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Anti-Abuse Developments: A New Normal In The Netherlands – Withholding Tax


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“Doe normaal” is practical advice in the
Netherlands encouraging one to act normal. In the past, that phrase
would describe commonly used plans to reduce tax. Today, if the old
normal is followed by a group effecting an acquisition, it could
end up facing unintended consequences. Legislators and tax
authorities are increasingly examining traditionally
“normal” acquisition structures and financing
arrangements in a quest to combat deemed abusive tax arrangements.
Like its fellow E.U. Member States, the Netherlands has shifted its
tax policy agenda in recent years in line with international and
E.U. initiatives to target abuse.

The U.S. has targeted abusive arrangements for several decades
via common law doctrines and codified anti-abuse rules, including
the economic substance doctrine and conduit financing regulations.
Consistent with these U.S. provisions, the E.U. is imposing its own
anti-abuse rules, scrutinizing transactions lacking a business
motive and structures with interposed entities deemed to be
artificial.1 Member States are now charged with
enforcing these policies, and often do so without clear guidance.
The result is an ever-evolving landscape that is detrimental to
taxpayers following previously accepted methods.

This article highlights the features of anti-abuse provisions
originated in the U.S. and their latest counterparts in the E.U. It
then analyzes how the new normal established by E.U. developments
pose tax risks to existing acquisition structures and intercompany
financing arrangements within the E.U., specifically through the
lens of the Netherlands. Among the latest possible tax risks, this
article considers the effects of recent case law challenging the
deductibility of interest on intercompany loans used to finance
acquisitions and the risk of potential withholding taxes on
outbound payments. In certain situations, a group can face both
consequences if it adheres to the traditional way of doing


Economic Substance Doctrine

Seemingly in line with tax authorities around the world, the
I.R.S. announced it could “bring up the economic substance
doctrine to a greater extent than in the

Look no further than the complaint filed in October against
Liberty Global, Inc. alleging the company employed a series of
transactions lacking economic substance with the goal to avoid
G.I.L.T.I. and capital gain taxes.3 Additionally, the
I.R.S. issued interim guidance in April 2022 making it simpler for
examiners to raise the economic substance doctrine and assert
penalties by eliminating the prerequisite of first receiving
executive level approval.4

The economic substance doctrine (“E.S.D.”) is a common
law doctrine now codified under §7701(o). A transaction or
series of transactions will be treated as having economic substance
only (i) the transaction changes the taxpayer’s economic
position in a meaningful non-tax way and (ii) the taxpayer has a
substantial non-tax business purpose for entering into the

The I.R.S. can employ the economic substance doctrine when the
tax results of a transaction are inconsistent with congressional
intent. In such cases, the I.R.S. will recharacterize a transaction
to reflect the true economic reality and assess taxes


A foreign, younger relative of the U.S.’s economic substance
doctrine is the E.U.’s general anti-abuse rule
(“G.A.A.R.”) articulated in Article 6 of the A.T.A.D.
According to the G.A.A.R., a Member State shall ignore an
arrangement or series of arrangements if (i) the main purpose or
one of the main purposes is to obtain a tax advantage that defeats
the object or purpose of the law and (ii) the arrangement is deemed
to be non-genuine to the extent it is not put into place for valid
commercial reasons that reflect economic reality.

The uses of “transaction” in the E.S.D. and
“arrangement” in the G.A.A.R are virtually
interchangeable. An arrangement is a broader term meant to include
not just a transaction, but also any agreement, understanding, or
scheme. The E.U. will generally refer to arrangements in its
anti-abuse initiatives.

While both the E.S.D. and the G.A.A.R target abusive
arrangements, based on a plain reading, the E.S.D. concentrates on
business motives whereas the G.A.A.R. primarily focuses on tax
motives underlying an arrangement, even if valid business
considerations exist. In this sense, the G.A.A.R. can be a more
difficult and less defined test, blurring the line on how far tax
authorities may go.

Fraus Legis

The Netherlands chose not to implement the E.U. G.A.A.R.
Instead, it relies on the Dutch common law doctrine fraus
, which effectively works in the same manner. Like the
G.A.A.R., fraus legis allows tax consequences of certain
arrangements to be ignored if (i) the decisive purpose for entering
into an arrangement was to realize a tax benefit (considering the
artificiality of an arrangement lacking a business motive) and (ii)
the arrangement is contrary to the object and purpose of the law.
Fraus legis can be applied only if no specific anti-abuse
rule is applicable to challenge the bona fides of a

As will be demonstrated in the following section, fraus legis
has been applied as a backstop to anti-abuse legislation, making
for a win-win situation for the Dutch Tax Authority

Interest Expense Deductions – to Permit or

The Netherlands applies many specific anti-abuse rules of Dutch
tax law, including Article 10a of the Corporate Income Tax Act
1969. The D.T.A. has successfully applied Article 10a in
combination with fraus legis to deny interest expense deductions on
intercompany loans within typical acquisition structures. However,
an open question remains as to whether interest expense deductions
can be denied when the intercompany loan is constructed under
arm’s length terms and conditions.

