Impairment loss on receivable is deductible (in part) if debtor is substituted | Deloitte Nederland

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Impairment loss on receivable is deductible (in part) if debtor is substituted

An impairment loss sustained following substitution of a debtor is deductible insofar as this loss has already arisen prior to that substitution and therefore does not arise from the acceptance of an extreme default risk.

8 December 2020

Introduction

When a company’s shareholder extends a loan to that company with such a high risk of default that an independent third party would not have accepted this risk, this loan qualifies as an extreme default risk loan (onzakelijke lening) for tax purposes. Losses on such loans may not be charged to the profit realised by the creditor. In this context, the Supreme Court recently pronounced judgment on whether or not an impairment loss may be deducted in the event of a debtor substitution.

Restructuring of mutual debt relations

The interested party is a director-major shareholder who holds all shares in the company D BV, which is part of the D group. D BV holds all shares in E BV, while E BV in turn holds all shares in various group companies, including F BV. In order to finance F BV, group companies of the D group borrow money from the interested party and then lend it on to F BV. At the end of 2012, the mutual debt relations were restructured and the receivable provided by the interested party to the D group to fund F BV was converted into a current account receivable from F BV itself. This receivable amounted to EUR 580,758 at the end of 2012.u

In October 2013, F BV was declared bankrupt. The interested party valued the receivable from F BV at nil in its 2012 income tax return and charged the impairment loss to the income from other activities (box 1). However, the Tax Inspector did not accept this impairment arguing that it concerned an extreme default risk loan. Before the The Hague Court of Appeal, parties disputed whether it was justified to deduct the impairment loss in the tax return.  

Deductibility of impairment loss on substitution of debtor

The Court of Appeal ruled that the amount in respect of which the amounts payable to the interested party by the D group were converted into a receivable from F BV alone, did not constitute a new loan but a substitution of the debtor. The Court of Appeal then judged that the Supreme Court case law on extreme default risk loans also applies to the substitution of debtors. In this case, the interested party did not act in an arm's length manner when substituting debtors. Considering F BV's very poor financial situation and the consequent lack of collateral, an extreme default risk (onzakelijk debiteurenrisico) was accepted. Hence, the The Hague Court of Appeal held that the interested party had wrongfully deducted the impairment loss.

However, in cassation the Supreme Court stated that when assessing the deductibility of the impairment loss it is important whether this actually relates to the impairment of the original amount payable to the interested party by the D group companies. After all, if the receivable was already impaired at the time of redemption (by means of the substitution of the debtor), the impairment loss does not result from acceptance of an extreme default risk when F BV became a debtor. To the extent that the nominal value of the receivable exceeded the fair value at the time of the substitution of the debtor, the impairment loss can, in principle, be charged to the result. The Supreme Court referred the case to the Amsterdam Court of Appeal to examine to what extent this is the case.


Source: HR 20 November 2020, 19/04790, ECLI:NL:HR:2020:1856

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