Supreme Court clarifies: fraus legis and interest deduction

On 5 September 2025, the Dutch Supreme Court rendered an important judgement in the field of interest deduction in an acquisition structure. The Dutch Supreme Court ruled that, even if the possibility of rebuttal under article 10a of the Dutch Corporate income tax act 1969 ('CITA') can be successfully invoked, the interest can be excluded from deduction entirely if there is fraus legis. Even if taxpayers have not acted contrary to the intent and purpose of article 10a CITA, there may be a conflict with the intent and purpose of the CITA as a whole. In short, the fraus legis doctrine means that if there is a violation of the intent and purpose of the law, the intended tax benefits must be refused. In this case, this means that the interest on the acquisition financing is not deductible. This judgement brings an end to a long-running procedure on interest deduction in acquisition financing.

What does this mean for your organisation?

With this judgement, the Dutch Supreme Court provides more clarity about the possibility of limiting the deduction of interest costs paid in respect of acquisition financing for corporate income tax purposes on the basis of fraus legis.

More specifically, it has been clarified that fraus legis can also be applied if the possibility of rebuttal under article 10a(3) CITA has been successfully invoked. Only when there is a so-called pivotal financial function (‘financiële spilfunctie’) at the lender, fraus legis cannot apply.

Legal framework

If a loan is taken out from a related entity, for example a shareholder, and a certain legal transaction is performed with those borrowed funds, the interest on that loan is in principle not deductible for Dutch corporate income tax. This is laid down in article 10a CITA. One of these legal acts concerns – in short – the acquisition or expansion of a shareholding. The main purpose of article 10a CITA is to prevent the creation of artificial interest deduction (anti-base erosion). However, the interest is still deductible in the event of a successful reliance on the so-called rebuttal rule (article 10a(3) CITA). This appeal succeeds if either there is sufficient taxation on the part of the recipient of the interest or if both the legal transaction and the loan raised for it, are at arm's length. The taxpayer who wants to deduct the interest bears the burden of proof for the rebuttal rule.

Article 10a CITA is a codification of the fraus legis case law of the Dutch Supreme Court. The fraus legis doctrine – also known as the doctrine of evasion of the law – was developed in tax case law. Fraus legis only comes into the picture after the usual rules of interpretation of the law lead to an unacceptable (tax) outcome.

According to established case law of the Supreme Court, the following two requirements must be met simultaneously for fraus legis to apply:

The decisive motive for entering into a (legal) transaction is to frustrate taxation (the subjective requirement or motive requirement); and

The chosen method of tax evasion is contrary to the intent and purpose of the law (the objective requirement or standard requirement).

It is up to the inspector to make it plausible that fraus legis applies.

It follows from previous case law that the doctrine of fraus legis can also be applied if article 10a CITA does not apply, for example because the lender is not a related entity, but the tax base is being eroded. However, it was still unclear whether fraus legis can also apply if the rebuttal possibility of article 10a(3) CITA is successfully invoked. The Dutch Supreme Court has now confirmed and clarified this.

The case

This concerns a Dutch company that is being taken over by two funds with sub-funds in which Dutch and foreign pension funds participate, among others. These funds participate in a Luxembourg parent company. The Luxembourg parent company provided loans to a Dutch company that bought the shares in the Dutch retail chain (through a (sub)subsidiary that joined it in the fiscal unity).

The funds were raised by the Luxembourg parent company from the funds that had equity capital invested by their investors. None of the entities that made up these funds had an interest of a third or more in the Dutch company. On the basis of the statutory regulation as it applied in 2011, as such, these funds were not related entities of the Dutch company. The Luxembourg parent company is a related entity.

The first judgement of the Supreme Court

In the order for reference judgement of 15 July 2022, the Dutch Supreme Court considered that the starting point is that taxpayers have freedom of choice in the method of financing a company in which they participate. In so far as article 10a CITA infringes this freedom of choice, this provision must be interpreted restrictively. The Supreme Court then stated that a debt is predominantly based on business considerations if the funds used for the external acquisition have not been diverted. According to the examples given in the legislative history, there is only a diversion if the related entity that granted the loan has obtained the funds used for this loan from another entity in the same 'group' ('groep') or 'collective' ('concern') as the taxpayer.

