The Court follows the division made by the plaintiff
deductible/non-deductible on the basis of the ratio of
the plaintiff's capital and reserves, so that 77.1% of the aforementioned mixed
costs are in principle deductible. The claimant's appeal to internal
compensation fails for this reason.
116.
The
Court sees no reason for an additional deduction of indirect financing costs.
The Court agrees with the Respondent that the said indirect financing costs
([Av] , [As] , [Az] , [AA] , [AF] and [AG] ) belong to
the General Partner of the various LPs and not to the Claimant. The claimant
has not made it plausible, in spite of the defendant's
substantiated refutation, that these costs relate to herself or to the
companies belonging to the fiscal unity. It follows from the documents that it
concerns services performed for the benefit of the General Partner or its
advisor [T], among other things because the engagement letters are in the name
of the General Partner and the relevant assignments were issued by [T]. This
allocation of costs is also supported by the fact that the investment strategy
was determined and investment decisions were taken at
the level of [H], no acquisition and financing file is present at (the fiscal
unity of) the claimant and said costs relate to advice on the structure of [H]
'above the Netherlands'. Moreover, there are no invoices and - as far as they
are available - they are partly not addressed to the claimant or to the
companies involved in the fiscal unity, so that also for that reason it is not
possible to attribute the costs to (the fiscal unity of) the claimant. The
Court follows the defendant to the extent that with regard to
[As] and [AA] costs of respectively € 125,000 and € 46,982 have already been
allowed as deduction. For this, the Court refers to the report reproduced in
Section 23 of this judgment.
117.
Also with respect to the [An] [Ana] amounting to € 2.85 million, there is a
question of a service to the General Partner. The General Partner is the client and it concerns M&A services to the General
Partner. The Court agrees with the Respondent that the invoice is wrongly in
the name of [Ad] B.V. Together with the defendant, the Court assumes that only with regard to the Loan Syndication fee of the [An]
amounting to € 150,000 there are financing costs that can be attributed to the
claimant. In this respect the defendant has already allowed an amount of €
21,509 to be deducted as depreciation costs. Below the Court will address the
question of whether good business practice requires capitalization.
118.1.
The
costs of [At] in the amount of € 480,767 have not been sufficiently
substantiated by the plaintiff. [At] has assisted the [An] in discussions
concerning the bank financing. The underlying invoice of the [An],
correspondence with the [An], the legal opinions and proof of payment have not
been provided. The costs may also be related to said M&A services to the
General Partner. The plaintiff's bare assertion that these costs do not relate
to costs incurred by [AnA] M&A but by the lending
department of [An] by virtue of its roles as (security) agent and lead arranger
of the [AmA], the court considers insufficient for a
different opinion.
118.2.
With regard to the costs of [Au], there are costs of [H] and also
non-deductible acquisition costs. In part, these are financing costs for the
plaintiff's fiscal unity. The court follows the defendant in its calculation of
the deduction in the amount of € 158,799. This amount has already been taken into account in the assessment. In this respect the
court also refers to the findings in the report reproduced in section 23 of
this judgment."
4.8.2.1.
On
appeal, the interested party took the position that the costs of [Av] , [As] , [Az] , [AA] , [AF] and [AG] should be deducted
because they belonged to the interested party.
4.8.2.2.
Furthermore,
the costs of [At] passed on to the interested party, as they were incurred in
the context of the attracted bank facilities, should also be deducted from the
latter.
4.8.2.3.
The
interested party argued that banks require documents such as due diligence
reports because they conduct their own investigation into the creditworthiness
of the potential debtor within the context of acquisition financing. In that
context, the banks also demand that they be allowed to derive confidence from
such documents, with the possible consequence of holding liable the financial
advisor(s) involved in drawing up the due diligence report, according to the
interested party. According to the interested party, the due diligence reports
constituted a suspensive condition for the bank financing of the acquisition of
the [N].
