On 1 March 2013, the Dutch Supreme Court (Hoge Raad der Nederlanden) gave its decision in X v. Tax Administration on the taxing rights with respect to a devaluated debt-claim under the Belgium - Netherlands Income and Capital Tax Treaty (1970) (the Treaty). Details of the case are summarized below.
(a) Facts. The taxpayer was a resident of Belgium. He was the sole shareholder of a Dutch BV and he granted various loans to that company. In 2001, he devalued the claims but that devaluation was as such not in issue (because it was certain that part of the loans would not be repaid). The taxpayer did not opt to be taxed as a resident taxpayer in the Netherlands.
(b) Issue was whether the devaluation could lead to a loss relief in the Netherlands.
(c) Legal background. Article 13(4) of the Treaty provided that gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3, shall be taxable only in the state of which the alienator is a resident.
(d) Decision. The Supreme Court decided that the residence state (i.e. Belgium) has taxing rights with respect to the devaluated debt-claim based on article 13(4) of the Treaty. The Court noted that this provision was equivalent to the current article 13(5) of the OECD Model (2010) (until 2003, numbered as article 13(4) of the Model). Referring to the related Commentary, the Court considered that the term "gains from the alienation of any property" does not preclude a treaty state from including in the taxation of taxable gains a gain increase which did not result from a transfer. The Court held that the devaluation of a debt-claim must be treated as transfer within the meaning of article 13(4) of the treaty, which means that the residence state (Belgium) has taxing rights.
Finally, the Court rejected the taxpayer's argument that the loss must be accepted based on the Schumacker doctrine because, in the case at hand, no tax advantage was rejected which is linked to the ability to pay.