The Dutch Supreme Court then considered that group and collective are not defined in the law and that therefore for the rebuttal rule – and in particular the question of whether the funds within the group or collective have been diverted in a non-commercial manner – an entity does not belong to the collective or the group of the taxpayer if that entity is not an entity related to the taxpayer within the meaning of article 10a CITA.

In this case, the funds were, and sub-funds are not related entities of the Dutch company. Therefore, the debt in question is predominantly based on business considerations and the rebuttal rule is met.

The Dutch Supreme Court referred the case to the Court of Appeal of Amsterdam for assessment of whether the interest is still not deductible on other grounds. In 2023, the Court of Appeal qualified the shareholder loan as a 'non-business loan' (‘onzakelijke lening’). These are loans that an independent third party would not have taken out without profit-dependent interest due to the high default risk. In this case, interest was corrected from 10% to 3.2%. According to the Court of Appeal, the remaining interest on the (non-business) loan could not be deducted either, because the doctrine of fraus legis applies. In this regard, it refers to a 2021 Dutch Supreme Court judgement (see the PwC Tax News article 'Dutch Supreme Court rules on interest deduction in two acquisition structures'). In view of this, the interest on the acquisition financing could not be deducted at all.

The judgement of 5 September 2025  

The Dutch Supreme Court ruled, following the Court of Appeal of Amsterdam, that deduction of the interest on the shareholder loans used for the acquisition is not permitted on the basis of acting contrary to the intent and purpose of the CITA as a whole (fraus legis). The circumstance that the interested party has successfully invoked the rebuttal rule of article 10a(3) CITA and that the deductibility of this interest is therefore not excluded by article10a CITA does not preclude the possibility that that deduction may nevertheless have to be refused as a result of "artificiality occurring outside the 10a structure", resulting in a conflict with the intent and purpose (abuse) of the CITA as a whole. This occurs in the case of base erosion as referred to in the 2021 judgement. Only if the lender has a pivotal financial role is it excluded that the motive requirement for the application of the doctrine of evasion of the law (fraus legis) is met in respect of the same loan.

This exception for lenders with a pivotal financial role follows from an earlier judgement from 2023, see the PwC Tax News article ‘Funding by treasury department not artificially diverted’.

According to the Dutch Supreme Court, if there is a pivotal financial function, the frameworks of which are provided in the judgement mentioned before, it cannot be said that the funds were diverted in an unbusinesslike manner and as such, reliance on the rebuttal rule succeeds. The Supreme Court does make an important nuance and considers that this is different if the entity that provides the financing does not have sufficient so-called 'substance' or if it is a conduit entity. In the case of the judgement of 5 September 2025, the Court of Appeal held that such a conduit existed, as a result of which the exception for pivotal financial functions does not apply and fraus legis can be applied.

Relationship to the 2021 judgement

In the 2021 judgement, in which the Dutch Supreme Court also ruled that the interest was not deductible on the basis of the fraus legis doctrine, there was an acquisition structure that did not fall within the scope of article 10a CITA and of which the deduction of interest on the acquisition loans could therefore not be challenged with article 10a CITA. In that case, the application of fraus legis seemed to be an ultimate means of combating the undesirable interest deduction. In the present case, there is an acquisition structure that does fall within the scope of article 10a CITA, but in which reliance on the rebuttal rule has been successful, as it has been established that the debt arising from the shareholder loans and the related legal transaction is predominantly based on business considerations. Despite the arm's length nature of the loan, the interest can still be limited in deduction, according to the Dutch Supreme Court, by applying fraus legis because the tax base is being eroded.

Cooperating group

This case concerns the financial year 2011/2012. In 2017, a new provision was introduced in the law in which the term 'cooperating group' is defined. In our estimation, the Dutch Supreme Court's consideration on this point might turn out differently if the proceedings concerned tax year 2017 or later. 

Finally, we would like to point out that there are currently various proceedings pending before the Supreme Court in which the relationship with European law is also discussed, see for example the PwC Tax News article ‘CJEU: Article 10a Dutch CITA is compatible with EU laws’.