Huygens Quantitative Tax Consulting

Important new Dutch case law for buyers of distressed debt

3 February 2023 - A Dutch district court published an important decision on the taxation of distressed debt that was acquired by a Dutch BV.


On 3 February 2023, a Dutch district court (the ‘Court’) published a decision in a case concerning the 2016 acquisition by a Dutch BV (the ‘Taxpayer’) of a German group, active in the manufacture and sale of production lines to produce plastic products, such as profiles, by extrusion (the ‘Group’). Before the acquisition, the Group was in distress: the Taxpayer acquired its shares and the internal receivables from the Group, with nominal value of € 44 million, for € 1, and the receivables that an unrelated creditor held from the Group (together with the aforementioned internal receivables, the ‘Receivables’), with a nominal value of € 68 million, were acquired for € 15 million.

Following the acquisition, the Taxpayer made a € 8.75 million equity injection in the Group, mainly to fund the working capital required to keep the Group operational. The Group recovered and made a € 7 million repayment to the Taxpayer on the Receivables pursuant to a 2017 sale of an interest in a listed company held by the Group. The Taxpayer used the proceeds for a dividend distribution to its shareholder, together with a dividend payment in kind of the majority of the Receivables outstanding after the repayment. At that time, the market value of the distributed Receivables exceeded the book value by € 13.4 million.

The dispute between the Taxpayer and the Dutch Tax Administration concerned the following:

    1. Are the realized gains on the Receivables upon distribution of the dividend exempt from corporation tax based on the Dutch participation exemption, because the Receivables either qualify as ‘profit participating loans’ or as ‘uncommercial loans’?
    2. Can the € 8.75 million equity injection be attributed to the Receivables’ book value?
    3. What is the amount of the taxable interest income on the Receivables to be declared by the Taxpayer?

The Court held that the Receivables do not qualify as ‘profit participating loans’, because the Receivables are not profit-sharing, and the term of the Receivables is less than 50 years. These are strict requirements for the qualification as ‘profit participating loans’, based on Dutch case law. The Court further held that the Taxpayer cannot succeed in demonstrating that the Receivables qualify as ‘uncommercial loans’, because the € 1 purchase price is at arm’s length and the Receivables are therefore inherently at arm’s length. It does not matter whether the Receivables qualified as ‘uncommercial loans’ prior to the acquisition. Therefore, the realized gains on the Receivables are not exempt from corporation tax under the participation exemption.

The Court then ruled that it is inconsistent with Dutch case law and Dutch civil law to attribute the equity injection to the Receivables’ book value. Finally, the Court held that the Taxpayer cannot rely on the Dutch Supreme Court’s ‘uncommercial loan’ doctrine in respect of the taxable interest income on ‘uncommercial receivables’, because the Receivables are at arm’s length. All interest income on the Receivables was therefore taxable.


Note that this case was given by a lower tax court. We see opportunities for the Taxpayer to successfully appeal against the Court’s ruling, as it may be argued that the Court’s conclusion on the at arm’s length nature of distressed debt acquired by investors is not in line with Dutch corporation tax and case law on ‘uncommercial loans’.

Furthermore, we believe that the Group could have avoided the tax consequences that it now faces if it had structured the acquisition more carefully, e.g., by providing the required funding as debt with a higher ranking than the Receivables or by converting the Receivables into preferred stock before the acquisition. The key take-away from this case therefore is that the acquisition of distressed debt requires careful structuring.


Photo Quirijn Knab

Quirijn Knab

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