Huygens Quantitative Tax Consulting

New Dutch transfer pricing case law on at arm’s length interest rate in real estate financing

26 April 2022 - A Dutch district court published an interest decision on the determination and substantiation of an at arm's length interest rate on a shareholder loan.

This April, a Dutch district court (the ‘Court‘) issued an interesting judgment on the determination of an arm’s length interest rate. The Court dealt with the comparability of benchmark studies (and acceptability of accompanying ‘sanity checks’), the use of third-party reports on real estate financing (e.g., published by De Montfort University) and the extent specific loan characteristics are to be considered when determining an at arm’s length interest rate.

In this article, we provide you with a summary of the judgment, an (unofficial) English translation of the (transfer pricing related parts of the) judgment, and our take aways (including case study).


In 2016, the taxpayer acquired an office building for in total ~€ 31 million, of which 40% was equity financed and 60% was financed through shareholder loans with an 8% coupon and a maturity of 15 years. The shareholder loans did not include collateral, a repayment scheme, or a loan to value (‘LTV‘) covenant. It did include a possibility of suspending interest payments in the event of liquidity problems.

The 8% interest rate on the shareholder loans was substantiated with a benchmark study (credit rating analysis followed by an analysis of bonds (issued on or after 1 January 2008) in Bloomberg, considering a maturity of 15 years). In 2021, an additional analysis was performed, in which the expected internal rate of return (‘IRR‘) of the investment (i.e., the office building) and the taxpayer’s equity IRR were calculated using Monte Carlo simulations. As the equity IRR of 11.9% was higher than the shareholder loans’ coupon of 8%, taxpayer claimed that this confirmed that the shareholder loans’ interest rate was at arm’s length.

The tax inspector did not agree with the 8% interest rate and imposed assessments considering an interest rate of 1.78%. In the inspector’s view, interest margins could in any case not be higher than 4% (on top of a variable base rate). The inspector derived these conclusions from (semi)public reports published by De Montfort University (UK), KPMG, and ING/Nyenrode Business University (Netherlands). Finally, the inspector pointed towards a so-called ‘debt raise proposal’ prepared in the context of taxpayer’s property acquisition, stating that external senior financing with a 5-year maturity at a 50% LTV could be obtained at a maximum rate of 3%.

The Court’s considerations

The Court firstly referred to standing Supreme Court case law that:

  • if the interest rate on intra-group loans is not at arm’s length, such rate is to be corrected considering the other loan provisions as contractually agreed upon (e.g., regarding loan term and security); and
  • taxpayers are free to choose the financing mix of the company in which it has a participation and taxpayers are free to choose the party from which they draw loans (e.g., whether internally or externally).

The Court then found that the interest rate of 8% was not at arm’s length, based on the following:

  • The Court generally acknowledged that certain loan characteristics (e.g., a 15-year term, lack of collateral, lack of repayment scheme and lack of an LTV covenant) lead to higher risk and, therefore, higher interest rates, but held in this case that such characteristics did not have a significant effect, because (i) the lenders, in their capacity as shareholders, have the power to decide whether to early repay the loans, and to prevent the real estate from being provided as security to third parties or have the company otherwise enter into extensive obligations, and (ii) the taxpayer wished to apply the Dutch investment institution (fbi) regime and was therefore essentially bound to an LTV covenant of 60% (which is a requirement under this regime), which the taxpayer’s lenders (also being its shareholders) could manage themselves by providing additional funds to comply with an LTV covenant.
  • The 8% interest rate deviated largely from the contents of the reports brought forward by the inspector and such large deviation could not be justified based on the terms and conditions of the shareholder loans. The Court also mentioned that the 8% interest rate deviated largely from the information included in the “debt raise proposal”.
  • The comparables in taxpayer’s benchmark study were not in and of themselves representative of the shareholder loans attracted by the taxpayer to finance the office building, as these comparables predominantly included bond loans issued by Southern European banks, which were substantially affected by the financial crisis.
  • The observation that the 8% interest rate was lower than the – ex post – established equity IRR of 11.9% in and of itself is not sufficient to substantiate what interest rate would have been agreed upon between third parties.

That being said, the Court also rejected the 1.78% interest rate as argued for by the tax inspector either, because the 1.78% is the median of an unknown number of transactions in the UK property market (derived from the De Montfort University report), and based on the other reports it was not possible to determine whether the (terms and conditions of the) underlying transactions were representative for this particular case.

As a final step, the Court determined the at arm’s length interest rate “in good justice”. Considering that the reports (referred to by the inspector) mainly deal with bank financing, and the shareholder loans have a long maturity of 15 years, the Court determined that an interest rate of 4.5% should be considered at arm’s length on the shareholder loans.


  • This is another case where a Dutch court ruled on the comparability of data in benchmark studies, and also in this case the Court rejected a traditional benchmark study because of insufficient comparability between the controlled transactions and the benchmark data. Other commonly used reports, such as the “De Montfort University” report on leverage levels and interest rates, were also rejected to establish the interest rate, given that they either related to the UK property market or included insufficient detail on loan terms and conditions to be able to perform a full comparability analysis.
  • Although taxpayer seemingly attempted to overcome comparability issues by performing an economic sanity check using Monte Carlo simulations, the Court found that a comparison of the coupon with the expected equity IRR in and of itself is not sufficient to substantiate the arm’s length character of an interest rate. We agree with that decision, although we stress that it remains key to test the economic viability of the shareholder loans on the lenders’ equity cash flows by way of a “commercial benefit test”. Such commercial benefit test, however, will neither determine nor confirm the arm’s length interest rate, but only the shareholder loan’s arm’s length debt volume, which debt volume, however, was not disputed by the tax authorities. We refer to our case study for an example of our experience and approach in this respect.
  • We regret that the court did not substantiate the interest rate that it established in good justice. This leaves arm’s length loan pricing shrouded in mystery, while robust techniques are available to price loans without the traditional benchmarks.
  • Remarkably, the Court noted that the missing conditions in the shareholder loans had an insignificant effect on the at arm’s length interest rate because the lenders (in their capacity as shareholders) de facto had control over those topics regardless of whether this was included in the loan documentation. In our view, the Court does overlook the fundamental notion of transfer pricing that one should abstract from any and all group relationships to arrive at an at arm’s length price. This element also seems to contradict the German Bundesfinanzhof’s views. We refer to our earlier post on this topic.


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Quirijn Knab

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