NL Tax Alert: Supreme Court rules that termination payments on certain interest rate swaps must be activated and amortized
Today, the Supreme Court ruled on the valuation of interest rate swaps related to floating interest loan payables:
- The general rule for a hedged position is a coherent valuation (same as a long-term fixed interest loan). This means that it is not allowed to devalue the swap during the term in case the interest decreases.
- If the swap and debt positions are settled during the term, it is possible to deduct the loss from a redemption payment on the swap at once.
- If, however, the swap-payable position is effectively continued by refinancing into a fixed rate loan with a lower interest rate, a redemption payment must be activated and amortized over the term.
- An effective continuation is not present in case the original interest rate swap is subject to a margin call risk (forcing to pay in liquidities as security). In that case, the redemption amount may be deducted at once (regardless of the motive of refinancing, the counterparty and whether the refinancing results in a profit or loss).
The Supreme Court ruling underlines the economic approach prevailing in Dutch sound business principles.