Netherlands vs “Lux Credit B.V. – Ruling on Arm’s Length Principle in Intra-Group Financing Case


Case Information:

Court: District Court of The Hague
Case No: AWB – 21 _ 4016
Applicant: Lux Credit B.V.
Defendant: The Inspector of Taxes
Judgment Date: 14 July 2023

Judgment Summary:

This judgment from the Court in The Hague revolves around a transfer pricing dispute between Lux Credit B.V. and the Inspector of Taxes concerning the deductibility of interest and commitment fees on various financial facilities. The court ruled in favour of the claimant on several grounds, notably rejecting the defendant’s retrospective recovery of tax assessments for 2012/2013 and 2013/2014 while upholding the defendant’s right to correct commitment fees and interest in subsequent years.

Key Points of the Judgment:


  • The plaintiff, a Dutch company, was part of a multinational group and had several intra-group financing arrangements.
  • The dispute arose when the Inspector of Taxes imposed additional corporate tax assessments on the plaintiff for the financial years 2012/2013 through 2016/2017, involving significant adjustments to the claimed deductible interest and commitment fees on various intra-group financing facilities.
  • The claimant challenged these adjustments, leading to legal proceedings.

Core Dispute:

The primary issues were:

  • Whether the Inspector of Taxes had the authority to issue post-clearance tax assessments.
  • Whether the interest rates and commitment fees on the intra-group loans were at arm’s length.
  • The tax authorities argued that the commitment fees were not deductible and that the interest rates were too high.
  • The plaintiff contended that the financing arrangements were in line with the arm’s length principle.
  • The legitimacy of the defendant’s reliance on the principle of legitimate expectations and whether fraud or sham transactions was present.

Court Findings:

  1. Commitment Fees:
    • The court upheld the tax authorities’ position that commitment fees on Facilities 1, 3, and 7bn were not deductible.
    • However, due to a procedural issue, it ruled that the tax authorities could not recover commitment fees for Facility 7bn for the years 2012/2013 and 2013/2014.
  2. Interest Rates:
    • The court rejected the tax authorities’ adjustments to interest rates on Facilities 1, 3, and 7bn.
    • It found that the tax authorities failed to demonstrate that the agreed interest rates were not at arm’s length.
  3. Facility 5:
    • The court upheld the tax authorities’ decision to disallow both commitment fees and interest on Facility 5, which was established to cover potential tax liabilities in a foreign country.
  4. Adjustments Validity:
    • The court upheld the adjustments to the commitment fees for facilities 1, 3, and 5 for subsequent years but found the defendant’s proposed interest rate adjustments unsubstantiated.
  5. Burden of Proof:
    • The court ruled that the burden of proof remained with the tax authorities to demonstrate that the transfer prices were not at arm’s length.
  6. Documents and Omissions:
    • The court found no evidence that the defendant failed to produce all relevant documents.
  7. Post-Clearance Assessments:
    • The court ruled that the post-clearance assessments for 2012/2013 and 2013/2014 were invalid due to a change in the defendant’s understanding of the facts.
  8. Legitimate Expectations:
    • The court rejected the claimant’s argument regarding legitimate expectations, as no explicit promises or conduct by the defendant substantiated such claims.


  • The court partially upheld the taxpayer’s appeal.
  • It ordered the tax authorities to reduce the tax assessments in accordance with the judgment.
  • The tax authorities were ordered to pay the plaintiff’s legal costs.

Transfer Pricing Method:

The case primarily focused on the application of the arm’s length principle rather than a specific transfer pricing method. However, the court’s analysis suggests an emphasis on comparable uncontrolled price (CUP) considerations, particularly when evaluating the interest rates.

Major Issues and Areas of Contention:

  1. Authority for Post-Clearance Assessments: Whether the Inspector of Taxes could legitimately issue post-clearance assessments for previous years based on new information or revised interpretations.
  2. Deductibility of Commitment Fees and Interest: Whether the interest rates and commitment fees were set at arm’s length and in line with market practices.
  3. Legitimate Expectations: Whether the claimant could reasonably expect that the tax treatments previously agreed upon would continue to be upheld.
  4. Fraus Legis and Sham Transactions: Allegations that the financial arrangements were designed to evade taxes and did not reflect economic reality.

