On 25 November 2011, the Dutch Supreme Court shaped the concept of a new kind of loan in a number of rulings. This so-called extreme default risk loan is a high risk loan that has both the marks of equity and debt. The Supreme Court ruled that such a loan must be regarded as a debt, and yet write-downs on these loans are not permitted. Furthermore the Court ruled that the interest stated in the loan agreement is to be ignored for tax purposes and must be replaced by the interest rate that would have been agreed upon had the loan been granted by a third party, but with a guarantee by the creditor. In this article we analyze the rulings and show that in a cross-border setting the fiscal treatment set out by the Supreme Court could lead to undesirable cross-border mismatches. We propose a number of potential solutions to this problem.
Intertax