Huygens Quantitative Tax Consulting

Dutch Court rejects loan benchmark study and replaces it with internal CUP

22 June 2023 - Amsterdam Court of Appeal provides important guidance for the transfer pricing practice by rejecting a benchmark study for an uncommercial shareholder loan and replacing it with an internal CUP.


On 6 June 2023, the Amsterdam Tax Court of Appeal (the ‘Court’) ruled on the arm’s length nature and interest rate of a shareholder loan (the ‘SHL’) provided by Alpha Private Equity, a French private equity group to an acquisition vehicle (‘BV’) that acquired the shares in Hans Anders Groep, a Dutch optician group. BV financed the acquisition with senior debt, mezzanine debt, a PIK-loan, the SHL and equity. The SHL was the only internal debt.

In an elaborately reasoned judgment, the Court ruled that the interest on the SHL was not deductible based on (i) the qualification of the SHL as an uncommercial loan and (ii) the application of the abuse of law doctrine.

The qualification of the SHL as a so-called uncommercial loan means that the lender, by providing the loan, assumed a credit risk that a commercially behaving lender acting at arm’s length would not have been willing to accept (unless against a profit-sharing remuneration). As a result of this qualification (in line with case law of the Supreme Court) the Court determined the applicable interest on the SHL at the risk-free rate. The Court determined the risk-free rate at 3.2%, while the SHL bore interest at a rate of 10%. As a second step, the Court determined that the 3.2% interest is also not deductible, under the abuse of law doctrine.

Although the Court’s judgment on the abuse of law is also important, we want to draw your attention to the transfer pricing aspects of the judgment, because these provide clear guidance for determining the arm’s length volume and interest rate of internal loans.

The Court extensively reviews and eventually rejects the taxpayer’s benchmark study, even though the study followed the commonly used methodology of comparable loan searches using publicly available commercial databases. The Court criticizes the comparability and search criteria used by the taxpayer’s transfer pricing advisor and identifies a variety of factors on which the SHL differed significantly from the benchmarked debt instruments, including the SHL’s level of subordination, lack of security, its payment-in-kind (‘PIK’) mechanism, low credit rating and an increasing leverage ratio due to the PIK mechanism. The Court also considers it relevant that the debt service capacity analysis, which was part of the transfer pricing report, and which tested whether the cash flows from the operations would be sufficient to service the debt, was based on different (i.e., higher) projected results than the bank financing. Considering these fundamental comparability flaws, the Court rejects the benchmark study. According to the Court, BV should have considered the mezzanine loan and the PIK-loan (which were granted almost at the same time to BV by a third-party lender) in its analysis, whereby the Court considered the mezzanine loan as more comparable to the SHL than the PIK-loan. Such analysis would have revealed that a commercially behaving lender would likely have demanded a significantly higher-than-10% coupon on the SHL because the SHL carried more risk than the mezzanine loan: it ranked lower, had less security, a lower credit rating, an increasing leverage ratio, and a worse debt service capacity ratio than the third-party loans. The Court considered that the interest rate on the SHL (10%) was lower than the interest rate on the higher ranked mezzanine loan (13%), while, according to the Court, economic logic suggests that under those circumstances the SHL coupon should be higher instead of lower than the mezzanine loan. However, should the SHL’s coupon be adjusted to a commercially viable level, then, the Court ruled, the loan would likely become profit-sharing. As a result, the Court qualifies the SHL as an uncommercial loan.


This Court decision is very important for the Dutch transfer pricing practice involving internal loans, because:

  • It confirms that benchmarks are relatively easily rejected as comparability often is an issue. This Court judgment is not the first to reject the benchmark study that was carried out in line with the generally applied transfer pricing practice of using publicly available databases.
  • By deciding that BV should have used the mezzanine loan as a benchmark, the Court effectively applies the internal comparable uncontrolled price (‘CUP‘) method with adjustments. Economically, it clearly makes much more sense to use an internal CUP with adjustments as a reference point for determining the arm’s length interest rate on an internal loan, instead of using the outcome of a benchmark that returns data with a low level of comparability. The Court acknowledges this.

What to do?

  • If you are currently facing challenges by the authorities about the arm’s length pricing of shareholder loans or other internal debt, we advise to perform an economic analysis in line with this Court judgment to review whether the shareholder loan may be qualified as an uncommercial loan and the shareholder loan’s coupon logically relates to the existing external debt’s loan pricing.
  • If you are not (yet) facing challenges, similar actions could be taken to allow you to make proper adjustments, if any, and align the interest coupon of the shareholder loan with the economic analysis.
  • If you consider implementing internal loans for the financing of a project or an acquisition, ensure that you align the interest coupon and debt volume with the external debt data by performing a cash flow-based economic analysis.

If you want to receive more information on how the internal CUP method (with adjustments) can be applied in an economic analysis to determine an at arm’s length interest rate, take a look at our case study or contact Quirijn Knab or Stephan Kraan.


Photo Quirijn Knab

Quirijn Knab

+31 20 247 03 03
+31 6 10 89 76 10

Photo Stephan Kraan

Stephan Kraan

+31 20 247 03 01
+31 6 82 32 67 91