Decision Analysis:

The decision was somewhat unexpected and potentially controversial in several aspects:

  1. Commitment Fees: The court’s ruling that commitment fees were not deductible may be seen as controversial, as it challenges common practices in intra-group financing.
  2. Interest Rates: The rejection of the tax authorities’ adjustments to interest rates is significant and may be viewed as favourable to taxpayers.
  3. Burden of Proof: The court’s emphasis on the tax authorities’ burden to prove non-arm’s length pricing is noteworthy and may impact future transfer pricing disputes.
  4. Facility 5: The complete disallowance of deductions for Facility 5 highlights the challenges in justifying facilities for unique purposes.

Significance for Multinationals and Revenue Services:

  1. For Multinationals:
    • Increased scrutiny of intra-group financing arrangements, particularly commitment fees
    • Need for robust transfer pricing documentation and economic analysis
    • Importance of considering the commercial rationale for financing structures
    • Potential for challenging tax authority adjustments on interest rates
  2. For Revenue Services:
    • Higher burden of proof in challenging arm’s length nature of financing arrangements
    • Need for more sophisticated analysis to support transfer pricing adjustments
    • Potential limitations on recovering taxes for past years due to procedural issues
  3. Global Implications:
    • The case may influence transfer pricing practices and disputes in other jurisdictions
    • Increased focus on the economic substance of intra-group financing arrangements
    • Potential for divergent approaches to commitment fees across different countries

Value of Transfer Pricing Expertise:

This case underscores the critical importance of transfer pricing expertise in managing complex intra-group financing arrangements:

  1. Economic Analysis: Expert economic analysis is crucial to support the arm’s length nature of interest rates and financing terms.
  2. Documentation: Comprehensive transfer pricing documentation can help defend against tax authority challenges and mitigate risks.
  3. Dispute Resolution: Transfer pricing experts are vital in navigating disputes with tax authorities and presenting compelling arguments in court.
  4. Strategic Planning: Expertise is essential for designing financing structures that balance tax efficiency, compliance, and defensibility.
  5. Industry Knowledge: Understanding industry practices and market conditions is crucial for benchmarking and defending transfer pricing positions.

The value of transfer pricing expertise in cases like this can be substantial, potentially saving companies millions in tax liabilities and penalties.

Preventative Measures and Tax Risk Management:

Implementing a proper tax risk management process and tax steering committee could have helped avoid or better manage a case like this:

  1. Proactive Risk Assessment: A tax steering committee can identify and assess transfer pricing risks associated with intra-group financing arrangements before they become issues.
  2. Policy Development: Establishing clear transfer pricing policies for intra-group financing, including guidelines for setting interest rates and commitment fees.
  3. Documentation Strategy: Implementing a robust documentation process to support the arm’s length nature of financing arrangements.
  4. Regular Reviews: Conducting periodic reviews of existing financing structures to ensure ongoing compliance with the arm’s length principle.
  5. Stakeholder Alignment: Ensuring alignment between tax, treasury, and business functions on the objectives and risks of intra-group financing.
  6. Scenario Planning: Developing contingency plans for potential tax authority challenges and dispute resolution strategies.
  7. Monitoring Changes: Staying informed about evolving transfer pricing regulations and tax authority approaches to intra-group financing.
  8. External Advisors: Engaging transfer pricing experts to provide independent assessments and recommendations.

Referring to the Tax Risk Management website (, a tax steering committee can play a crucial role in:

  • Providing strategic oversight of tax matters, including transfer pricing
  • Ensuring proper governance and control over tax risks
  • Facilitating communication between tax and other business functions
  • Making informed decisions on tax positions and dispute resolution strategies

By implementing these preventative measures and establishing a solid tax risk management framework, multinational companies can significantly reduce the likelihood of costly and time-consuming transfer pricing disputes like the one in this case.


This Dutch court ruling provides valuable insights into applying the arm’s length principle to intra-group financing arrangements. It highlights the complexities of transfer pricing in this area and underscores the importance of robust documentation, economic analysis, and proactive risk management. Multinationals should carefully consider the implications of this case for their financing structures and transfer pricing practices.

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