In both cases, the Supreme Court looked first to the civil law characteristics of loans and share capital.
The Dutch high court noted three exceptions to the civil law rules for loans—e.g., an exemption applies to loans if a “sham loan” or there is no expectation of repayment or a participating loan is involved—whereas there were no exceptions for share capital.
In other words, if share capital is regarded as such from a civil law perspective, then it is also regarded as share capital for tax purposes.
The Supreme Court also found that there is a freedom of choice under civil law for taxpayers that seek to finance a company in which the taxpayers participate and that this treatment would not be contrary to the aim and the spirit of the law.
The judgments reflect that the Supreme Court does not allow for an exception to be made on the civil law qualification as share capital, given the significant legal uncertainty this could cause. Foreign forms of company finance in which a participation is held, thus, would need to be assessed under civil law standards.
The law offers a freedom of choice regarding the financing of a company in which a participation is held, and this freedom cannot constitute an act contrary to the aim and the spirit of the law (i.e., an abuse of the law).
Read a February 2014 report prepared by the KPMG member firm in the Netherlands: Qualification capital contribution explained in more detail by the Supreme Court