Netherlands: Interest expense may be non-deductible when acquisitions financed with shareholder loans (Supreme Court decision)
Acquisitions financed with shareholder loans may be considered abusive (“fraus legis”)
The Dutch Supreme Court on December 19, 2025, held in the so-called “Coffee case” that interest on a loan provided by a Luxembourg shareholder to refinance an existing debt of an acquired group was deductible. However, the Supreme Court did not depart from its position in prior case law that acquisitions financed with shareholder loans may be considered abusive (“fraus legis”) and thus interest on such loans treated as non-deductible.
The Coffee case bears many similarities with the so-called “Brillen case,” on which the Supreme Court rendered judgment at the beginning of September 2025. Read TaxNewsFlash
Summary
The taxpayer was an acquisition holding company of a private equity fund incorporated in the 2010/2011 tax year that purchased shares in a target in the same year for €438 million, with a further €240 million needed to refinance existing loans of the acquired group. The total €678 million was financed by means of €43 million in paid-in capital and a €635 million loan from the taxpayer’s 100% shareholder, a Luxembourg company, which financed the loan by issuing preferred equity certificates (PECs)—hybrid financing instruments qualifying as debt in Luxembourg but, according to the Dutch Appeals Court, payments received on the PECs were not been taxed as interest income to the recipients.
The Appeals Court held that while the shareholder loan did indeed qualify as a loan and not as capital, it was a “non-business motivated loan” and thus interest charged on the loan had to be adjusted downward for tax purposes, from around 15.2% to 2.5%. Of this 2.5% in interest, some was subsequently treated as non-deductible. To the extent that the loan was used to acquire shares, the interest deduction on the loan was deemed fraus legis and therefore not allowed. To the extent that the loan was used to refinance an existing loan, the interest was deductible. The Appeals Court noted that refinancing involves replacing one loan with another one, and that therefore there is no profit shifting.
The Dutch Supreme Court upheld the Appeals Court’s judgment that the part of the shareholder loan used for the refinancing was not fraus legis. The court determined in essence that because the old debt was not fraus legis, the refinancing could not be fraus legis.
Read a December 2025 report prepared by the KPMG member firm in the Netherlands