In an exciting and very detailed conclusion published on 11 June 2025, the Advocate General argues that the arm’s length interest on an unsecured uncommercial shareholder loan (onzakelijke lening) should in this specific case be set at the arm’s length interest rate of the uncommercial loan if that loan would have been secured by a mortgage right. The Advocate General advises the Supreme Court to refer the case back to the Court of Appeal to determine the interest on the uncommercial loan on this basis.
In existing case law, the Supreme Court ruled that the interest rate on an uncommercial loan should be set according to the “pledge analogous interest rate” (borgstellingsrente) doctrine (as explained below). The Court of Appeal determined the pledge analogous interest rate in this case to be 2.28%, respectively 3.09% (the conclusion refers to two related matters, based on the same grounds of appeal). The interest rate of the shareholder loans (‘SHLs’) will likely be higher if it is determined at the arm’s length rate of the uncommercial SHLs, assuming they had been secured by a mortgage right.
Although the Supreme Court first referred to the concept of an ‘uncommercial loan’ already 17 years ago, the tax authorities, taxpayers, as well as the Dutch tax courts are still struggling with the tax consequences of the ‘uncommercial loan’. In this update we discuss the Advocate General’s conclusion to the extent it refers to the determination of the interest on the unsecured uncommercial SHL and the consequences it will have for determining the arm’s length interest rate on uncommercial SHLs if the Supreme Court follows the advice from the Advocate General. We note that the dispute between the taxpayer and the inspector also concerns the application of the Dutch REIT regime, and a question on the burden of proof, but we do not address this part of the dispute in our update.
Summary of the relevant facts and decision of the Court of Appeal.
In 2014 (in one case) and 2016 (in the other case), the relevant taxpayer acquired an office building. It financed the office building for 40% out of equity and for 60% through a SHL. The SHL had a coupon of 8%, respectively 10%. The SHL, among other things, did not have a mortgage right or other security rights and it did not have a loan-to-value (‘LTV’) covenant. The taxpayer stated before the Court of Appeal that a third-party bank would most likely not have been willing to provide a loan up to 60% of the acquisition price of the office building, without an LTV covenant and mortgage right.
The tax inspector imposed assessments, correcting the interest rate on the SHL to 1.78% and 2.59%, respectively. The inspector primarily argued that this correction was based on adjusting the SHL’s terms and conditions, other than its interest rate, to arm’s length terms and conditions and that the arm’s length interest rate should be determined based on the adjusted terms and conditions. As a result, the interest rate on the SHL should be adjusted to the interest rate on a loan that is secured by mortgage and has an LTV covenant. The tax inspector determined this interest rate to be 1.78% and 2.59%, respectively.
In the alternative, the inspector argued that if the SHL’s terms and conditions should not first be adjusted to arm’s length terms and conditions, the SHL qualifies as a so-called “uncommercial loan”. A SHL qualifies as an uncommercial loan if the terms and conditions are such that an unrelated lender would not have agreed to grant the loan, unless at an interest rate that is (effectively) profit sharing. According to existing Supreme Court case law, the arm’s length interest rate of an uncommercial loan is determined at the “pledge analogous interest rate” or the risk-free rate. The pledge analogous interest rate is the interest rate which would have been paid to an external lender, if the loan was provided by an external lender under a guarantee of the SHL’s lender. If the pledge analogous interest rate would also be (effectively) profit sharing, the interest on the uncommercial loan is set at the risk-free rate. The tax inspector argued that the pledge analogous interest rate is this case is also 1.78% and 2.59%, respectively.
The Court of Appeal held that the inspector’s primary position was incorrect, because Supreme Court case law stipulates that the arm’s length character of a SHL should be tested given its other terms and conditions. The Court ruled that the terms and conditions of the SHL can therefore not be adjusted to arm’s length terms and conditions, before testing the SHL’s pricing.
The Court agreed with the inspector’s subsidiary position and ruled that the SHL qualifies as an uncommercial loan. It based its decision on the fact that the taxpayer itself acknowledged that no third party would have agreed to provide the SHL based on its specific terms and conditions, i.e. without a mortgage right (or other security rights) and an LTV-covenant. The Court generally confirmed the methodology applied by the inspector for determining the pledge analogous interest rate (although the Court slightly adjusted the applicable interest rate to account for certain minor differences from 1.78% and 2.59% to 2.28% and 3.09% respectively).
