Tax Alert: Dutch Supreme Court rules on interest-deduction limitation rule and fraus legis in private equity structure

Last Friday, on 19 December 2025, the Dutch Supreme Court issued a decision concerning an acquisition financing structure of a private equity fund. In short, the Dutch Supreme Court ruled, among other things, that the interest deduction claimed by a Dutch acquisition vehicle was (partially) limited on the grounds of the general abuse of law doctrine (fraus legis). In doing so, it confirmed its earlier case law that the interest deduction on a (direct) shareholder loan used for acquisition purposes may be regarded as an abuse of law, even in case where valid business motives for such loan are (deemed) present in the context of the Dutch anti-base erosion rule. In this Tax Alert, we address certain key points of this decision.

Background

The Netherlands has several interest deduction limitation rules. One of these rules concerns the Dutch anti-base erosion rule which in short aims to prevent an artificial erosion of the Dutch tax base by creating interest deduction within a group of affiliated taxpayers. The rule tries to prevent the deduction of interest on loans to affiliated companies used to finance certain “tainted transactions” (such as dividend payments, capital contributions or the acquisition of an interest in a company that qualifies as an affiliated company of the taxpayer after acquisition). Interest related to a tainted transaction may, nevertheless, be deductible if the taxpayer proves that both the transaction and its financing are predominantly based on business motives. 

Further, the Netherlands has a general abuse of law doctrine (fraus legis). This doctrine can be applied in case the deduction of interest is against the spirit of the law by creating artificial arrangements with the predominant motive to realize a tax benefit.

Relevant facts

Dutch BidCo and its subsidiary have been incorporated to acquire a Dutch target-group (A-group). Dutch BidCo and the subsidiary form a fiscal unity for Dutch corporate income tax purposes. The shares of Dutch BidCo are held by a Luxembourg company (LuxCo). To finance the acquisition of the A-group, Dutch BidCo used, among other things, funds from the shareholder loan of c. EUR 635 million (the SHL) provided by LuxCo. LuxCo had raised this amount by issuing so-called Preferred Equity Certificates to its shareholders (i.e., among other things, two investments funds consisting of two limited partnerships that are tax resident in the Cayman Islands and co-investors). Dutch Bidco lent most of the SHL to its subsidiary, which in turn used this amount to acquire the A-group. After the acquisition, several (eligible) entities of the A-group were included in the Dutch fiscal unity.

In its corporate tax return 2010-2011, Dutch BidCo claimed interest deduction on the SHL. This was denied by the Dutch tax authorities. We note that this case has already been brought before the Dutch Supreme Court in 2022 (please see our Tax-Alert), where the Supreme Court – in short – ruled, that the anti-base erosion rule was not applicable as it could be substantiated that both the transaction and the debt were based on business motives. The case was, however, referred back to a Court of Appeal for a further decision on whether fraus legis would limit the interest deduction.

With regard to the amount of interest in dispute, the referral Court of Appeal then ruled that the interest deduction of Dutch BidCo on the SHL (i) was limited to the extent it was used for the acquisition based on fraus legis but (ii) permitted to the extent it was used to refinance current debts of the A-group. Both Dutch BidCo and the Dutch Secretary of State appealed this decision.

Dutch Supreme Court judgement

Appeal of Dutch BidCo
One of the arguments brought forward by Dutch BidCo was that the interest deduction cannot be limited on the basis of fraus legis in the case at hand. According to Dutch BidCo, it provided – in the context of the anti-base erosion rule – predominant business motives for the financing structure, as a result of which the motive requirement of fraus legis cannot be met. The Dutch Supreme Court, however, rejects this argument, ruling – in short – that the observation that there has not been a violation of objective and scope of the anti-base erosion rule, does not imply that BidCo has no motive to realize a tax benefit. The Dutch Supreme Court appears to confirm its previous case law, explicitly mentioning that only in the situation where a loan is provided by an affiliated entity that performs a pivotal finance function (financiële spilfunctie) within the group, thereby not acting as a conduit, the business motives for the anti-base erosion rule can exclude that the motive requirement for fraus legis has been satisfied with respect to that particular loan. Since the referral Court of Appeal had already ruled that such pivotal finance function is not present in the case at hand, the Dutch Supreme Court limits the (disputed) interest deduction of Dutch BidCo based on fraus legis.

Appeal of the Dutch Secretary of State
In appeal, the Dutch Secretary of State argued on various grounds that the interest on the SHL allocable to the refinancing, should also be non-deductible under fraus legis. In a nutshell, the Dutch Supreme Court rejected this by ruling that in the case at hand, the Court of Appeal was able to rule, insofar the proceeds of the SHL were used for refinancing the current debts, the interest deduction was not limited under fraus legis. Relevant in this regard is the fact that the deductible interest on the SHL was already reduced to an arm’s length interest of 2.5%. The refinancing did therefore not lead to a tax benefit for Dutch BidCo.

Final remarks

This decision is relevant for Dutch acquisition structures involving shareholder loans. Even though the ruling concerns old tax years and the relevant legislation has been amended several times since then, the ruling is important. This case forms another reminder for Dutch corporate taxpayers that even in cases interest deduction is (ultimately) not limited under the anti-base erosion rule, the Dutch tax authorities may in certain cases still successfully argue that the interest deduction should be limited on the grounds of the general abuse of law doctrine. It does seem helpful that the Dutch Supreme Court (re)confirms that in the situation where the affiliated entity providing a shareholder loan performs a pivotal finance function within the group, business motives that are put forward under the anti-base erosion rule may exclude the application of fraus legis with respect to that particular loan.