This case stems from the 2010 issuance of Perpetual Capital Securities by Alliander. The tax authorities took the position that from a civil law point of view the Securities should be qualified as equity capital because of the pari passu ranking. The Supreme Court held that the starting point for the analysis is indeed the civil law qualification of the instrument. If the provision of the funds is considered a provision of equity capital from a civil law perspective, then the Securities should be considered equity capital for Dutch tax purposes as well. If not, then for the tax qualification of the instrument it needs to be determined whether there is a repayment obligation. If from a civil law point of view there is a repayment obligation, then for Dutch tax purposes the instrument is a debt. The fact that the repayment obligation is conditional and uncertain does not impact this analysis.
The Supreme Court decided that the pari passu ranking of the Securities with the Preference Shares when the holder of the Securities demands repayment in a bankruptcy or liquidation scenario, does not make the Securities equity capital from a civil law perspective and thus also not from a tax perspective.
The tax authorities had also raised a second argument: if the Securities are not equity capital from a legal perspective, the Securities should be considered to function as equity capital for Dutch tax purposes because the Securities were perpetual, subordinated and profit sharing. With respect to this argument the Supreme Court simply followed the previous decisions of the Tax Court and the Higher Tax Court: the remuneration payable to the holders of the Securities was not profit sharing and thus the Securities did not function as equity capital for Dutch tax purposes.
The decision of the Supreme Court ends a long lasting debate. Interest payments on Perpetual Capital Securities that rank pari passu with Preference Shares are deductible for Dutch tax purposes, subject of course to other interest deduction limitation rules.
