Publication date 11 February 2014
A bank syndicate had originally financed its acquisition holding with a loan, which it later converted into cumulative preference shares. The new financing method is quite similar to a three-year loan with a fixed interest. In dispute is whether the payment received by the bank syndicate should be regarded as interest or as participation dividends. According to the Supreme Court, the civil law qualification is, in principal, decisive, although three exceptions do apply for money loans. The Supreme Court ruled that in the reverse situation – where it is regarded as share capital from a civil law perspective – there are no exceptions to the general rule. An exception that depends on the level of risk would lead to a legal uncertainty as to when financing is regarded as the issue of risk-bearing capital or is regarded as a loan. The payment relates to a capital contribution from a civil law perspective and therefore falls under participation exemption. Abuse of law does not change this.
A fiscal unity initially granted a loan to an Australian company. For the purposes of changing the financing structure, the loan was repaid and the fiscal unity obtained direct redeemable preference shares (RPS) in the Australian company. A fixed payment is made on the RPS and the nominal value is repaid after ten years. The Amsterdam Court of Appeals ruled that the RPS are similar to cumulative preference shares to a degree that the payment made on the RPS qualifies as exempt dividends. The Amsterdam Court of Appeals also ruled that no abuse of law was involved. The Supreme Court confirmed the Court's position.
Old case law showed that the Supreme Court considers that the civil law qualification is, in principle, decisive. An exemption applies to loans if a sham loan, loan with no expectation of repayment or a participating loan is involved. The judgments rendered on February 7, 2014 made clear that the Supreme Court does not allow for an exception to be made on the civil law qualification as share capital, in view of the significant legal uncertainty this would cause. Foreign forms of company finance in which a participation is held will need to be assessed by civil law standards. The law offers a freedom of choice regarding the financing of a company in which a participation is held. Utilizing this freedom cannot constitute an act contrary to the aim and the spirit of the law, i.e. abuse of the law.
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