Article 10a denies a taxpayer interest expense deductions in
respect of debts insofar as these debts are related to the
acquisition or increase of an interest in an entity that is or
becomes affiliated with the taxpayer.5 An acquired
entity is considered affiliated with a taxpayer when (i) the
taxpayer holds at least a one-third interest in the entity, (ii)
the entity holds at least a one-third interest in the taxpayer, or
(iii) a third-party holds at least a one-third interest in both the
taxpayer and the acquired entity.6 As of 2017, the
affiliated entity definition extends to a cooperating group,
whereby the cooperating group’s total interest taken together
is at least one-third.7

Two exceptions exist to this rule. A deduction of interest is
still permitted where (i) the taxpayer demonstrates that the loan
and transaction are based predominantly on business considerations
or (ii) the interest income is taxed at a rate of at least 10% in
the hands of the direct recipient or a direct or indirect
shareholder of the recipient.8

A presumption exists that a loan and transaction entered into
for the acquisition or expansion of an interest in an entity that
only becomes associated with the taxpayer after the acquisition or
expansion are predominantly based on business considerations. The
presumption does not apply if the loan is deemed to be a wholly
artificial arrangement. Regrettably, if equity capital of the group
is diverted into debt capital for no commercial purpose other than
the generation of a tax benefit the arrangement is deemed to be
wholly artificial.9

In cases where Article 10a is inapplicable due to the entities
involved not meeting the affiliation threshold (generally for
arrangements preceding the 2017 cooperating group provision), the
D.T.A. has applied fraus legis to sidestep the issue and deny
interest expense deductions.

Over the years, it has been typical to finance acquisitions
through intercompany loans originally stemming from contributed
equity, as it is explicit in Dutch case law that a taxpayer is free
to choose the most beneficial form of financing of a company in
which it participates.10 As evidenced by recent court
decisions in the Netherlands, this principle may have its

Recent Challenges in the Courts

Limitations on the choice of financing gained momentum following
the July 2021 landmark Dutch Supreme Court case,
Hunkemöller. 11 The case involved a
private equity structure that acquired a retail business
headquartered in the Netherlands. Four French investment entities
(transparent under French law and opaque under Dutch law) wholly
owned a Dutch HoldCo, which acquired all the shares of the Dutch
retail group using a combination of equity and shareholder loans.
The shareholder loans were financed through equity of the
investment group. After the acquisition, the Dutch HoldCo formed a
fiscal unity with the retail group and used the interest from the
shareholder loans to offset income.

The D.T.A. initially denied the interest expense deductions
arguing Article 10a. However, the court deemed the provision
inapplicable since none of the French entities held a one-third
interest in the Dutch HoldCo. Nonetheless, the D.T.A. successfully
argued that if Article 10a was inapplicable, then fraus legis
should cause the interest expense deduction to be disallowed
– the overall transaction involved the diversion of equity
into a shareholder loan, which was wholly artificial and lacked
business considerations aside from the realization of tax benefits.
Further, the interest income went untaxed due to the hybrid
mismatch of the French entities. The Court found the arrangement to
be against the object and purpose of the law (of Article10a) and
disallowed the deduction of interest associated with the loan. The
decision informed the business community that limits exist to a
taxpayer’s discretion on the choice of financing.

The diversion of equity into debt is not automatic grounds for
abuse. In a case involving a comparable fact pattern that was
decided one week prior to Hunkemöller, the Dutch Supreme Court
ruled that no abuse of law existed where the funds used by a
shareholder to finance the loan were acquired initially by way of a
third-party bank loan.12 The Court concluded that the
two-step arrangement did not lose the link with the external loan
and is therefore not abusive.

“The decision informed the business community
that limits exist to a taxpayer’s discretion on the choice of

Throughout 2022, the D.T.A. continued to find success in the
courts challenging interest expense deductions in the spirit of
Article 10a.13 That was until the Dutch Supreme Court
paused to reconcile the issue with recent holdings of the C.J.E.U.
and the European Free Trade Association (“E.F.T.A.”)

