Supreme Court rejects interest deduction, repeats previous judgments

On 1 May 2026, the Supreme Court rendered its judgment in a case in which the interested party X BV buys shares in a Luxembourg company from its Luxembourg shareholder, and borrows the purchase price from that shareholder. The Supreme Court ruled that the interest in this case is not deductible on the basis of a specific anti-profit drainage provision, article 10a Corporate Income Tax Act (CITA), and that there is also a conflict with the overall purpose of the CITA.

The judgment of the Supreme Court

X BV is a joint venture of a Dutch and a French bank. A Luxembourg company (A SA, belonging to the French banking group) holds 95% of the shares in X BV, the Dutch bank holds the remaining 5%. X BV acquires shares in C SA from its Luxembourg major shareholder A SA. This A SA also lends the purchase price to X BV.

In this case, the whole of the transactions leads to profit drainage in both the Netherlands and Luxembourg. However, the interest income itself is taxed at A SA in Luxembourg at an effective levy higher than the Dutch corporate income tax rate.

The dispute concerns the period October 2007 to September 2009. The inspector refused the interest deduction for the entire period. It is important to note that the law has been slightly amended as of 2008. For the period from 2008 onwards, the inspector argued that, in short, there were insufficient commercial considerations for these loans and legal transactions. The Supreme Court found that the inspector had made this sufficiently plausible. The interest is also not deductible for the period up to 2008, because the construction is designed in such a way that the creation of interest deduction was the decisive motive. Allowing interest deduction would then be contrary to the overall purpose of the CITA (fraus legis). The Supreme Court thus repeats its earlier judgment that even if the profit drainage rules of article 10a CITA do not apply, the interest deduction in the case of 'artificial' structures can still be excluded on another ground. The fact that the interest income in Luxembourg is actually taxed by a compensatory levy does not preclude this.

In addition, the Supreme Court reiterates its earlier judgment on a possible conflict with EU law. In the X B.V. judgment of 16 January 2026, the Supreme Court already ruled that both article 10a of the CITA and the doctrine of fraus legis are not in conflict with EU law. In doing so, the Supreme Court adheres to the line of interpreting the motive requirement out of fraus legis under national law (purpose of the CITA) and not by testing it against its supranational counterpart in the EU anti-abuse doctrine, the purpose requirement (purpose of EU treaty freedoms).

So much for this new case. For a good overview of the Supreme Court's line in similar cases on interest deduction (and limitation), the Supreme Court's judgment on a so-called financial hub within the group is also important. In previous cases, the question was whether the group company that lends the money for the acquisition fulfils the role of a financial hub within the group. The Supreme Court has ruled that only if the lender has such a financial hub function in the group, fraus legis cannot apply, and the interest on the loan in question cannot therefore be limited by fraus legis.