4.8.2.4.
The
interested party disputes that the indirect financing costs relating to, among
others, [As] and [AA] should be attributed to the General Partner.
4.8.2.5.
According
to the interested party, the costs of [AB] BV (€ 150,000), [AC] (€ 125,000),
[AD] CV (€ 136,184) and [AE] (€ 120,000; as mentioned in paragraph 5.1 of the
Final Report of [X] cited in 23.1 of the court ruling) were regarded as
acquisition costs and therefore already non-deductible. The taxpayer disputes
that these costs should be allocated to the General Partner,
because it is the acquirer of the shares in the [N].
4.8.2.6.
The
Interested Party considers it understandable that the District Court did not
attach any consequences to the percentage of 77.1% mentioned in paragraph 115
of its judgment, because it allocated the mixed costs to the General Partner.
The Arrangement Fee and the Loan Syndication Fee fall outside this allocation
because, according to the Interested Party, these are costs that relate
exclusively to the acquisition of the financing. The interested party also
considers the percentage used by the court to allocate mixed costs as
acquisition costs or financing costs a correct approach.
4.8.2.7.
In its
notice of appeal, the interested party concluded with a statistical amount of €
25,031,490. From an explanation of this amount provided at the request of the
Court, attached to the Interested Party's letter of 19 October 2020, the Court
deduces that the Interested Party also considers the fee [An] for an amount of
€ 2,569,826 to be deductible.
4.8.3.1.
On
appeal, the Inspector refers to the judgment of HR 7 December 2018, 17/01211,
ECLI:NL:HR:2018:2264, BNB 2019/26, cited by the District Court. According to
him, costs that might have partly (indirectly) served to finance the
acquisition are not deductible either. The circumstance that banks request
documents (such as due diligence reports) because they are available in the
context of an acquisition does not make these documents 'mixed' financing
costs, according to the inspector.
On this
basis the Inspector in his notice of appeal claims to have been too generous in
determining the assessment. The costs [Au] (€ 158,799), [As] (€ 125,000) and
[AA] (€ 46,982; together: € 330,781), as also mentioned in paragraph 5.1 of the
Final Report of [X] cited under 23.1 of the judgment of the District Court,
were initially wrongly deducted, according to the Inspector. He argued that the
deduction of these costs should still be corrected by means of 'internal
compensation'.
4.8.3.2.
In
addition, the Inspector states - with approval - that the District Court, in
paragraph 116 of its ruling, has ruled that the indirect financing costs [As]
and [AA] belong to the General Partner and are therefore not eligible for
deduction. For the costs [AB] BV (€ 150,000), [AC] (€ 125,000), [AD] CV (€
136,184) and [AE] (€ 120,000, as also mentioned in paragraph 5.1 of the Final
Report [X] ) the same applies, according to the
Inspector.
4.8.3.3.
The
Inspector furthermore observes that he cannot follow the percentage of 77.1
mentioned by the court in paragraph 115 of its ruling and that it seems to him
that the court did not attach any numerical consequences to this.
4.8.3.4.
If the
interest on the Loan Notes to [Aj] BV is deductible
(as the Court ruled), then its views (in the alternative) lead to the following
conclusion numerically:
Taxable amount
(after setting off a loss from previous years that is not in dispute, to the
amount of € 138) € 3,862,679 Interest [Aj] BV -/-
2,478,638
Non-deductible
expenses (as mentioned in 4.8.3.1) + 330,781 Determined taxable amount €
1,714,822
The taxable amount takes into
account depreciation of an Arrangement Fee of € 8.4 million and a Loan
Syndication Fee of € 150,000; the depreciation taken into account in 2011
amounts to € 1,204,488 and € 21,509 respectively.
4.8.4.1.
