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Decision of the Supreme Court of The Netherlands in Case No. 21/00299 dated 03 March 2023

The case deals with interest deduction limitation under Section 10 a of the Corporate Income Tax Act of 1969. The issue arose in respect of an external acquisition (a business-motivated 10a transaction) that had been debt-financed. The Dutch Supreme Court held that the direct financing of a business-motivated transaction results in a business-motivated debt.

The Court noted that a debt is business-motivated if the related entity to whom the taxpayer incurred the debt performs activities pertaining to finance in a way that it fulfills an important financial function for the group as a whole. According to the Court, it cannot be said that funds were diverted in such cases, even if the funds were acquired from group entities. The Court laid down that it is upon the tax authorities to furnish facts and discharge the burden of proof for any exception. Further holding that in assessing whether the related entities fulfill a pivotal financial function, the circumstances of the case must be considered coherently. The key ingredient is whether the said entity or independent business unit fulfills an active financing function within the group. Furthermore, the relevant entity or independent business unit must be involved with performing financial transactions such as borrowing and lending of funds etc. for the group. The Court clarified that an entities independence is not based on the fact that it is involved in the group’s central strategy.


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