Dutch TP Case: Real Estate Interest

June 30 2022
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On 16 May 2022 a Dutch transfer pricing case on interest rate benchmarking analysis was published. This district court case concerned the financing of a real estate investment and is of interest as it deals with interest rate benchmarking in some detail.

Facts and assessment

A Dutch limited liability company purchased an office building in the Netherlands. The Dutch entity was owned by a number of foreign entities resident in the same country. A purchase agreement was signed on 4 January 2016, and the office building was let to a number of third-party tenants on 10-year leases.

The purchase price was approximately EUR 31M, and the Dutch entity was financed by equity in the amount of EUR 12.5M and intercompany shareholder loans for a total amount of 18.75M.

No third-party debt was obtained but a debt raise proposal was prepared in December 2014 in which it was indicated that senior financing with a term of 5 years at interest at a maximum of 3% per annum subject to a loan-to-value ratio of 50% could be obtained in the market.

The terms of the shareholder loans were as follows:

  1. Maturity terms of 15 years;
  2. Interest rates of 8% per annum;
  3. No mandatory repayment obligation during the term of the loans;
  4. Callable by the borrower;
  5. In case of default, a loan would be repayable;
  6. In case of liquidity issues, interest payments could be postponed;
  7. No security was provided;
  8. No covenant such as a maximum loan-to-value ratio applied; and
  9. Dutch law was applicable.

A transfer pricing study had been prepared by one of the shareholders to substantiate the 8% interest rate. Based on a “trade date” of 31 December 2015, a maturity term of 15 years and a credit rating of BB+, using the Bloomberg yield analysis tool (YAS), 11 bonds were identified resulting in an interquartile range between 5.85% and 8.53%. One of the bonds was issued by a real estate investor while the remaining 10 were issued by banks.

The Dutch tax administration found the interest of 8% to be in excess of an arm’s length level and argued that a rate of 1.78% would be at arm’s length. This rate consisted of a risk-free base rate of 0% plus a margin of 1.78%. In support of this rate, the tax administration referred to:

  1. The Commercial Property Lending Report Mid Year 2015 from the UK Montfort University on the basis of which it was concluded that a margin of 1.78% applied for a loan with a loan-to-value ratio of maximum 64%;
  2. 2014 and 2015 Property Lending Barometer reports from KPMG and the report The Financing Policy of Dutch Private Real Estate Investors in 2015 from ING and the Nyenrode Business University on the basis of which it was concluded that the interest rate level for bank financing for the Dutch office market was between 2.0% and 2.5% and that interest rates above 4% were not observed; and
  3. The above mentioned debt raise proposal mentioning that financing at an interest rate of 3% was possible.

The decision

The court decided largely in favour of the tax administration and only accepted an interest rate of 4.5% instead of the 8% rate applied by the taxpayer.

In reaching this decision, the court first confirmed that a corporate taxpayer in principle is free to choose the type of its financing as well as the lender. Furthermore, based on the quantitative references provided, the court first found that senior financing could have been obtained for the investment and at a rate significantly below 8%. The court also noted that it was not clear how and why the interest rate was set at 8%. The taxpayer claimed it was a result of negotiations with the lenders but no details were available.

The interest rate benchmarking study was also rejected by the court. The reason was technical and interesting: Because a number of the comparables were bonds issued by banks in Southern Europe affected by the credit crisis, the court did not find these bonds comparable to the intercompany loans financing an investment in the Netherlands. A second analysis using the forecasted internal rate of return was also rejected by the court because this analysis did not determine the interest rate that a third party would have agreed to and because the analysis was done after the transaction was entered into.


Although the decision of the court - like other court decisions - is affected by the arguments put forward and the quantitative evidence provided by the parties and one could also critique that general quantitative industry information was relied on, there area few important take aways from the case as follows:

  1. Focus on price setting at the moment a financial transaction is entered into is preferred. Although it does not appear explicitly from the case, it looks like the investors had set the interest rate on the shareholder loans prior to performing the relevant transfer pricing analysis;
  2. Apply relevant comparability criteria for the benchmark. By reading the case, one gets the impression that the comparability criteria used in the interest rate benchmark were selected with the view to justify a desired high result, i.e. the 8% interest rate;
  3. Whenever possible, justify the choice of value in the range; and
  4. The negotiation argument is never very strong in related-party situations.

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