In
paragraph 116, the Court considered that the costs [Av] ,
[As] , [Az] , [AA] , [AF] and [AG] BV, as mentioned in the overview included in
Section 23.1 of the judgment of the Court, belong to the General Partner and
not to the interested party. According to the District Court, the Interested
Party has not substantiated the reasoned contradiction of the Inspector by
demonstrating that the costs in question were incurred by itself or by the
companies forming part of the fiscal unity. For the further substantiation of
this, the Court refers to paragraph 116 of the judgment of the District Court,
which is largely based on the findings of the investigation by the Inspector,
as described in section 23.2 of the judgment of the District Court and deemed
plausible.
–
In the
opinion of the Court of Appeal, the district court ruled on good grounds that
the costs [Av] , [As] , [Az] , [AA] , [AF] and [AG] BV
should be regarded as costs of the General Partner. Also
on appeal, the interested party - who bears the burden of proof - has not made
any plausible facts and circumstances that would require the judgment that
these costs should be considered (partly) the costs of the interested party or
that these costs should be charged to the interested party.
4.8.4.2.
With
respect to the costs [At], the court ruled that the interested party had failed
to substantiate these sufficiently. The District Court based its ruling on the
findings of the Inspector's investigation with respect to these costs, which
were reproduced and deemed plausible in section 23.2 of its ruling. Since these
findings have not been refuted by the interested party (who bears the burden of
proof), also on appeal, the Court of Appeal follows the District Court in its
opinion that the costs [At] are not deductible.
4.8.4.3.
With
regard to the costs [AB] BV, [AC] , [AD] CV and [AE],
the Court of Appeal is of the opinion that - on the same grounds as for the
costs [Av] , [As] , [Az] , [AA] , [AF] , [AG] BV and [At] - these costs are not
deductible because they must be considered costs of the General Partner. The
Court of Appeal refers in this respect to what has been stated about these
costs under 23.2 of the ruling of the District Court and observes that the
facts and circumstances mentioned there by the interested party also on appeal
have not
been refuted, so that it has not been made plausible that these costs should be
considered (partly) the costs of the interested party or should be passed on to
it. To this the Court added that a different opinion regarding the costs of
[AB] BV, [AC] , [AD] CV and [AE] would have no effect
on the taxable profit, since the interested party, in its statement of defence on appeal, took the position that these were
non-deductible acquisition costs.
–
With regard to the deduction of the fee [An], the Court of Appeal
agrees with the considerations of the District Court in paragraph 117. The
Court of Appeal sees no reason in the arguments brought forward by the
interested party on appeal to reach a different opinion than that of the
District Court with regard to the [An] fee. This
concerns the so-called Success Fee of € 2,850,000. The Arrangement Fee of €
8,400,000 and the Loan Syndication Fee of € 150,000 are - as is not in dispute
between the parties - deductible, although the Inspector states that these fees
should be capitalized, so that only the depreciation - already taken into account in the tax return - can be charged to the
profit of 2011.
4.8.4.4.
The
Court of Appeal sees no reason in the arguments brought forward by the
Inspector on appeal to reach a different opinion than that of the District
Court with respect to the parts of the financing costs [Au] ,
[As] and [AA] that are regarded as costs of the interested party on an
estimated basis according to the Inspector's Final Report on [X] BV (judgment
of the District Court under 23) (a total of € 330,781). Like the District Court
(paragraphs 115, 116 and 118.2), the Court rejects the claim to internal
compensation in relation to these costs.
4.8.4.5.
The
above considerations mean that, except for the mandatory activation of the
Arrangement Fee and the Loan Syndication Fee to be assessed below, the Court,
like the District Court, arrives at a taxable amount of nil and a loss of
€5,939,824 for the year 2011.
Activation of costs
4.9.1. The
court answered the question of whether the Arrangement Fee and the Loan
Syndication Fee should be capitalized as follows and elaborated on the
numerical consequences of its judgments as stated in 120 and 121.