Taxpayers may still have room to finance an acquisition of a
Dutch target with an intercompany loan if the conditions, including
interest rate, are consistent with arm’s length terms. The
Dutch Supreme Court raised the issue in its September 2, 2022,
opinion in which it asked the C.J.E.U. for guidance on whether
Article 10a can be applied to loan interest where the agreed loan
conditions are arm’s length.15

The case involved a Dutch HoldCo that acquired all the shares in
a Dutch Target Co. The acquisition was financed via intercompany
loans from a Belgian coordination center, which obtained the funds
shortly before through a capital contribution. The lower courts
disallowed the interest expense deduction based on Article 10a
because the funds used for the acquisition diverted equity into
debt. For that reason, the arrangement was deemed to be wholly
artificial and lacking a business purpose. Fraus legis was not at
stake since the affiliated entity threshold was met.

The Dutch Supreme Court expressed the opinion that the interest
expense deduction should be completely denied even if the loan
contains arm’s length terms and conditions. The key factor was
the artificial reduction in the Dutch tax base inherent in the
transaction. The Court acknowledged, though, that this line of
reasoning might run contrary to the C.J.E.U. decision in Lexel,
which involved a cross-border internal acquisition financed through
an intercompany loan. The C.J.E.U. assessed the validity of Swedish
law similar to Article 10a and held that intercompany loans
containing arm’s length terms and conditions cannot be
considered wholly artificial.16 The C.J.E.U. concluded that only
the non-arm’s length portion of the interest rate could be
denied due to the E.U. principle of proportionality. Denying
anything more would go beyond what is necessary to prevent wholly
artificial arrangements. In 2022, the E.F.T.A. Court came to a
similar conclusion in PRA Group Europe AS v. Norway. 17
According to the E.F.T.A. Court, a domestic tax law denying
interest expense deductions for anti-abuse purposes must focus on
the portion of interest expense that exceeds an arm’s length

Lexel involved an internal acquisition, whereas the
Dutch case involved an external acquisition. The Supreme Court
asked the C.J.E.U. if this distinction has any bearing on the
principle laid down in Lexel. Further, the Court asked
whether the application of Article 10a is a breach of E.U. law in
situations where a loan is concluded under arm’s length terms
and conditions.

The decision is expected within the next two years and will
provide much needed clarity for the choice of acquisition
financing. If the C.J.E.U. interprets Article 10a in line with
Lexel and PRA Group Europe AS, the decision will
effectively create an arm’s length safe harbor permitting the
deductibility of interest associated with intercompany loans funded
by group equity. In this light, it will be imperative to document
not only the arm’s length interest rate, but also additional
arm’s length terms and conditions, including the debt-to-equity
ratio, payment schedule for interest and principal, and creditor

Despite the potential arm’s length safe harbor for interest
expense deductions, the same arrangement could subject the interest
payment to Dutch withholding tax. If the arm’s length safe
harbor does not prevail, debt financing could potentially take a
double hit – a denial of interest expense deduction and
subject to withholding tax. Financing an acquisition with 100%
equity won’t resolve these concerns, since a deduction is not
available, and dividend payments could similarly be subject to
withholding tax. Prudence suggests that taxpayers review their
structures and financing arrangements to adjust terms and
conditions, if any, that run afoul of fraus legis and
Article10a and a withholding tax regime that is described in the
following section.


Like the use of intercompany loans to finance acquisitions, the
use of interposed entities in acquisition structures has been
market standard for years. Multinational groups typically establish
layers of interposed entities to hold an acquisition vehicle
established in the jurisdiction of the target in order to
facilitate an investment or series of investments. Today, however,
tax authorities are scrutinizing the economic reality of the
interposed entities and asserting that some act as conduits
permitting related-party income streams to avoid withholding taxes
while the income goes untaxed at the level of the ultimate
beneficial owner.

U.S. Conduit Financing

While scrutiny applied to conduit financing arrangements is
relatively new in the E.U., the U.S. has long combatted the use of
these arrangements initially highlighted in the 1971 Tax Court case
Aiken Industries. 18 The court held that the interest paid
to an interposed company was not exempt from U.S. withholding
taxes, as the interposed company was deemed a conduit established
for the sole purpose of avoiding withholding taxes.

