The Court of Justice of the European Union (CJEU) issued a decision on 3 April 2025, concluding that the benefits of national participation exemptions can be denied under the general anti-avoidance rule (GAAR) in the EU Parent-Subsidiary Directive (PSD).
For an arrangement to be considered “abusive” for purposes of the PSD, there must be (i) a “non-genuine arrangement” (ii) whose principal (or one of its principal) purposes is to obtain a tax benefit that defeats the object and purpose of the PSD. The tax benefit should be evaluated based on the overall tax position of the arrangement in the relevant EU member state. In addition, the characterisation of an arrangement as non-genuine requires an analysis of all facts and circumstances of the arrangement, not only those that existed at the time of the dividend distribution. The CJEU’s findings in this case are the first involving the relationship between the GAAR and the participation exemption and they complement existing case law on the abuse of withholding tax exemptions (e.g. “Danish cases,” T Danmark and Y Denmark, cases C-116/16 and C-117/16).
The case before the CJEU involved a Lithuanian electronic gaming company, Nordcurrent, which set up a subsidiary in the UK (UK Sub) in 2009 for the sale and distribution of games. UK Sub acted as an intermediary between Nordcurrent and various advertising and game distribution platforms. In 2018 and 2019, Nordcurrent received dividends from UK Sub. Under Lithuania’s implementation of article 4 of the PSD, the dividends, in principle, should be exempt at the level of Nordcurrent. The Lithuanian tax authorities deemed the UK Sub to be a non-genuine arrangement created to obtain a tax advantage and denied the application of the participation exemption to the dividends Nordcurrent received from UK Sub. Relying on the GAAR provisions, the authorities based their decision on the fact that the UK Sub had limited personnel and tangible assets and no office space of its own. Nordcurrent appealed the tax authorities’ decision to the Lithuanian Tax Dispute Commission, which ultimately resulted in a referral to the CJEU.
The Tax Dispute Commission disagreed with the tax authorities, ruling that the UK Sub is not a conduit company, as defined in the Danish cases, and that it received income from activities it carried out in its own name. Further, the commission determined that the UK Sub fulfilled a real function and carried out real activities from the time of its establishment in 2009 until 2018 and 2019. The commission concluded that the UK Sub did not directly obtain a tax benefit because the profits in the UK were subject to a higher tax rate than they would have been in Lithuania.
The Lithuanian Tax Dispute Commission asked the CJEU to rule on three questions:
The CJEU ruled as follows:
The CJEU’s decision that EU member state participation exemptions can be disallowed under the PSD GAAR is the first time the court has addressed the relationship between the GAAR and the participation exemption and the decision may have an adverse impact on EU taxpayers with EU subsidiaries in certain circumstances. However, the court’s clarification about the need to take into account all facts and circumstances regarding a non-genuine arrangement and a “(main) purpose of obtaining a tax benefit” offers useful guidance for taxpayers. It clarifies that the corporate tax burden in the member state in question could be a relevant factor and prevents EU tax authorities from disqualifying structures solely because they lack valid commercial reasons or substance. MNE groups should monitor developments and review the position of their investments in EU-based subsidiaries.
Lisanne Rijff
BDO in Netherlands
For an arrangement to be considered “abusive” for purposes of the PSD, there must be (i) a “non-genuine arrangement” (ii) whose principal (or one of its principal) purposes is to obtain a tax benefit that defeats the object and purpose of the PSD. The tax benefit should be evaluated based on the overall tax position of the arrangement in the relevant EU member state. In addition, the characterisation of an arrangement as non-genuine requires an analysis of all facts and circumstances of the arrangement, not only those that existed at the time of the dividend distribution. The CJEU’s findings in this case are the first involving the relationship between the GAAR and the participation exemption and they complement existing case law on the abuse of withholding tax exemptions (e.g. “Danish cases,” T Danmark and Y Denmark, cases C-116/16 and C-117/16).
