No Deduction Allowed for Loss under Cross-Guarantee

International Transfer Pricing Journal, 2013 (Volume 20), No. 4 - Bernard Damsma and Krzysztof Łukosz

In its recent ruling, the Supreme Court of the Netherlands upheld the position of the Higher Court of Arnhem that a loss under a cross-guarantee agreement is not deductible because such a loss, according to the Supreme Court, is relative to an agreement that group companies entered into because of their corporate relationships. Specifically, the Supreme Court indicated that if:

–	a company jointly participates in a (third-party) credit arrangement with other group companies;
–	that company is jointly and severally liable for all the receivables that the creditor has on the other group companies under the credit arrangement; and
–	the recourse (of the company against the other group companies) that arises from such joint and several liability cannot be claimed until the full amount outstanding under the credit arrangement has been repaid (i.e. cross-guarantee-related claims are subordinated to banks’ claims),

then the acceptance of such joint and several liability is triggered by corporate relationships. Thus, the company’s credit loss resulting from the cross-guarantee is not deductible for corporate income tax purposes. This judgment has potentially far-reaching implications for intercompany guarantee arrangements.