In Aiken Industries, a U.S. subsidiary intended to pay
interest to its foreign parent domiciled in the Bahamas, which did
not have an income tax treaty in effect with the U.S. It was
advised that a 30% withholding tax would be imposed on the payment
of interest. To address the issue, the Bahamian parent sold the
note to a second-tier Honduran subsidiary. At the time, an income
tax treaty existed between the U.S. and Honduras that provided full
tax exemption for the payment of interest. The I.R.S. challenged
the arrangement and the U.S. Tax Court ruled in its favor.
According to the court, the Honduran entity was merely a conduit
for the passage of interest payments from the U.S. subsidiary to
the Bahamian parent and denied access to treaty benefits. The
Honduran entity had no actual beneficial interest in the interest
it received because it was committed to pay out exactly what it
collected and had no opportunity to realize a profit. Withholding
tax was levied on the interest payment because the economic owner
of the payment was the Bahamas corporation.

The primary holding of Aiken Industries has since been
codified in Code §7701(l), which authorizes the conduit
financing regulations found in Treas. Reg. §1.881-3. The
conduit financing regulations allow the I.R.S. to disregard
intermediate conduit entities in a financing arrangement and assess
withholding taxes by looking only at the U.S. payer and the
ultimate foreign recipient. An intermediate entity is generally
regarded as a conduit if its participation reduces withholding tax
owed pursuant to a tax avoidance plan.

The Danish Cases

While Aiken Industries was decided over half a century ago, it
was not until 2019 when the E.U. reached similar landmark decisions
in what are known as the Danish Cases. 19 The Danish Cases
confirmed the ability of Member States to enforce anti-abuse rules
in E.U. directives in the absence of domestic legislation if
appropriate to deny withholding tax benefits in artificial conduit

Each case generally involved the use of common international
private equity structures whereby dividend or interest payments
were made from a Danish entity to an E.U. resident entity and then
eventually paid forward to an ultimate parent entity in a third
country. In order to benefit from withholding tax exemptions under
E.U. law, the C.J.E.U. held the recipient must be the beneficial
owner of the income. The court articulated that the beneficial
owner is an entity that benefits economically from the income
received and has the power to freely determine its use. A conduit
company is the opposite of a beneficial owner because the entity
lacks substance and is not put in place for valid business reasons
reflecting economic reality. Conduit indicators identified by the
court include the following:

  • The existence of a legal or contractual obligation to pass the
    income to another person, so that the payee has no right to use or
    enjoy the proceeds of the income

  • The fact that income is passed on shortly after receipt to
    other entities which do not qualify for benefits

  • The fact that the entity makes an insignificant profit from the
    income it receives because it is obligated to pass the funds on to
    other entities

  • The entity’s sole activity is the receipt of passive income
    and the payment of that income to another party

The impact of the C.J.E.U. judgments can be felt throughout the
E.U. as tax authorities have since placed greater emphasis on
combatting entities without substance and an apparent economic

“Dutch tax policy has traditionally focused on
promoting the Netherlands as a center for global trade. Key to this
policy was the absence of withholding taxes on payments of
interest, royalties, and direct investment dividends to recipients
outside the Netherlands.”

What Do the Dutch Have to Say About It?

Domestic Law

Dutch tax policy has traditionally focused on promoting the
Netherlands as a center for global trade. Key to this policy was
the absence of withholding taxes on payments of interest,
royalties, and direct investment dividends to recipients outside
the Netherlands. That policy has changed significantly in recent
years following international and E.U. developments.

In accordance with the Danish Cases and to distance
itself as a conduit facilitator, the Netherlands amended its
minimum substance requirements for foreign entities claiming an
exemption from withholding tax. Minimum Dutch substance
requirements include the following factors:

  • At least half the board members reside in the jurisdiction of
    the recipient.

  • The board members have qualified knowledge to complete tasks
    that are required for the position.

  • The recipient employs qualified personnel.

  • Board meetings and key board decisions take place in the
    jurisdiction of the recipient.

  • Main bank accounts are managed and held in the jurisdiction of
    the recipient.

  • Books and records are kept in the jurisdiction of the

  • Wage costs exceed €100,000.

  • For a period of at least two years, the recipient has equipped
    office space in the jurisdiction where activities are actually

While no longer functioning as a safe harbor, entities who
satisfy the minimum substance requirements can shift the burden to
the D.T.A. to prove that the arrangement is abusive.

