Netherlands: Supreme Court clarifies interest deduction limitation rule

April 19, 20230

On March 3, 2023, the Dutch Supreme Court issued a ruling on the interest deduction limitation rule under Article 10a of the Dutch Corporate Income Tax Act of 1969.  

The rule states that interest expenses are not deductible for Dutch corporate income tax purposes if a loan from a related party is used for dividend distribution, repayment of capital, capital contribution, or acquisition of shares in a related party. However, there is an exception if the transaction and loan are based on sound business motives. 

Previous case law has established that external acquisitions are transactions based on sound business motives. The Dutch Supreme Court ruling clarifies that this interpretation also applies to transactions other than external acquisitions, such as capital contributions, as long as they are based on sound business motives and funds are not diverted in a non-businesslike manner. 


 The facts of the case concern a Swedish multinational group that was exiting the Italian stock market. Under the scrutiny of the Dutch Supreme Court, the capital contribution to a newly incorporated Italian subsidiary (which was financed by debt) in order to acquire listed shares, has been deemed to be based on sound business motives. In addition, the Court clarified that if a loan is granted by a group company that performs a pivotal financial function, supported by qualified personnel, funds are not considered to be diverted in a non-businesslike manner. 

Taxpayers who have not yet challenged the application of the interest deduction rule in situations similar to the Supreme Court ruling may consider challenging it by taking a filing position in the tax return or by applying the rule and filing an objection against the tax assessment. Filing an objection poses less risk for penalties and interest if the taxpayer ultimately cannot establish that the interest deduction rule should not apply. 

Fraus Legis 

The court also ruled on the application of fraus legis (evasion of law) in cases where a taxpayer successfully invokes the double business motivation test of Section 10a(3)(a) CITA 1969. The court noted that if the taxpayer can demonstrate that the debt and associated transaction is primarily business-motivated, this rules out that the motive requirement for applying the doctrine of evasion of the law (fraus legis) has been met in respect of that debt and transaction. 

For further consultation on the interest deduction limitation rule, please contact us.


Author: Angelo Girardi, Junior Associate

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