On 5 June 2015, the Supreme Court rendered a decision on interest deduction on tainted related party debt (Dutch base erosion rules). The Supreme Court ruled that even in case of an external acquisition of shares, business reasons must predominantly underlie the connected debt. Furthermore, the Supreme Court ruled that a parent company is in principle free to fund its subsidiaries with either debt or equity.
Facts
In 2007 a listed parent company of a South African media group issued shares. Approximately 60% of the proceeds were directly wired to its Dutch third-tier subsidiary ("Dutch Holding Company"). From a legal perspective, the proceeds were contributed as capital to a second-tier Mauritian company, which in turn granted an interest free loan to its 100% Mauritian subsidiary, the group's internal financing (low-substance) company ("Mauritian Financing Company"). This company lent the proceeds to the Dutch Holding Company through an interest bearing loan ("Mauritian Debt"). Initially, it was expected that the Dutch Holding Company would use the proceeds for the acquisition of an Argentinian target company. Instead, the Dutch Holding Company acquired other companies in 2007 and claimed interest deduction on the Mauritian Debt.
Dutch base erosion rules
Dutch base erosion rules (article 10a Dutch corporate income tax Act: "CITA") stipulate that interest charges on related party debt are not deductible if the debt is connected with certain acquisitions, capital contributions or dividend distributions. A rebuttal rule applies if the taxpayer can demonstrate that business reasons predominantly underlie the transaction and the debt obligation connected therewith ("business reasons exception").
First of all the Supreme Court ruled that the burden of proof to demonstrate that business reasons predominantly underlie an acquisition and the related party debt lies with the taxpayer. The character and substance of the legal transactions as such are insufficient to meet this burden of proof. The Supreme Court also ruled that the business reasons exception must take into consideration all parties that are involved in the pertinent transactions i.e. the Dutch Holding Company cannot claim that it had no alternative but to accept the loan offer from the Mauritian Financing Company.
Furthermore the Supreme Court ruled that a parent company is free to fund its subsidiaries with either debt or equity. The Supreme Court articulated that this implies a limited scope for the Dutch base erosion rules. If (equity) funds are not diverted through low-taxed group companies, but directly lent to a Dutch taxpayer, the legislator has in principle accepted the tax consequences – i.e. interest deduction – of the choice of such a financing arrangement.
Insufficient business reasons for the Mauritian Debt
The Dutch Holding Company claimed that the business reasons exception by definition applied to the Mauritian Debt, because it acquired participations from third parties. This reasoning is in line with older case law (BNB 2005/169), which the Supreme Court ruled under its abuse of law doctrine (fraus legis) prior to the codification of the base erosion rules in article 10a CITA. The Supreme Court has now decided that his former decision is not relevant for the interpretation of article 10a CITA.
The Dutch Holding Company also referred to the parliamentary history upon amendment of article 10a CITA per 1 January 2007 and claimed that the business reasons exception applied, because the proceeds from the share issuance were not diverted through the Mauritian Financing Company in view of a specific acquisition. The Supreme Court, however, decided that this is not decisive in case a Dutch company attracts loans for acquisitions in general, as the Dutch Holding Company did in the case at hand. Finally the Supreme Court didn't address any possible infringement(s) with EU-law.
The Supreme Court confirmed the court's decision that the Dutch Holding Company has not demonstrated sufficient business reasons for the Mauritian Debt and denied the interest deduction.
Bron: Loyens & Loeff
Informatiesoort: Nieuws
Rubriek: Vennootschapsbelasting, Internationaal belastingrecht
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