In cases where abuse is deemed to be present, the Netherlands
can levy withholding taxes on dividend, interest, and royalty
payments made to foreign entities. The Netherlands has historically
applied a dividend withholding tax under certain conditions.
Currently, the rate is 15%. As of January 1, 2021, the Netherlands
applies a conditional withholding tax on interest and royalties if,
inter alia, an arrangement is deemed abusive. The tax is
assessed at the highest corporate rate, currently 25.8%. A
conditional dividend withholding tax in line with the conditional
interest and royalty withholding tax will take effect January 1,

Both the dividend withholding tax and conditional withholding
tax on interest and royalties contain similar anti-abuse rules to
prevent interposed conduit entities from enjoying an exemption from
withholding tax.20 A withholding tax generally will be imposed on
dividend, interest, or royalty payments if (i) the recipient is
included in the structure mainly to avoid withholding tax and (ii)
the payment is part of an artificial arrangement that has not been
put in place for valid business reasons that reflect economic

If the recipient entity is considered the beneficial owner of
the income and satisfies the minimum substance requirements, the
entity and transaction are presumed to have been put in place for
valid business reasons that reflect economic reality. Consequently,
the income will likely avoid Dutch withholding tax.

In situations where the D.T.A. believes the entities were put in
place for the avoidance of tax and not valid business reasons that
reflect economic reality, a withholding tax can be levied on
interest and dividends paid up the structure. In conjunction with a
denial of interest expense deductions, these highlighted tax risks
can have a significant impact on the rate of return of an
investment or a group’s operating profit.

Treaty Considerations

Withholding taxes assessed in abusive situations can
nevertheless be mitigated if the recipient is resident in a
jurisdiction that has concluded an income tax treaty with the
Netherlands that permits the reduction or exemption from
withholding taxes on dividends, interest, or royalties. The
Netherlands, though, has ratified the M.L.I. and elected to include
the Principal Purpose Test (“P.P.T.”). The P.P.T. will
apply to deny treaty benefits if, having regard to all relevant
facts and circumstances, it is reasonable to conclude that
obtaining the treaty benefit was one of the principal purposes of
an arrangement or transaction that directly or indirectly results
in that benefit. If granting the benefit would be in accordance
with the object and purpose of the relevant provisions, the treaty
benefit will not be denied.

The P.P.T. will apply in tax treaties concluded with Netherlands
if the treaty partner has also ratified the M.L.I. and adopted the
P.P.T. If there is no P.P.T. or alternative anti-abuse provision in
the treaty between the Netherlands and recipient jurisdiction,
successfully combating the undesired use of the tax treaty becomes


The E.U. is catching up to the U.S. in combatting deemed abusive
tax practices, with new initiatives, directives, and landmark cases
challenging the status quo. Traditional acquisition and financing
methods are under scrutiny, and those that do not reflect economic
reality may lead to undesired tax consequences. International
taxpayers should review their structures and take action where
necessary to remain compliant in this evolving landscape. This is
especially true in the Netherlands, as the legislature and the
D.T.A. continue to redefine what are acceptable arrangements.
Perhaps taxpayers could heed the advice of the Dutch adage
“doe normaal” after all, so long as they are conforming
to the “nieuw normaal.”


1 See Council Directive (EU) 2016/1164 of 12 July 2016,
Article 6 General anti-abuse rule and the Danish Cases (joined
dividend cases C-116/16 and

C-117/16; joined interest cases C-115/16, C-118/16,
C-119/16, and C-299/16).

2 Andrew Velarde, “Government’s Use of Economic
Substance Doctrine May Increase,” Tax Notes, Oct. 17,

3 United States v. Liberty Global, No. 22-cv-02622

4 LB&I-04-0422-0014.

5 Article 10a(1)(c) C.I.T.A.

6 Article 10a(4) C.I.T.A.

7 Article 10a(6) C.I.T.A.

8 Article 10a(3) C.I.T.A.

9 Supreme Court 2 September 2022, nr. 20/03948,

10 Supreme Court 9 July 2021, nr. 19/05112,

11 Supreme Court 16 July 2021, nr. 19/02596,

12 Supreme Court 9 July 2021, nr. 19/05112,

13 See Supreme Court 15 July 202, nr. 20/03946, ECLI: NL:
HR: 2022:1085. and nr. 20/02096, ECLI:NL:HR:2022:1086 (cases
remanded to rule on applicability of fraus legis to deny interest
deductions); District Court of North Holland 12 August 2022, nr.
AWB-18_2897, ECLI:NL:RBNHO:2022:6584 (interest deduction disallowed
on shareholder loans used to acquire Dutch company).

14 The E.F.T.A. Court is the equivalent of the C.J.E.U.
in matters relating to E.E.A. E.F.T.A. states (Iceland,
Liechtenstein and Norway).

15 Supreme Court 2 September 2022, nr. 20/03948, ECLI:
NL: HR: 2022:1121.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.


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