CJEU on the Anti-Abuse Clause of the Parent-Subsidiary Directive
By judgment of 15 October 2026 in Case C-203/25, the Court of Justice of the European Union (CJEU) commented on the interpretation of Directive 2011/96/EU on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States. The central issue was the circumstances under which the withholding tax exemption for dividends may be refused where the tax administration assumes the existence of an improper arrangement.
The proceedings were based on a request for a preliminary ruling from the Commission for Tax Disputes under the Government of the Republic of Lithuania. The dispute concerned a Lithuanian company and the Lithuanian tax administration. The subject matter of the dispute was the taxation of dividends distributed to a parent company registered in Cyprus.
The decision concerns in particular Article 1(2) and (3) and Article 5 of Directive 2011/96/EU as amended by Directive 2015/121/EU. The CJEU addressed the EU-law anti-abuse clause, the concept of an improper arrangement, the significance of a chain of transactions, the beneficial owner of the dividends and the principle of proportionality.
Background to the Main Proceedings
Dividend Distributions to the Cypriot Parent Company
The Lithuanian company NEO GROUP UAB considered itself entitled to distribute dividends to its Cypriot parent company Retal Industries Ltd. without withholding tax being deducted. According to the findings in the main proceedings, the shares in NEO have been held 100% by the Cypriot company Retal Industries Ltd. since 10 August 2005. The facts on which the CJEU based its decision remain decisive.
In 2016 and 2017, Retal received dividends from NEO amounting to EUR 15,000,000. In addition, another Lithuanian company, Retal Lithuania UAB, in which Retal likewise held all the shares, distributed dividends amounting to EUR 13,485,032. The dividends paid to Retal therefore totalled EUR 28,485,032.
NEO based the non-deduction of withholding tax on Article 34(2) of the Lithuanian Law on Corporate Income Tax. Under that provision, dividends paid by a Lithuanian company to a foreign entity are not taxed if certain participation and holding-period requirements are met. According to the information on national law, the general Lithuanian withholding tax rate on dividends paid to foreign entities is 15 percent.
Position of the Lithuanian Tax Administration
Following a tax audit for the years 2016 and 2017, the Lithuanian tax administration issued a decision dated 30 October 2024. In essence, it took the view that there had been a chain of transactions at the end of which a natural person stood as the beneficial owner of the dividends distributed by the Lithuanian companies.
In the tax administration’s view, this was an arrangement aimed at obtaining a tax advantage. That advantage consisted in the circumvention of corporate income tax on the dividends paid to Retal. In doing so, the administration relied on the Lithuanian anti-abuse provision by which Article 1(2) and (3) of Directive 2011/96/EU was transposed.
As a result, the tax administration assessed additional corporate income tax against NEO in the amount of EUR 2,250,000 plus default interest and also imposed a fine. NEO challenged that decision before the Lithuanian Commission for Tax Disputes.
Legal Framework of the Parent-Subsidiary Directive
Purpose of the Withholding Tax Exemption
Directive 2011/96/EU pursues the objective of exempting dividends and other profit distributions from subsidiaries to parent companies in other Member States from withholding taxes. At the same time, double taxation of that income at the level of the parent company is to be avoided. This is intended to facilitate the grouping together of companies from different Member States within the European Union.
Article 5 of the Directive provides that profits distributed by a subsidiary to its parent company are exempt from withholding tax. This is subject to the companies concerned meeting the requirements laid down in the Directive. Under Article 3(1) of the Directive, a parent company is, in particular, a company of a Member State which holds a share of at least 10 percent in the capital of a company of another Member State.
Anti-Abuse Measures under Article 1(2) and (3)
The Directive also contains an EU-law anti-abuse clause. Under Article 1(2) of the Directive, the benefits of the Directive are not granted if, having regard to all relevant facts and circumstances, there is a non-genuine arrangement or a non-genuine series of arrangements. It is also required that the main purpose or one of the main purposes be to obtain a tax advantage that defeats the object or purpose of the Directive.
Article 1(3) specifies when an arrangement is non-genuine. Accordingly, an arrangement or series of arrangements is regarded as non-genuine to the extent that it is not put into place for valid commercial reasons which reflect economic reality. An arrangement may comprise more than one step or part.
Directive 2015/121/EU, which inserted the anti-abuse clause, emphasises that tax administrations should carry out an objective analysis of all relevant facts and circumstances. At the same time, anti-abuse rules are to be applied proportionately.