“119. With
the plaintiff, the court is of the opinion that good business practice does not
oblige to capitalize financing costs and that it is permitted to deduct
financing costs from the result in the year of contracting the debt. In this
regard the Respondent, with reference to the judgment of the Court of Appeal of
The Hague of 7 February 1968, no. 45/1967, ECLI:NL: GHSGR:1968:AX5512, BNB
1968/250, states that such costs may, in principle, be charged to the profits
at once, unless this leads to significant profit shifts. In the opinion of the
District Court, there is no question of such an exception since the arrangement
fee of € 8.4 million is limited in size in relation to the money loan (4% of €
210 million) and also in relation to the other
profit-determining elements (revenues and costs). This also applies to the Loan
Syndication fee to the amount of € 150,000."
120. Of the financing costs an amount of €
354,761 (€ 125,000 + € 46,982 + € 158,799 + € 23,980 (being the amount not
assessed by the defendant)) has already been taken into
account (see above). This means that at present the arrangement fee in
the amount of € 8.4 million and the remaining amount of the Loan Syndication
fee of € 150,000 can still be deducted from the taxable profit for 2011. On the
arrangement fee in 2011 a depreciation in the amount of € 1,204,488 has already
been taken into account, so that additionally an amount
of € 7,195,512 (€ 8.4 million minus € 1,204,488) can still be deducted. On the
loan syndication fee in 2011 depreciation has already been taken
into account to the amount of € 21,509, so that additionally an amount
of € 128,491 (€ 150,000 minus € 21,509) can be deducted. In addition,
therefore, a total of € 7,324,003 (€ 7,195,512 + € 128,491) in finance costs
can be deducted.
Final sum
121.
In
view of the above, the appeal should be declared well-founded. In connection
with the subordinated loans, an amount of interest of €2,478,638 will be
deducted from the taxable profit. In addition, financing expenses in the amount
of € 7,324,003 will be deducted from the taxable profit established in the
assessment. As a result, the taxable profit will be reduced to an amount of nil
and the loss will be determined at an amount of € 5,939,824 (€ 3,862,817 -/- €
2,478,638 -/- € 7,324,003)."
4.9.2.1.
With regard to the capitalization and depreciation of non-recurring
financing costs, the Inspector states that the Arrangement Fee of €8.4 million
and the remaining amount of the Loan Syndication Fee of €150,000 relate to the
raising of loan capital. Since the provision of that loan capital took place
during several years, these fees should also be attributed to several years,
according to the Inspector; unless it is expected that there will be no benefit
or that the costs are not attributable, but this is not the case according to
the Inspector.
4.9.2.2.
As the
fees are paid to the lender, it is generally immaterial to the borrower and the
lender whether the underlying services are charged by way of a higher interest
rate or a closing agent fee. Consequently, the fees should also be capitalised. This corresponds to the manner of accounting
according to the annual accounts law, according to the Inspector.
4.9.2.3.
The
inspector pointed out that his position was in line with that of the tax return
submitted by the interested party. According to him, by taking the position in
the objection that a lump-sum deduction was necessary, the party concerned
violated the established practice in the tax return with the sole purpose of
obtaining a tax benefit. According to the inspector, this is also contrary to
sound business practice. According to him, the additional deduction of €
7,324,003 taken into account by the district court
should therefore be omitted.
4.9.3.According to the interested party, by
basing itself on the judgment of the Court of The Hague of 7 February 1968, no.
45/1967, ECLI:NL:GHSGR: 1968:AX5512, BNB 1968/250, the
District Court applied the correct test when answering the question whether the
Arrangement Fee and the Loan Syndication Fee had to be capitalized. According
to her, costs incurred for the financing of a business asset may be deducted
from the profit at once. Good business practice allows, but does not require,
capitalization, according to the interested party. According to the interested
party, the District Court's decision was confirmed by the judgment of HR 21
February 1934, B. no. 5580, and the judgment of the Amsterdam Court of Appeal
of 21 May 1999, 95/3338, concerning the LIONS loan, as published in BNB
1999/333.
