The Netherlands Supreme Court issued an important decision on 5 September 2025 in which it disallowed an interest deduction based on the application of the fraus legis or abuse of law principle and provided some welcome clarifications of the rules.
Under Dutch tax law, when a company pays interest on a debt, it usually may deduct that interest from its taxable profit unless one of the rules disallowing a deduction applies. For example, the anti-base erosion rule in article 10a of the Corporate Income Tax Act 1969 generally disallows an interest deduction if the underlying transaction is deemed to be “tainted” and is financed with a debt owed to a related entity. This was the situation in the case before the Supreme Court. However, the general rule did not apply because the taxpayer successfully invoked the rebuttal provision of the anti-base erosion measure, which allows interest to remain deductible if there are justifiable business reasons for the transaction and the debt.
Avoiding the application of the anti-base erosion measure is only the first step for the taxpayer. It then must be determined whether the interest deduction may be limited—or disallowed in its entirety—due to the application of the fraus legis principle. Fraus legis can be applied if two conditions are fulfilled:
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 company, which financed the acquisition partly with debt. By forming a Dutch fiscal unity (i.e., a consolidated tax group) with the acquired companies, the interest was able to be set off against the operating profits of those companies.
In line with recent case law, the Supreme Court disallowed the interest deduction based on the application of fraus legis, even though the taxpayer successfully invoked the rebuttal provision in article 10a. The court held 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 anti-base erosion rule in the Corporate Income Tax Act. Consequently, both the motive and norm conditions for applying fraus legis were fulfilled and the interest deduction was disallowed.
Acquisition structures often involve debt financing. The Supreme Court’s decision is relevant for such structures, even if the financing comes from parties with minor interests, such as private equity structures. However, it appears that structures involving financing entities that serve a genuine financial hub function (and are not mere conduits) and those involving genuine external financing are not affected by the decision.
Lisanne Rijff
Ferry van Hal
BDO in Netherlands
Background
Under Dutch tax law, when a company pays interest on a debt, it usually may deduct that interest from its taxable profit unless one of the rules disallowing a deduction applies. For example, the anti-base erosion rule in article 10a of the Corporate Income Tax Act 1969 generally disallows an interest deduction if the underlying transaction is deemed to be “tainted” and is financed with a debt owed to a related entity. This was the situation in the case before the Supreme Court. However, the general rule did not apply because the taxpayer successfully invoked the rebuttal provision of the anti-base erosion measure, which allows interest to remain deductible if there are justifiable business reasons for the transaction and the debt. Avoiding the application of the anti-base erosion measure is only the first step for the taxpayer. It then must be determined whether the interest deduction may be limited—or disallowed in its entirety—due to the application of the fraus legis principle. Fraus legis can be applied if two conditions are fulfilled:
- Motive condition: The decisive motive for entering into the transaction is tax avoidance; and
- Norm condition: The intended result of the transaction is contrary to 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 company, which financed the acquisition partly with debt. By forming a Dutch fiscal unity (i.e., a consolidated tax group) with the acquired companies, the interest was able to be set off against the operating profits of those companies.
In line with recent case law, the Supreme Court disallowed the interest deduction based on the application of fraus legis, even though the taxpayer successfully invoked the rebuttal provision in article 10a. The court held 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 anti-base erosion rule in the Corporate Income Tax Act. Consequently, both the motive and norm conditions for applying fraus legis were fulfilled and the interest deduction was disallowed.
Implications for Acquisition Structures
Acquisition structures often involve debt financing. The Supreme Court’s decision is relevant for such structures, even if the financing comes from parties with minor interests, such as private equity structures. However, it appears that structures involving financing entities that serve a genuine financial hub function (and are not mere conduits) and those involving genuine external financing are not affected by the decision.Lisanne Rijff
Ferry van Hal
BDO in Netherlands