Euro Tax Flash from KPMG's EU Tax Centre

CJEU – Lithuania – Anti-abuse provisions – Dividends – Tax Exemption – Parent-Subsidiary Directive – Classification of the subsidiary as a non-genuine arrangement – Artificial arrangements – Steps of an arrangement – Tax advantage 

On April 3, 2025, the Court of Justice of the European Union (CJEU or the Court) rendered its decision in case C-228/24, on the interpretation of the anti-abuse provision in the Parent-Subsidiary Directive (the PSD or the Directive).

The Court ruled that the anti-abuse provision does not prevent a national practice whereby a parent company is denied a corporate income tax exemption on dividends received from a subsidiary classified as a non-genuine arrangement, even if the subsidiary is not a conduit company and the distributed profits arise from activities conducted in its own name, provided that elements of an abusive practice are present.

The CJEU did hold that the anti-abuse provision prohibits a national practice that considers only the situation on the dividend payment dates when classifying a subsidiary established in another Member State as a non-genuine arrangement, particularly when the subsidiary was established for valid commercial reasons and its genuine activities prior to those dates are not called into question.

Lastly, the Court confirmed that the mere classification of a subsidiary as a non-genuine arrangement does not automatically imply that the parent company receiving an exemption from corporate income tax on dividends received from that subsidiary is deemed to have obtained a tax advantage that undermines the object and purpose of the PSD.

In 2018 and 2019, the plaintiff, a Lithuanian company active in the video games industry, received dividends from its UK subsidiary (UK Sub). ​During this period, the UK subsidiary served as an intermediary between the plaintiff and various advertising and game distribution platforms. The UK Sub's activities ceased in 2019, once the plaintiff was able to secure direct agreements with these platforms, leading to its liquidation in 2021. Following a tax inspection, the Lithuanian tax authorities denied the applicability of the dividend participation exemption under the PSD, on the grounds that the UK Sub was a non-genuine arrangement. The tax authorities based their conclusion on the following points:

• Lack of human resources: the tax authorities argued that the UK Sub did not have sufficient human resources to manage its operations. The Lithuanian authorities argued that, despite the high volume of game downloads, the UK Sub only employed one manager who also managed seven other companies.
• No physical premises and no real economic activity: the tax authorities took the view that the UK Sub did not engage in real economic activity during 2018 and 2019 in the UK. As such, the UK Sub was registered at an address shared by a large number of third-party companies, and lacked data on immovable property, fixed assets, websites, or email addresses used for its operations.
• Insufficient resources for operations: the tax authorities argued that given the large number of games, customers, sales channels, and high sales volumes, significant human resources (financial staff, data analysts, IT specialists) and material resources (premises, hardware, software) were required. The Lithuanian tax authorities noted that these resources were not available in the UK Sub.

The plaintiff challenged the tax authorities' assessment, arguing that the resources of the UK Sub were appropriate for its activity, specifically the distribution of electronic games. The plaintiff argued that physical premises were unnecessary and that a single manager was sufficient to oversee standard contracts for game distribution and advertising sales. Furthermore, the plaintiff emphasized that the UK Sub was established for legitimate commercial reasons and played a crucial role as an intermediary between the plaintiff and advertising and game distribution platforms, facilitating the creation of a sales channel. The plaintiff further notes that, at that time, direct distribution of electronic games from Lithuania was not possible. During the years in question, the business structure evolved so that eventually the plaintiff retained all rights to the games, while the UK Sub was solely responsible for their distribution. By the end of 2019, the subsidiary had ceased game distribution and advertising purchases, leading to the decision to wind it up. Additionally, the plaintiff argued that the overall tax burden in the UK was higher than it would have been in Lithuania.

The Lithuanian Tax Disputes Commission expressed doubts on the interpretation of the anti-abuse provision set out Article 1 (2) and (3)¹ of the PSD and referred the case to the CJEU. For more details, please refer to E-news Issue 196.

Can a subsidiary that is not a conduit company constitute a non-genuine arrangement?

The first question referred to the CJEU examined whether the anti-abuse provision in the PSD precludes a national practice that denies a parent company a tax exemption on dividends received from a subsidiary in another Member State, on the grounds that the subsidiary constitutes a non-genuine arrangement – even when the subsidiary is not a conduit company and the distributed profits arise from activities carried out in its own name.

The CJEU recalled that the anti-abuse provision in the PSD must be interpreted by considering not only its wording but also the objectives of the Directive. Regarding its wording, the Court highlighted that the anti-abuse provision is not limited to specific situations or types of arrangements. Instead, when determining the existence of a non-genuine arrangement, an overall assessment of all relevant facts and circumstances is required. In the Court’s view, a narrower interpretation would not be in line with the objective of preventing misuse of the PSD.

