The court’s ruling of the North Holland District Court of 26 April, 2022, (213367;213368, ECLI:NL:RBNHO:2022:3889) addresses a dispute in which several shareholders provided a loan to BV X to finance real estate, specifically to finance an office building. In dispute is, among other things, whether X meets the statutory and actual investment requirement for the Dutch fiscal investment institution regime (fbi regime), whether the financing limit in the years in question was exceeded and whether the interest rate on the shareholder loans is in line with the at arm’s length principle. This article focuses on whether the interest rate agreed upon the shareholder loans is in line with the at arm’s length principle.
The Dutch Tax Authority (“DTA”) argued that the interest rate on the loan of 8% agreed upon between the shareholders and BV X cannot be considered at arm’s length. The DTA considered an interest rate of 1.78% to be at arm’s length. The DTA determined both the loan-to-value ratio and the interest rate with a reference to the Montfort University’s Commercial Property Lending Report Mid-Year 2015 (”Montfort University report”). In addition, the DTA referred to the Property Lending Barometer reports 2014 and 2015 published by a big four firm, the report “The financing policy of Dutch private real estate investors in 2015” published by ING (a major Dutch bank) and Nyenrode Business University . The DTA considered that the difference between the interest rate agreed upon between the parties and the interest rate based on the reports should be considered a profit distribution.
The court agreed with the DTA that the interest rate agreed upon between the shareholders and BV X cannot be considered at arm’s length. However, the court ruled that the DTA did not make it sufficiently plausible that an interest rate of 1.78% can be considered to be at arm’s length, since the Montfort University report covers transactions on the British real estate market while in case it is about Dutch real estate. The court considered an interest rate of 4.5% to be at arm’s length in good justice, while referring to statements of a real estate financing consultant about financing conditions, various public reports that indicated interest rates of 4% and higher were rare and the terms and conditions of the loan agreement, which in case had a tenor of 15 years. Regarding the loan-to-value the court only stated that it is up to the taxpayer how it finances its activities, be it through equity or debt (also from related parties). It refers to a case from the Supreme Court (HR 14 August 2015, ECLI:NL:HR:2015:1460), also known as the Mauritius case. Likely the loan-to-value did not get much attention since it was not extreme (60%).
In addition, the court considered the comparables used in the TP-study to substantiate the interest rate on the shareholder loan insufficiently comparable for the loan issued, since the interest rate was determined based on a median in a range of an unknown number of transactions in the UK real estate market.
In practice, in the case of real estate financing, the Montfort University report is regularly used in determining the loan-to-value ratio. In our opinion, this is one of the best sources of available information. However, caution should be taken when using these kind of reports. The rejection of the DTA’s approach to determine an arm’s length interest rate by the court means that one should have a critical look on how to structure a search for comparables. Looking at British real estate transactions to determine an interest rate for Dutch real estate transactions may then not be the best approach in this case. The fact that the court agreed with the DTA that the interest rate agreed upon between the shareholders and BV X is not arm’s length, stresses the importance of a solid transfer pricing analysis to determine arm’s length terms and conditions for intercompany loans, also regarding real estate financing.