On 14 June 2024, the Netherlands State Secretary of Finance published Decree No. 2024-12473 of 30 May 2024 in the Official Gazette. This new decree updates Decree No. BLKB2013/110M of 25 March 2013, which relates to non-deductible interest.
Specifically, the decree outlines the policy for Article 10a of the Corporate Tax Act 1969, which states that interest on debts is non-deductible in certain circumstances, such as when the debt is associated with:
- a profit distribution or a return of paid-up capital to an affiliated body or affiliated natural person;
- a capital contribution to an affiliated body;
- the acquisition or expansion of an interest in a body that, after this acquisition or expansion, is an affiliated body.
The interest that falls under the deduction limitation of Article 10a, Corporate Income Tax Act 1969, may, in principle, still be deducted if the taxpayer can demonstrate:
- that both the legal act and the related debt are predominantly based on business considerations, regardless of whether the debt is, in fact, owed to a third party (double arm’s length test);
- that on balance, the interest is subject to a reasonable tax by Dutch standards (compensatory tax test).
The decree clarifies that Article 10a of the Corporate Income Tax Act 1969 is partly a codification of fraus legis case law. It follows from established case law subsequently that this codification does not, in appropriate cases, prevent the application of the doctrine of fraus legis to interest deduction constructions.
The fraus legis doctrine may also apply if interest charges are compared to purchased profits or otherwise contrived benefits. Even if, considered in themselves, legal acts are used to achieve business purposes that are not necessary for fulfilling those purposes, interest expenses cannot be deducted based on the doctrine of fraus legis.