4.9.4.In the opinion of the Court of Appeal, the
interested party is free to object to an (intended) consistent course of action
regarding the year/years in which the Arrangement Fee and the Loan Syndication
Fee (hereinafter also referred to as: the fees) are to be deducted from the
profits, since that (intended) course of action has not yet had irrevocable
consequences for a tax year in which the costs in question could be taken into account (cf. HR 4 May 1983, no. 21.669, BNB
1983/194).
The
inspector's position that the interested party was not allowed to reconsider
the activation of the fees according to its tax return is therefore rejected.
4.9.5.1.
The
question is, however, whether the interested party was permitted to charge the
fees in a single payment to the 2011 profits. Although it is not disputed that
the fees should have been charged to the taxpayer's profits in any year, the
burden of proof as to the facts and circumstances on which the single charging
of the fees to the profits is based lies, in the opinion of the Court of
Appeal, with the taxpayer.
4.9.5.2.
The
Court of Appeal also took as a starting point that costs whose usefulness
extends over several years should, in principle, be attributed to the years in
which they are useful according to good business practice, if not activating
them would lead to significant profit shifts. In the opinion of the Court of
Appeal, this last condition has been met with respect to the Arrangement Fee,
on the grounds that the amount of this fee has been set at 4% of the credit
facility and that this fee is very substantial in absolute terms.
4.9.5.3.
In
this respect, the Court of Appeal takes into consideration what has been
mentioned above under 2.6.1 to 2.6.3, 2.12, as well as what has been mentioned
in section 23 of the judgment of the District Court concerning the fees. In
particular, it is important that, with respect to the Arrangement Fee, as
appears from the facts and circumstances mentioned under 2.6.1 through 2.6.3,
there is a clear connection between the costs of the Arrangement Fee - paid to
the lender and referred to by the interested party as 'prepaid expenses' (see
under 2.12) - on the one hand, and the provision of the credit facility that
puts the interested party in possession of a certain amount of money during a
period agreed upon with a syndicate of banks, on the other hand.
The agreed
percentage relationship between fee and credit facility indicates a
relationship between fee and the size of the facility made available as such, contrary
to what would have been the case with a fixed amount fee related to certain
activities (related to that amount and carried out in 2011).
In
addition, in the opinion of the Court of Justice, there is a sufficiently clear
link with the asset financed by means of the credit facility, also taking into account the modus operandi of the Fund and the
result to be generated by it. The agreed term of the financing and the -
related - intended duration of possession of the asset make it (easily)
possible to attribute the costs to that term or duration of possession.
4.9.5.4.
As
opposed to the above-mentioned link with the availability of the credit
facility, the interested party has not provided any facts and circumstances
that would justify attributing the Arrangement Fee exclusively to the year
2011. The Court of Appeal is therefore of the opinion that the party concerned
is obliged to capitalise the Arrangement Fee and to
depreciate it in accordance with the agreed term of the credit facility, or, as the case may be, the intended duration of the
possession of the asset financed with it, as it did in its tax return.
4.9.5.5.
With regard to the question of whether compulsory activation of the
Loan Syndication Fee is required, the Court agrees with what was considered
with regard to that fee in the judgment of the District Court (119 and 120). In
this respect, the Court considers it decisive that the amount of the Loan
Syndication Fee is so small in relative and absolute terms that the party
concerned is not obliged to activate it on that basis.
4.9.5.6.
In
view of the above, the Court of Appeal - unlike the District Court - is of the
opinion that it is not allowed to deduct the Arrangement Fee in one go from the
2011 profits. This means that the loss of 2011 determined by the District Court
to be €5,939,824 (negative) must be reduced by the amount of the Arrangement
Fee that the District Court has allowed to be deducted, as mentioned in
paragraph 120 of the judgment of the District Court. The taxable profit should
therefore be determined at €1,255,688 (= -/- €5,939,824 + €7,195,512). Less a
loss from a previous year of € 138, the taxable amount should be set at €
1,255,550.
