On 14 July 2023, the Tax Court of The Hague (the ‘Court’) ruled on whether interest and commitment fees which were due by a Dutch holding company (‘BV’) of an internationally operating group (the ‘Group’) under certain intra group loan facilities (the ‘Facilities’) were deductible and, if so, to what amounts.
The Dutch tax authorities (the ‘DTA’) started a tax audit with BV for the years 2012/13 through 2016/17, pursuant to which the DTA disallowed most of the interest deductions, by reducing the amount of deductible interest based on ‘full implicit support’ and disallowed the deduction of the commitment fees entirely. In addition, the DTA argued that the burden of proof should be reversed because, according to the DTA, BV’s transfer pricing documentation did not meet the minimum standards.
The Court agreed with the deduction of the interest for the amounts reported by BV but disallowed the deduction of the commitment fees. In addition, the Court ruled that the burden of proof should not be reversed.
The arm’s length interest
The Group’s treasury department determined the credit rating of BV (at each time it entered into a Facility) and, subsequently, the arm’s length interest rate for such a Facility. The DTA argued that the interest rate for each of the Facilities should have been determined at the rate against which the ultimate parent company of the Group was able to borrow from third parties, resulting in a substantially lower interest rate. The DTA based this argument on so-called implicit support: even though the parent company had not provided any guarantees or letters of comfort, it would, according to the DTA, have supported BV at all times, because of BV’s importance to the Group. BV rebutted this based on, among other things, two statements of former bank employees, who confirmed that third-party lenders would not have relied on implicit support. The Court ruled that the DTA was not successful in demonstrating that BV could benefit from full implicit support, so that unrelated lenders would have relied on BV having the same credit rating as its ultimate parent company.
The arm’s length commitment fees
The Group’s treasury department also determined the amount of the arm’s length commitment fees for each of the Facilities. The Court decided that the commitment fees were not deductible, because the DTA successfully demonstrated that it is unusual between unrelated parties to agree on a Facility under which interest can be accrued up to a maximum amount, against payment of a commitment fee.
BV argued that the interest and commitment fees should be considered together, as the total remuneration for the Facility and that the Court should decide whether this total remuneration is at arm’s length. The Court rejected this argument because BV and the affiliated lender explicitly distinguished between interest and commitment fees in the Facility agreements.
Other transfer pricing aspects
The DTA also argued that BV’s transfer pricing documentation did not meet the legal requirements, because it was prepared only when the DTA requested it, the original source documents were no longer available when the transfer pricing documentation was prepared, and it contained several errors. Therefore, the burden of proof should be reversed. The Court disagreed with the DTA and ruled that the DTA was not successful in demonstrating that the transfer pricing documentation of BV contained so many errors that BV could be considered to have filed an incorrect tax return. The Court confirmed that it was not relevant that the transfer pricing documentation was prepared at a later date.
- In the first place, this decision of the Court confirms that a taxpayer can also meet the general legal transfer pricing documentation requirement if the documentation is prepared at a later time. The decision also confirms that the burden of proof is not easily reversed because of (assumed) errors in this transfer pricing documentation.
- Another take away is that ‘full implicit support’ cannot be easily assumed. As confirmed by statements of former bank employees, brought forward by BV, third party lenders generally do not seem to rely on implicit support. The OECD Transfer Pricing Guidelines provide only little guidance on when implicit support should be considered and, if so, to what extent.
- Finally, the Court disallowed the deduction of the commitment fees because it considered this arrangement ‘unusual’. In our view, the question at stake is not so much whether the arrangement is ‘unusual’, but whether the pricing of the Facilities is at arm’s length. It is not clear from the Court’s decision whether it has considered to what extent the ‘unusual’ arrangement resulted in a remuneration for the Facilities that exceeded an arm’s length remuneration.
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Mark van Casteren
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