Dutch Supreme Court rules that interest deduction is rightfully denied due to Abuse of Law
Dutch Supreme Court rules that interest deduction is rightfully denied due to Abuse of Law
On September 5, 2025, the Dutch Supreme Court issued an important ruling regarding the deductibility of interest. The highest judicial authority in the Netherlands held that the case involved fraus legis (abuse of law), meaning that interest on the debt was not deductible.
In this case, the taxpayer had set up an acquisition structure involving a holding company in Luxembourg that used hybrid financing instruments. The Luxembourg company set up a Dutch acquisition holding, which financed the acquisition partly with debt. By forming a Dutch fiscal unity with the acquired companies, the interest was set off against the operational profits of those companies.
In line with recent Dutch case law, the Dutch Supreme Court ruled that the interest deduction is denied due to the application of fraus legis, even though the taxpayer successfully invoked the rebuttal provision of article 10a DCITA. The Dutch Supreme Court ruled that the interest expenses were artificially created with tax avoidance as the decisive motive, resulting in a conflict with the purpose and scope of the law. Consequently, both the motive and norm requirements for applying fraus legis were met and the interest deduction was denied.
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Background
When a company pays interest on a debt, it is generally allowed to deduct that interest from its taxable profit. However, Dutch corporate income tax law includes various measures that can deny such deductions. One example is the anti-base erosion measure in article 10a of the Dutch Corporate Income Tax Act 1969 (DCITA). This provision generally disallows interest deductions if the underlying transaction is considered “tainted” and is financed with a debt owed to a related entity. This was precisely the situation in the court case at hand. Nevertheless, the general rule did not apply because the taxpayer successfully invoked the rebuttal provision of the anti-base erosion measure. This provision allows interest to remain deductible if both the transaction and the debt creation are for business reasons.Fraus Legis
Avoiding the application of the anti-base erosion measure is only the first step for the taxpayer. It must then be assessed whether the interest deduction is still limited due to the doctrine of fraus legis. This doctrine can be applied if two conditions are met:- Motive requirement: tax avoidance is the decisive motive for entering into the transactions; and
- Norm requirement: the intended result of the transactions conflicts with the purpose and scope of the law.
In this case, the taxpayer had set up an acquisition structure involving a holding company in Luxembourg that used hybrid financing instruments. The Luxembourg company set up a Dutch acquisition holding, which financed the acquisition partly with debt. By forming a Dutch fiscal unity with the acquired companies, the interest was set off against the operational profits of those companies.
In line with recent Dutch case law, the Dutch Supreme Court ruled that the interest deduction is denied due to the application of fraus legis, even though the taxpayer successfully invoked the rebuttal provision of article 10a DCITA. The Dutch Supreme Court ruled that the interest expenses were artificially created with tax avoidance as the decisive motive, resulting in a conflict with the purpose and scope of the law. Consequently, both the motive and norm requirements for applying fraus legis were met and the interest deduction was denied.
Implications for Acquisition Structures
Acquisition structures often involve financing with debt. This ruling is relevant for such structures, even if the financing comes from parties with minor interests, such as private equity structures. It appears that structures involving financing entities that serve a genuine financial hub function (and are not mere conduits) are not affected by this new ruling. Structures involving genuine external financing also seem to remain unaffected.Contact Your Advisor
Would you like to know how the anti-base erosion measure or fraus legis might affect your situation? Our specialists are happy to assist. Contact us via our form or directly through your BDO contact person.Contact
