Judgment summary
This is a preliminary ruling given by the Court of Justice of the European Union on a reference from the Mokestinių ginčų komisija prie Lietuvos Respublikos Vyriausybės (Tax Disputes Commission under the Government of the Republic of Lithuania), made by decision of 26 February 2025 and received at the Court on 17 March 2025 (referral details per case heading).
The case concerns the interpretation of Article 1(2) and (3) and Article 5 of Directive 2011/96/EU (the Parent-Subsidiary Directive), as amended by Directive 2015/121, and the principle of proportionality, in proceedings between 'NEO GROUP' UAB (NEO), a Lithuanian company, and the Lithuanian State Tax Inspectorate, concerning the taxation of dividends distributed by NEO to its Cypriot parent company, Retal Industries Limited (Retal) (paras 1-2).
The referring court asked six questions concerning whether the anti-abuse provision of the Directive could be applied to deny the withholding tax exemption on dividends in circumstances involving a chain of transactions, some steps of which were said not to be genuine, culminating in a benefit to a natural person who controlled the whole corporate group (paras 41-42).
Background
Since 10 August 2008 and up to the date of the request for a preliminary ruling, Retal has held 100% of NEO's capital. Retal also holds 100% of the capital of another Lithuanian company, 'Retal Lithuania' UAB (Retal LT) (paras 18-19).
In 2016 and 2017, Retal received dividends from NEO, amounting to EUR 15 000 000, and from Retal LT, amounting to EUR 13 485 032, a total of EUR 28 485 032 (para 20). NEO considered that the dividends it distributed to Retal were exempt from withholding tax under Article 34(2) of the Lithuanian Law on corporate income tax (para 21).
Following a tax inspection for 2016 and 2017, the Inspectorate adopted a decision on 30 October 2024 finding that a chain of transactions had resulted in PG, a natural person resident in Cyprus, becoming the 'ultimate beneficiary' of the dividends distributed by NEO and Retal LT to Retal, without application of the withholding tax provided for in Article 34(2) of the Law on corporate income tax. The Inspectorate found this chain of transactions constituted an arrangement caught by the Lithuanian anti-abuse provision (Article 32(6) of the Law on corporate income tax) (para 22).
According to the Inspectorate, Clendon Holdings Inc (Belize), which controlled 100% of Retal's capital, sold all Retal's shares to PPH Polymer Products Holding Ltd (PPH), a Cypriot company incorporated less than three months earlier, for EUR 310 400 000. Payment was deferred to 2027 and the resulting debt was assigned by Clendon Holdings to PG, who was already the beneficial owner of both Clendon Holdings and PPH, creating PPH's debt to PG. PG then received significant sums from PPH, in the form of loans and assignments of rights, the source of which was the dividends distributed by the Lithuanian companies, used to extinguish PPH's debt to PG (paras 29-30).
By the decision at issue, the Inspectorate issued a corporate tax adjustment against NEO of EUR 2 250 000, with default interest, and imposed a penalty on it (para 23). NEO challenged that decision before the referring court, the Tax Disputes Commission (para 24).
Core dispute
NEO argued that Retal, as a company carrying on an actual economic activity, is the beneficial owner of the dividends within the meaning of the LT-CY Convention, interpreted in light of the OECD Model Convention, and that the dividends should therefore benefit from the withholding tax exemption under Article 34(2) of the Law on corporate income tax (paras 27-31).
The Inspectorate did not dispute that Retal carried on an actual economic activity, but considered that the chain of transactions involving the sale of Retal's shares, the deferred purchase price, the assignment of debts, and the use of the dividends to extinguish debts owed to PG, constituted a non-genuine arrangement caught by the Lithuanian anti-abuse provision implementing Article 1(2) and (3) of the Parent-Subsidiary Directive (paras 22, 28-30).
The referring court asked the Court of Justice six questions, in essence: (1) whether the anti-abuse provision can apply to a genuine, economically active parent company that is not a conduit but participates in a chain including non-genuine transactions; (2) whether correspondence between amounts transferred at different stages of the chain can found a presumption of a 'chain of dividend transfer'; (3) whether the anti-abuse provision and the principle of proportionality permit application of the rule by the source State where the relevant transactions occurred in another Member State between non-residents; (4) whether a tax advantage obtained at any stage of the chain, including by the ultimate beneficiary rather than the subsidiary itself, suffices; (5) whether abuse can be found where dividends were used over a continuous period rather than passed on immediately; and (6) whether the anti-abuse provision can be applied to the dividend-paying subsidiary without assessing whether it knew or could have known of the non-genuine transactions within the group (paras 41).