The Six Questions Referred by the Lithuanian Court
The referring body submitted a total of six questions to the CJEU. They concerned the scope of the anti-abuse clause in the Parent-Subsidiary Directive in the case of a multi-tier cross-border structure.
In essence, the questions concerned the following points:
- whether the withholding tax exemption may also be refused where the parent company is genuinely engaged in economic activity and does not constitute a mere conduit company,
- what significance similar or matching amounts within a chain of transactions have,
- whether transactions outside the Member State of the distributing subsidiary may also be taken into account,
- whether the tax advantage may be relevant at every level of the chain of transactions,
- whether onward transfer over a longer period precludes a finding of a non-genuine arrangement,
- and whether the tax administration must examine whether the distributing subsidiary had or could have had knowledge of the chain of transactions.
Advocate General Kokott had, in her Opinion, also discussed the possibility of an abusive arrangement even where the parent company in another EU Member State is genuinely engaged in economic activity and does not appear as a purely artificial structure. The Opinion referred in this respect to the CJEU judgment of 3 April 2025 in Case C-228/24, Nordcurrent group, which likewise concerned the anti-abuse clause of the Parent-Subsidiary Directive.
No Limitation of the Anti-Abuse Clause to Conduit Companies
Genuine Economic Activity Does Not Preclude Abuse
The CJEU made clear that Article 1(2) and (3) of Directive 2011/96/EU does not, in principle, preclude a national practice under which dividends are subject to withholding tax despite the parent company’s economic activity. The condition is that that parent company is involved in a chain of transactions, all or some of which are non-genuine, and that the dividends are ultimately passed on to the natural or legal person who directly or indirectly controls all the companies involved.
The CJEU thus did not limit the anti-abuse clause to cases in which a mere conduit company is interposed. It pointed out that its earlier case law on conduit entities merely constitutes an example of the application of the general prohibition of abuse of rights. It does not follow from this that other arrangements would be excluded from review.
A comprehensive assessment remains decisive. According to the decision, an isolated examination of the economic activity of the immediate parent company is not sufficient if further relevant circumstances may indicate a non-genuine arrangement.
Role of the Double Taxation Convention
The Lithuania-Cyprus double taxation convention was also addressed in the main proceedings. It governs the taxation of dividends between Lithuania and Cyprus and contains provisions on residence and beneficial ownership. Under the national legal framework reproduced in the judgment, the source State may, under certain conditions, levy no tax or only limited tax.
However, the CJEU pointed out that it does not decide whether a Member State has breached a bilateral double taxation convention. It takes such a convention into account only to the extent that the referring court presents it as part of the legal framework and to the extent that this is useful for the interpretation of EU law. At the same time, the CJEU made clear that a double taxation convention must not lead to a result contrary to EU law.
Indications of a Non-Genuine Arrangement
Similar or Identical Amounts within the Chain of Transactions
With regard to the second and fifth questions, the CJEU stated that similar or even identical amounts within a chain of transactions may be relevant indications. This concerns in particular the case where the amounts transferred correspond to the dividends distributed by the subsidiary to the parent company.
According to the decision, however, such matches do not give rise to any general presumption of abuse. The tax administration must continue to carry out an objective analysis of all relevant facts and circumstances. Only on that basis can it be assessed whether the conditions for an abusive practice are met.
Onward Transfer over a Longer Period
The CJEU also made clear that an onward transfer does not necessarily have to take place within a short time in order to be relevant as an indication. Cash movements occurring at regular intervals and over a certain period within a corporate group may also be included in the assessment.
According to the decision, a non-genuine arrangement does not lose its potential abusive nature merely because its effects arise over a longer period. The tax administration may therefore not confine its examination to a short period after the dividend distribution if further events may contribute to the assessment of possible abuse.
Consideration of Foreign Transactions
Overall Assessment Across Borders
The third and fourth questions concerned the scope of the examination where the transactions regarded as non-genuine did not take place in the Member State of the distributing subsidiary. The CJEU held that Article 1(2) and (3) of Directive 2011/96/EU, read in the light of the principle of proportionality, does not preclude such a national practice.
By its very nature, the Parent-Subsidiary Directive concerns cross-border situations. An abuse review therefore cannot be limited to transactions in the source State. The tax administration of the Member State of the distributing subsidiary may also take account of transactions carried out outside that State and by natural or legal persons not resident there.
