Dutch court clarifies interest deduction limitation and exception for central financing function

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Dutch court clarifies interest deduction limitation and exception for central financing function

Sponsored by

Sponsored_Firms_piper.png
Amsterdam bridge.jpg

Jian-Cheng Ku, Roland Kleimann, and Jurriaan van Bladel of DLA Piper Netherlands analyse recent case law on key financing functions as an exception to a Dutch interest deduction limitation

In a decision rendered on April 1 2025, the Arnhem-Leeuwarden Court of Appeal (cases 23/714 and 23/715) ruled on the application of the Dutch interest deduction limitation included in Article 10a of the Dutch Corporate Income Tax Act (CITA).

Case details

The (abstracted) case involves a Swedish entity providing loans to a Dutch entity, which is part of the same group, for the purpose of acquiring the shares in an Italian listed company. The funds received by the Dutch entity were partly used for directly acquiring shares in the Italian company and partly used for a capital contribution in a subsidiary that also acquired shares in the Italian company.

The dispute between the taxpayer and the Dutch tax authorities centred on whether the Dutch entity is, for Dutch corporate income tax purposes, entitled to deduction of the interest expenses on the loans received from the Swedish entity. In this respect, the taxpayer argued that the existence of a treasury department at the level of the Swedish entity should allow for the application of an exception to the Dutch interest deduction limitation provided for in Article 10a of the CITA.

Legal framework

Deduction of interest expenses is, in principle, denied if a related party grants a loan to a Dutch company that uses the loan for one of the following so-called tainted transactions:

  • Profit distributions or repayment of capital;

  • A capital contribution; or

  • The acquisition or increase of a share interest in a company that becomes a related company.

One of the exceptions to this rule applies when the loan and the tainted transaction are mainly based on business reasons. In this respect, a loan may not qualify for the exception if there was re-routing of financing within the group to erode the Dutch tax base.

Taxpayers may rebut allegations of such re-routing if the entity making the loan to the Duch company fulfils a central financing function (treasury centre) for the group. In this respect, the normal function of a treasury centre is to attract funds from third parties and entities that are part of the same group for the purpose of financing other group entities.

Court decision and interpretation

The court of appeal referred to the previous decision in the same case, where the following criteria were outlined for determining the existence of a central financing function:

  • There is an active financing activity for group entities;

  • Its primary activity is the implementation of financial transactions, such as borrowing and lending funds, and managing excess cash for the group; and

  • There is independent decision making with respect to the day-to-day treasury activities, which includes the management of loans, sufficient qualified staff, and a separate financial administration.

In the case at hand, the taxpayer argued that there was indeed such a central financing function in Sweden at the time of incurring the loans, which was substantiated with, among others, a statement of a former employee, internal financial accounts, and various intercompany agreements.

The court found parts of the information brought forward lacking in detail and the statement of the employee could not be verified based on supporting documentation. In addition, the passage of time was not considered a valid argument from the taxpayer for not being able to provide more detailed (objective) information.

Given that the taxpayer did not meet the burden of proof for demonstrating the existence of a central financing function that had sufficient substance, the court of appeal rejected the interest deduction claimed by the taxpayer.

Key takeaways

The central financing function as a way to mitigate the application of the interest deduction limitation of Article 10a of the CITA remains important for structuring financing to a Dutch entity in a tax-efficient manner. The possibilities for tax planning through application of this exception seem to have prompted the court to require significant substantiation from the taxpayer that there was indeed such a central financing function.

The Netherlands has already been applying a ‘substance over form’ approach for many years in tax matters. However, this case makes it clear that the ‘form’ should not be neglected, either. In this respect, proper documentation and record keeping could be key in resolving tax controversy in general and interest deduction limitations specifically. It should also be kept in mind that cases may only be brought before a Dutch court after multiple years have passed.

more across site & shared bottom lb ros

More from across our site

ITR’s data has highlighted the US firm’s ambition to become America’s ‘premier’ tax player via a concerted partner recruitment strategy
Jaap Zwaan’s arrival continues a recent streak of A&M Tax investing in the region; in other news, the US and Japan struck a deal that significantly lowered tariff rates
In a world where international tax concepts rely on human activity, Leonard Wagenaar poses existential questions about the future of such ideas when AI is ever-present
France v Axa provides a practical illustration of how the burden of proof is applied in TP matters under French law, ITR also heard
In an exclusive interview with ITR, Ian Gary calls for a central public CbCR database and bemoans the US’s lack of involvement in international tax transparency
Reckitt Benckiser is to divest its Essential Home business, which includes more than 70 brands, to private equity firm Advent International
In the first of a new series of weekly opinion pieces, ITR Editor Tom Baker reflects on the OECD’s attempts to sanitise the US’s brazen pillar two negotiations
The threat of 50% tariffs on Brazilian goods coincides with new Brazilian legal powers to adopt retaliatory economic measures, local experts tell ITR
The country’s chancellor appears to have backtracked from previous pillar two scepticism; in other news, Donald Trump threatened Russia with 100% tariffs
In its latest G20 update, the OECD also revealed tense discussions with the US where the ‘significant threat’ of Section 899 was highlighted
Gift this article