Referring to its settled case-law, particularly the joined cases C116/16 and C-117/16² (the so-called “Danish cases”), the CJEU recalled that a corporate structure may be deemed as being an artificial arrangement, where, inter alia, a conduit entity is interposed between the company paying dividends and the group company which is the beneficial owner of such dividends. However, the Court clarified that it cannot be assumed that the anti-abuse provision applies solely to arrangements involving conduit companies. Instead, in the CJEU’s view, the reference to ‘inter alia’ in prior judgments indicates that conduit entities are merely one example of artificial arrangements, rather than the sole criterion for determining abuse³. In line with the CJEU’s decisions in the Danish cases, it will be up to the referring court to assess whether the elements of abuse are present in the case at hand.

The Court therefore concluded that the anti-abuse provision in the PSD allows a national practice such as the disputed one, provided that the constituent elements of an abusive practice are present.

Timing of the assessment of a non-genuine arrangement

The second question referred to the CJEU focused on whether it is consistent with the objectives of the PSD to assess the classification of a subsidiary as a non-genuine arrangement solely based on its situation at the time of the dividend payment, even if the subsidiary was originally established for legitimate commercial reasons.

The Court acknowledged that, in the case at hand, the findings of the Lithuanian tax authorities with regards to the existence of a non-genuine arrangement were based exclusively on the circumstances at the time the tax-exempt dividends were paid – i.e., 2018 and 2019. Neither the initial set-up of the subsidiary, nor the genuineness of its activities before 2018 was called into question.

The CJEU recalled that, under Article 1(2) of the PSD, an arrangement may consist of multiple steps. In the Court’s view, each step or component of an arrangement could independently be considered non-genuine and, therefore, could be covered by the anti-abuse provision. Quoting its settled case-law in the Danish cases, the CJEU held that when an arrangement consists of multiple steps, all relevant facts and circumstances must be taken into account to determine whether any of its steps are non-genuine. Furthermore, the Court clarified that nothing in the anti-abuse provision suggests that the examination of relevant facts and circumstances should be restricted to the specific moment a particular step of the arrangement takes place.

The CJEU concluded that, whilst national authorities may consider the circumstances at the time of the dividend payment when evaluating whether a subsidiary constitutes a non-genuine arrangement, this factor alone is insufficient to reach such a determination.

Determining the existence of a tax advantage

The third question examined whether the mere classification of a subsidiary as a non-genuine arrangement is sufficient to conclude that the parent company, which received tax-exempt dividends, has obtained a tax advantage contrary to the objective of the PSD.

The Court recalled its settled case-law in the Danish cases, under which an abusive situation can be evidenced in the combined presence of:

• objective circumstances, in which the purpose of the EU Directives is circumvented, despite a formal observance of the conditions required for their application; and
• subjective elements – the existence of a wholly artificial arrangement, as well as an intention to obtain a (tax) advantage.

The Court also emphasized that the subjective elements above represent two cumulative conditions. It is therefore not enough to establish that an arrangement was not put into place for valid commercial reasons reflecting economic reality – it is also necessary to establish that the primary purpose of the arrangement was to obtain a tax benefit.

The CJEU then noted that the PSD does not define the term ‘tax advantage’. The Court rejected a narrow interpretation under which the tax advantage covered by the Directive must be limited to the tax exemption provided by the PSD. Instead, the CJEU took the view that the ‘tax advantage’ should be interpreted in a broader sense, by taking into consideration the overall tax effect resulting from the arrangement. In the case at hand, the fact that the profits generated by the UK Sub were subject in the UK to a corporate income tax higher than the one that would have applied in Lithuania represents a relevant factor that should also be assessed when determining whether the main purpose or one of the main purposes of the arrangement involving the UK Sub was to generate a tax advantage.

Consequently, the Court concluded that merely classifying a subsidiary as a non-genuine arrangement is not sufficient to determine that the parent company, which enjoyed the benefit of receiving dividends from that subsidiary that were exempt from corporate income tax, has obtained a tax advantage that undermines the object and the purpose of the Directive.

The CJEU’s ruling in case C-228/24 is consistent with its settled case-law on the concept of abuse under EU law. The decision marks one of the first opportunities since the Danish cases for the Court to provide clarity on the interpretation of the anti-abuse provision in the PSD. Note that, at the time of the facts in the Danish cases, Denmark had not yet implemented the anti-abuse provisions of the Directive, which were adopted in 2015. The Court nevertheless ruled in those joint cases that a general principle of anti-abuse is inherent in EU law and it prohibits abusive practices related to the EU Directives, even in the absence of domestic or other anti-abuse provisions.

The decision in case C-228/24 is also valuable for the clarification of the concept of ‘tax advantage’ within the meaning of the anti-abuse clause in the PSD, i.e., the existence of a tax advantage should be determined by assessing the overall tax impact of the structure. It is noteworthy that the positions of various Member States are reflected in the observations submitted in relation to this case. In particular, the decision reveals that not only Lithuania, but also France and Belgium, argued that the concept of ‘tax advantage’ under the anti-abuse provision in the PSD should be interpreted narrowly – specifically, as only referring to the tax benefits provided under the PSD.

Should you have any queries, please do not hesitate to contact KPMG’s EU Tax Centre or, as appropriate, your local KPMG tax advisor.