Tax Advantage Need Not Arise at the Level of the Dividend Payer
According to the decision, it is irrelevant at which level of the chain of transactions the tax advantage is obtained. The advantage need not arise precisely at the subsidiary that originally distributed the dividends. It may also arise for a person who controls the corporate group and stands at the end of the chain of transactions.
The CJEU justified this on the ground that unjustified advantages could otherwise not be effectively eliminated. What matters is whether there is a tax advantage that defeats the object or purpose of the Directive and whether the further conditions of the anti-abuse clause are met.
Subjective Element in the Abuse Review
Knowledge of the Distributing Subsidiary Not Necessarily Required
The sixth question concerned the knowledge of the distributing subsidiary. The CJEU held that the tax administration is not necessarily required to examine whether that subsidiary knew or could have known that the distribution was part of a non-genuine chain of transactions.
A subjective element nevertheless remains necessary. According to settled case law, an abusive practice requires, in addition to objective circumstances, an intention to obtain an advantage provided for by EU law by artificially creating the conditions for obtaining it.
According to the CJEU, it is sufficient if that subjective element is established in relation to at least one of the group companies involved in the chain of transactions or in relation to the natural person who obtains the advantage at the end of the chain of transactions. Knowledge on the part of the distributing subsidiary itself is not required, provided that the stated conditions are otherwise established.
Outcome of the CJEU Decision
The CJEU summarised its decision in four key statements. Article 1(2) and (3) of Directive 2011/96/EU does not, in principle, preclude withholding taxation where a parent company is economically active but is involved in a chain of non-genuine transactions at the end of which dividends are passed on to the controlling person.
Similar or identical amounts within a chain of transactions, as well as transfers over a longer period, may be relevant indications. However, they do not replace the objective overall analysis of all relevant facts and circumstances.
The tax administration may also take account of transactions outside the Member State of the distributing company. In addition, it is irrelevant at which level of the chain the tax advantage arises.
Finally, the tax administration is not required to prove that the distributing subsidiary itself had or could have had knowledge of the chain of transactions. It is sufficient for knowledge of the chain of transactions to be established in relation to at least one participating group company or in relation to the natural person who obtains the advantage at the end of the chain.
Significance for Cross-Border Participation Structures
The decision makes clear that the withholding tax exemption under the Parent-Subsidiary Directive is not secured solely because the immediate parent company is economically active. The CJEU requires the entire structure to be considered where the tax administration assumes the existence of a non-genuine arrangement.
For corporate groups with cross-border dividend flows, it is particularly significant that subsequent events, foreign transactions and the use of the distributed amounts may also be included in the assessment. The burden of proof for the existence of an abusive practice remains with the tax authority seeking to refuse the exemption. However, the authority is not required to produce evidence that is in fact not accessible to it.
The decision follows the CJEU’s previous case law on the general prohibition of abuse and on the Parent-Subsidiary Directive. It does not extend that case law to create a blanket presumption of abuse, but it emphasises the scope of the objective overall assessment.
Frequently Asked Questions
CJEU C-203/25 Parent-Subsidiary Directive: When can the withholding tax exemption be refused?
The exemption may be refused if, having regard to all relevant facts and circumstances, there is a non-genuine arrangement or series of arrangements and the main purpose or one of the main purposes consists in obtaining a tax advantage contrary to the Directive.
CJEU on Directive 2011/96/EU: Is economic activity by the parent company sufficient to rule out abuse?
No. According to the CJEU, genuine economic activity by the parent company does not, in principle, preclude application of the anti-abuse clause if it is involved in a chain of transactions all or some steps of which are non-genuine.
What practical consequences does CJEU C-203/25 have for companies with cross-border dividends?
Companies must expect tax administrations to include not only the immediate distribution, but also subsequent events, foreign transactions and the economic use of the dividends in an overall assessment.
Assessment by MTR Legal Rechtsanwälte
The judgment of the CJEU in Case C-203/25 is of considerable importance for cross-border participation structures and intra-group dividend distributions. It shows that withholding tax exemptions under the Parent-Subsidiary Directive remain a central instrument for avoiding economic double taxation, but that their use is subject to the EU-law abuse review.
In tax-law matters concerning international participation structures, dividend taxation and the application of anti-abuse provisions, MTR Legal Rechtsanwälte supports companies, investors and high-net-worth individuals with advice tailored to the individual case. Further information can be found at Legal advice in tax law.
