In short, the Dutch thin capitalization rules prescribe that the ratio of equity and liabilities should not be less than 1 to 3. Interest expenses on related party loans are not deductible to the extent the amount of loan funding of the Dutch company exceeds this ratio.
In this court case the question was whether or not the thin cap regulations in The Netherlands are contrary to EU-law and/or bilateral tax treaty’s as stated by the interested party.
The court decided that the Dutch thin capitalization rules are not contrary to the EG legislation. Although it is possible that in a domestic situation these thin cap rules can be avoided in case of a fiscal unity, the court decided that these rules do not make an unlawful distinction in relation to the place of residence. Furthermore, there is no conflict with the freedom of capital movements within the EU.
The court also decided that the thin cap rules are not contrary to the EU interest and royalty directive, the at arm’s length articles in bilateral tax treaties and article 9 of the OECD model tax convention on income and capital.