Court findings
On the first question, the Court held that the anti-abuse provision of the Parent-Subsidiary Directive applies across the board to any type of non-genuine arrangement, and is not confined to arrangements involving conduit companies (paras 52-56, 61). The fact that the first transaction in a multi-step arrangement is a dividend distribution to a parent company that carries on an actual economic activity does not, by itself, exclude a finding of abuse; all relevant facts and circumstances, including share sales, loan agreements and debt assignments, must be assessed overall (paras 62-63). The Court also noted that conventions between Member States based on the OECD Model Convention, such as the LT-CY Convention, cannot be relied upon to achieve a result contrary to EU law (paras 67-69).
On the second and fifth questions, the Court held that the similarity or identity of amounts transferred at different stages of a chain of transactions, and the fact that transfers occurred continuously over a period rather than within a short time after the dividend distribution, both constitute relevant indications of a non-genuine arrangement, but do not give rise to a general presumption of abuse; an objective analysis of all relevant facts and circumstances remains required (paras 73-78).
On the third and fourth questions, the Court held that the anti-abuse provision, read with the principle of proportionality, does not preclude the source Member State from levying withholding tax even where the non-genuine transactions took place outside that State, between non-resident persons, and irrespective of the stage in the chain at which the tax advantage arose, including where the advantage is obtained by the ultimate controlling natural person rather than the subsidiary itself (paras 81-89).
On the sixth question, the Court held that the condition relating to the subjective element of abuse need not be established with regard to the dividend-paying subsidiary itself; it suffices that it is demonstrated with regard to at least one of the companies in the group participating in the chain of transactions, or the natural person who benefits from the advantage (paras 91-98).
Outcome
The Court ruled, in answer to all six referred questions (grouped into four rulings), that Article 1(2) and (3) of Directive 2011/96/EU, as amended by Directive 2015/121: (1) does not preclude, in principle, a national practice of levying withholding tax on dividends distributed by a resident subsidiary to its non-resident parent company where that parent participates in a chain of transactions, all or some of which are not genuine, resulting in the transfer of the dividends to the person controlling all the companies involved, even where the parent company carries on an actual economic activity and is not a conduit company; (2) treats as relevant indications of a non-genuine arrangement both the correspondence of transferred amounts across the chain and the continuous, rather than immediate, transfer of dividends, without this creating a general presumption, so that an objective analysis of all facts and circumstances remains necessary; (3) does not preclude, reading the anti-abuse provision with the principle of proportionality, a national practice of levying withholding tax where the non-genuine transactions occurred outside the source Member State among non-residents, irrespective of the stage at which the tax advantage was obtained; and (4) does not preclude levying withholding tax on the dividend-paying subsidiary without establishing that subsidiary's own awareness of the non-genuine chain, provided it is shown that at least one of the group companies participating in the chain, or the natural person benefiting from the advantage, was or could have been aware of the chain of transactions.
The decision on costs in the main proceedings was left to the referring court (para 100).
Major issues / areas of contention
- Whether the anti-abuse provision of Article 1(2) and (3) of the Parent-Subsidiary Directive can apply to a parent company that genuinely carries on an economic activity and is not a conduit, but participates in a chain of transactions that is partly or wholly non-genuine.
- Whether correspondence or similarity between amounts of dividends distributed and amounts subsequently transferred in a chain of transactions can be used as an indication, or presumption, of a 'chain of dividend transfer'.
- Whether the anti-abuse provision, read with the principle of proportionality, permits the source Member State to levy withholding tax where the relevant non-genuine transactions took place outside that State, between non-residents.
- Whether a tax advantage obtained by the ultimate controlling natural person, rather than by the dividend-paying subsidiary itself, and obtained at any stage of the chain of transactions, suffices to deny the exemption.
- Whether abuse can be established where dividends were passed on and used over a continuous period, rather than passed on immediately after receipt.
- Whether the anti-abuse provision can be applied to a dividend-paying subsidiary without the tax authority establishing that the subsidiary knew or could have known of the existence of non-genuine transactions elsewhere in the group.
- The relevance of a bilateral double taxation convention (the LT-CY Convention) and the concept of 'beneficial owner' under that convention and the OECD Model Convention, in the context of EU anti-abuse rules.