Final sum
4.10.1.
The
Court of Appeal concludes that the party concerned's
2011 profit was wrongly reduced by an interest expense of € 2.4 million, partly
because the loan from which this interest expense arose - contrary to the
District Court's ruling - is a non-corporate loan, and partly because the party
concerned evaded Article 10a of the Act and the legal rules on which it is
based, using equity diverted via Guernsey Limited and converted into a loan to
the party concerned.
4.10.2.
In
addition, the party concerned incorrectly - and contrary to the District
Court's opinion - took the position that an amount of € 7,195,512 in costs - in
the form of an Arrangement Fee - relating to the provision of loan capital
could be deducted from the profit in one go in 2011 instead of in the years in
which the capital was made available to it.
The Court
of Appeal considers that there are grounds for an order to pay the costs
pursuant to Section 8:75 of the Awb. The costs
eligible for reimbursement are laid down in Article 1 of the Administrative Law
(Procedural Costs) Decree (hereinafter to be referred to as the Decree). In the
present case, these are the costs of legal assistance provided by a third party
as referred to in section a. Pursuant to article 2, paragraph 1, opening words
and (a), of the Decree, the Court shall fix the amount of these costs in
accordance with the tariff included in the Annex to the Decree:
2,403 =
[(statement of defence on appeal 1 + submission of
information 1 (2 x 0.5) + appearance at the hearing of the Court of Appeal 1) x
1.5 (serious) x € 534].
The Court:
-
Annuls
the judgment of the district court, with the exception of
the decision on the costs of the proceedings and the court registry.
-
declares
the action to be well founded.
-
Annuls
the judgment on the objection.
-
reduces
the assessment to a taxable amount of € 1,255,550.
-
shall
reduce the decision on interest on taxes accordingly.
-
order
the inspector to pay the appeal proceedings costs of the interested party in
the amount of EUR 2,403, and
-
order
the Inspector to pay the appeal fee of EUR 532 paid by the interested party in
appeal to the interested party.
This decision has been rendered by E.A.G. van der Ouderaa, chairman, H.E. Kostense
and R.C.H.M. Lips, members of the tax division, in the presence of C. Lambeck, registrar. The decision was pronounced in public
on 23 February 2021 and will be published on www.rechtspraak.nl.
In the
absence of the chairman, the judgment was signed by H.E. Kostense
Both
parties may lodge an appeal in cassation against this ruling with the Supreme Court of the Netherlands within
six weeks of the date of posting, using
the web portal of the Supreme Court www.hogeraad.nl.
Certain
persons who are not represented by an agent providing legal assistance may
lodge an appeal in cassation by post. These are natural persons and associations
whose articles of association have not been included in a notarial deed. If
they do not wish to use digital proceedings, these persons may send the notice
of appeal in cassation to the Hoge Raad der Nederlanden (Tax
Chamber), PO Box 20303, 2500 EH The Hague. All
other persons and agents who provide legal assistance on a professional basis
are, in principle, obliged to litigate digitally (see www.hogeraad.nl).
When lodging an
appeal in cassation, the following should be taken into
account:
1. A copy of
this decision shall be appended to the notice of appeal.
2 - ( only in case of proceedings on paper) the appeal has to be
signed; 3 - the appeal has to mention at least the following:
a. the name and address of the petitioner.
b. the date.
c. a description of the judgment against which
the appeal in cassation is directed.
d. the grounds of the appeal in cassation.
A court
fee is payable for lodging an appeal in cassation. After lodging an appeal in
cassation, the petitioner receives a notice of appeal from the clerk of the
Supreme Court. In the notice of appeal in cassation the Supreme Court may be
asked to order the other party to pay the costs of the proceedings.
Explanation of appeal