Loan by director neither extreme default risk loan nor participating loan


Loan by director neither extreme default risk loan nor participating loan

According to the Supreme Court a loan granted by a financial director to a loss making company neither qualifies as a participating loan nor as an extreme default risk loan.

11 january 2018


Shareholders who are directors and major shareholders are often preoccupied with the financing of their companies. Financing can take the form of granting a loan or a capital contribution. The predominant feature of a loan is the repayment obligation. The form this takes according to civil law is leading in this respect. A requalification for tax purposes will only take place if it involves so called sham loans, bottomless pit loans or participating loans. A participating loan has three features: it has no fixed term (or a term exceeding 50 years); it is subordinated to all ordinary creditors and only demandable in the event of bankruptcy, suspension of payment or liquidation; and its compensation is almost fully profit related. Another type of loan is what we call extreme default risk loans. This involves loans between affiliated parties where the bad debt risk is high to the extent that an independent third party would not be prepared to grant such loans (or only against a profit participating compensation). Write down losses in respect of such loans cannot be deducted from the profit. Unlike participating loans, extreme default risk loans are regarded as debt capital.


Recently, the Supreme Court pronounced an interesting ruling on the question whether a funding would have to qualify as a participating loan or an extreme default risk loan. The case involved a parent company’s financial director, who acquired a shareholding in this company and granted it a loan in December 2008. The employment of the financial director was terminated in 2011. The shares and the receivable were subsequently transferred to the grandparent company with a loss. The dispute is about whether the financial director can deduct the loss on the loan from the box 1 income as negative result from other activities.

Participating loan

The Arnhem-Leeuwarden Court of Appeal has ruled that according to civil law this constitutes a loan. In this case none of the exceptions formulated by the Supreme Court occur. More specifically, it is not a participating loan because the loan has not been subordinated to all ordinary creditors. In his appeal the State Secretary argues, however, that the criteria for determining a participating loan should be interpreted broadly. According to the Supreme Court, though, this clashes with the assumption that the form a funding takes according civil law is leading for the qualification for tax purposes. What’s more, a broad interpretation would affect the legal certainty that the Supreme Court sought to offer when formulating the criteria for a participating loan.

Extreme default risk loan

The second disputed point involved the question whether the Court of Appeal was right to assume that this does not involve an extreme default risk loan. The State Secretary is left empty-handed here, too. The Supreme Court confirms the line it has taken in its earlier case law. As a rule, it considers there to be no extreme default risk loan when prior to the funding the taxpayer had not yet been a shareholder of the company to which the loan was supplied. This is because in that case the share ownership results from the funding. The Court of Appeal was correct in ruling that in this case there is no exception according to which all shareholders, more or less in proportion to their shareholding and under the same conditions as the financial director, provided the parent company with a loan carrying an extreme default risk.


This ruling is particularly important because it confirms that the form a funding takes according civil law is still leading for the qualification for tax purposes and that the criteria for determining a participating loan should be based on a strict interpretation. The legal certainty of taxpayers is thus served.

Source: HR 5 January 2018, 16/01047, ECLI:NL:HR:2018:2

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