Facts of the case
The case before the CJEU involved a Lithuanian electronic gaming company, Nordcurrent, which set up a subsidiary in the UK (UK Sub) in 2009 for the sale and distribution of games. UK Sub acted as an intermediary between Nordcurrent and various advertising and game distribution platforms. In 2018 and 2019, Nordcurrent received dividends from UK Sub. Under Lithuania’s implementation of article 4 of the PSD, the dividends, in principle, should be exempt at the level of Nordcurrent. The Lithuanian tax authorities deemed the UK Sub to be a non-genuine arrangement created to obtain a tax advantage and denied the application of the participation exemption to the dividends Nordcurrent received from UK Sub. Relying on the GAAR provisions, the authorities based their decision on the fact that the UK Sub had limited personnel and tangible assets and no office space of its own. Nordcurrent appealed the tax authorities’ decision to the Lithuanian Tax Dispute Commission, which ultimately resulted in a referral to the CJEU. The Tax Dispute Commission disagreed with the tax authorities, ruling that the UK Sub is not a conduit company, as defined in the Danish cases, and that it received income from activities it carried out in its own name. Further, the commission determined that the UK Sub fulfilled a real function and carried out real activities from the time of its establishment in 2009 until 2018 and 2019. The commission concluded that the UK Sub did not directly obtain a tax benefit because the profits in the UK were subject to a higher tax rate than they would have been in Lithuania.
Questions for the CJEU
The Lithuanian Tax Dispute Commission asked the CJEU to rule on three questions:
- Is it consistent with the objectives of the PSD GAAR to deny a national participation exemption if the parent company receives dividends from a profit-generating subsidiary that is not merely a conduit company, but can still be considered a non-genuine arrangement due to its structure?
- Should only the facts at the time of the dividend payment be considered when determining whether there is a non-genuine arrangement, even though initially there were commercial reasons for establishing the subsidiary?
- Is the characterisation of an arrangement as non-genuine under the PSD GAAR in itself sufficient to conclude that by benefiting from a participation exemption, a parent company obtained a tax advantage?
CJEU Decision
The CJEU ruled as follows:
- As long as the two elements of abuse are present, EU member states can deny the benefits of a national participation exemption in EU situations if a subsidiary is deemed to be a non-genuine arrangement, even if the subsidiary is not a conduit company and its dividends derive from activities carried out in its name.
- Characterisation of an arrangement as non-genuine under the PSD GAAR cannot be based solely on the facts and circumstances present at the time of the dividend distribution or when the arrangement was set up; all relevant facts and circumstances must be taken into account. The CJEU noted that an arrangement initially set up for valid commercial reasons could later be deemed non-genuine due to changed circumstances, and vice versa.
- Characterisation of a subsidiary as a non-genuine arrangement in and of itself is not sufficient to deny the participation exemption under the PSD GAAR. The two conditions must be satisfied to constitute abuse. The CJEU also noted that the existence of a tax benefit must be assessed taking into account the overall tax position of the arrangement in the member state in question. The overall position would be relevant as there may be structures that achieve a reduction in the tax burden, but this would not necessarily be connected to an abuse of rights in relation to benefits granted under the PSD.
BDO Insight
The CJEU’s decision that EU member state participation exemptions can be disallowed under the PSD GAAR is the first time the court has addressed the relationship between the GAAR and the participation exemption and the decision may have an adverse impact on EU taxpayers with EU subsidiaries in certain circumstances. However, the court’s clarification about the need to take into account all facts and circumstances regarding a non-genuine arrangement and a “(main) purpose of obtaining a tax benefit” offers useful guidance for taxpayers. It clarifies that the corporate tax burden in the member state in question could be a relevant factor and prevents EU tax authorities from disqualifying structures solely because they lack valid commercial reasons or substance. MNE groups should monitor developments and review the position of their investments in EU-based subsidiaries.Lisanne Rijff
BDO in Netherlands