The appeal to the Supreme Court
Both the tax inspector and the taxpayer appealed the Court’s decision to the Supreme Court. They both argued that the Court of Appeal should first have applied the arm’s length principle to the SHL, before considering the SHL as uncommercial loans and applying the pledge analogous interest rate. According to the Advocate General, they are both correct. In his very thorough conclusion, the Advocate General concludes that based on the arm’s length principle, the write-off loss of an uncommercial loan is not part of the taxable results of a taxpayer, because such loss is caused by risks that no third-party creditor would be willing to take. In other words, such loss is caused by the risks the creditor of the uncommercial loan is willing to take, based upon its shareholder relationship with the debtor and should therefore be excluded from the fiscal results of the creditor. This should also be reflected in the arm’s length interest of the SHL. According to existing Supreme Court case law, the arm’s length interest on an uncommercial loan should therefore be determined at the pledge analogous rate.
The Advocate General considers the use of the pledge analogous rate as a “second best” solution for lack of a better alternative. In this specific case, he considers there is a better alternative as it is relatively easy and straightforward to determine an arm’s length interest rate on the SHL assuming that the SHL would be secured by a mortgage. In the opinion of the Advocate General, the Court of Appeal should have investigated what unrelated parties would have agreed upon then, instead of concluding that the SHL, given its terms and conditions, qualifies as an uncommercial loan. The Advocate General advises the Supreme Court to refer the case back to the Court of Appeal to have the Court of Appeal determine the arm’s length interest on the SHL assuming that it would have a mortgage right.
Consequences if the Supreme Court follows the Advocate General’s views
The Advocate General concludes that the SHL is an uncommercial loan and that in this specific case, the arm’s length interest on the SHL should be determined assuming that the SHL is secured by a mortgage. In existing Supreme Court case law, the interest on uncommercial loans is determined based on the pledge analogous rate doctrine. If the Supreme Court follows the advice of the Advocate General, it should be determined for each related party loan, whether the terms and conditions can be adjusted to reflect a loan situation that third parties would normally agree to and whether an (non-profit sharing) arm’s length interest rate can be determined for such a loan. Unless the Supreme Court will include clear instructions in its decision that clarify in which cases and how this should be done, it will likely result in even more uncertainty about the consequences of the ‘uncommercial loan’.
However, we believe it unlikely that the Supreme Court will follow the advice of the Advocate General. Determining the interest rate of the SHL at the arm’s length rate assuming that the SHL would have a mortgage, contradicts the concept of the uncommercial loan that no third party lender would want to grant such a loan (unless at a profit sharing interest) and that, as a result, the effect of taking such a risk (i.e. both a write-off loss and the risk premium part of the interest rate) must be excluded from the tax results of the creditor.
If the arm’s length interest would be determined as now suggested by the Advocate General, the interest rate would reflect a debtor’s risk (i.e. it would probably be higher than the pledge analogous interest rate), whereas the deduction of the write-off loss would still be denied. Determining the arm’s length interest on this basis does therefore not seem to align with the rationale behind denying the write-off loss of the uncommercial loan. We therefore believe the Supreme Court will stick to its existing case law’s position and decide that the interest rate on the SHL should be determined at the pledge analogous interest rate.
In that respect, we note that the taxpayer also appealed against the judgement of the Court of Appeal that the pledge analogous interest rate should in this case be applied at the 85% grandparent of the borrower. The taxpayer argues that the pledge analogous interest rate should be determined at the level of the lenders, instead. The Advocate General only very briefly discusses this element and concludes that there should not be any objections to apply the pledge analogous interest at the grandparent level, instead of at the lenders’ level, as it is a ‘second best’ rule for lack of a better alternative which does not need to be very precise and “transfer pricing is not an exact science but a ranges practice”. We believe that if the Supreme Court agrees with the position of the Court of Appeal, this position deserves to be justified more detailed.
Contacts
 |
|
Mark van Casteren +31 20 247 03 04 |
 |
|
Quirijn Knab +31 20 247 03 03 |
