Dutch Supreme Court extents non-business like loans doctrine
The Dutch Supreme Court has introduced the concept of so-called “non-business like loans” in 2008. Generally, a loan qualifies as a non-business-like loan if the loan is provided under such conditions and circumstances that it entails a credit risk that independent parties would not have accepted. The impairment losses on a non-business-like loan are not tax deductible, in principle.
Over the years the Supreme Court has provided more clarity and guidance which situations should fall under the scope of the “non-business like loans” doctrine.
In a recent case a Dutch company granted a loan to another company. The Dutch company was unable to show or make clear that this loan was granted with sufficient security or collateral. Given the bad reputation of the debtor, this was surprising and most likely not in accordance with how an independent third party creditor would behave.
There was no affiliation between the debtor and the creditor for Dutch tax purposes, nevertheless the sole shareholder of the creditor had a minority interest (less than 33 1/3%) in the debtor.
The Dutch company applied an impairment to the loan based on the bad financial situation of the debtor. The tax inspector denied the loss for tax purposes.
The Supreme Court finally ruled that a non-business like loan can also exist if there is no (in) direct affiliation (33 1/3% or more) between the creditor and debtor. Under certain circumstances, a company can be deemed to make non-business like decisions (i.e. to grant a loan to a company without sufficient securities) if the company hereby acts in the interest of the (controlling) shareholder.
In situations of financial distress or doubts about the debt servicing capacity of the (affiliated) debtor, it is crucial to check whether the loan agreement and actions of the creditor may result in (future) denial of a (tax) impairment loss on a loan. It is in our view it is even better to document substantial intercompany loans and always to include proper covenants in the event the debtor is not able to service the debt. This should be integrated in debt management in order to avoid future discussions with the Dutch tax authorities.back to overview