Clarifications from the application of the Parent-Subsidiary Directive's anti-abuse provision 

A recent judgment of the European Union Court of Justice (the "CJEU") of 3 April 2025, Case C-228/24, addressed critical question surrounding the application of anti-abuse rules under the Parent-Subsidiary Directive (the "Anti-Abuse Provision") providing further clarification on its interpretation in a case dealing with a national participation exemption.

Facts of the case

The case arose from a dispute between Nordcurrent Group UAB (the "Parent Company"), a Lithuanian company active in the creation and distribution of games, and the Lithuanian tax authority (the "Inspectorate") regarding the denial of tax exemptions on dividends received from its UK subsidiary. The Inspectorate argued that Nordcurrent’s UK subsidiary lacked genuine economic activity during the 2018-2019 period, citing its use of virtual office services and absence of dedicated staff in the UK during those years.

In particular, the Inspectorate considered that the UK subsidiary was a "non-genuine arrangement" at the time of the receipt of dividends because it did not have human resources, the only employee of that subsidiary was its director, who at the same time managed seven other companies. Further, according to the Inspectorate, the UK subsidiary had neither its own place of business nor any tangible assets in the UK. In fact, a large number of undertakings, namely 97,110, were registered at the same address as the UK subsidiary, which was provided through a company registration service in that country.

The Parent Company contested the Inspectorate's decision, asserting that its UK subsidiary—operational from 2009 until its 2021 liquidation—served legitimate commercial purposes in game distribution and marketing. The Parent Company highlighted that the UK subsidiary’s structure was initially necessary to access international platforms. However, following a 2017 agreement with a major stakeholder, The Parent Company restructured operations, transferring all development and financial risks of the UK Subsidiary to the The Parent Company leading to its wind-up in 2021.

It was in this context that the Lithuanian court decided to suspend its ruling and submit three preliminary questions to the CJEU concerning the application of the Anti-Abuse Provision.

The CJEU's criteria

In answering the questions referred, the CJEU sets out the following interpretative criteria on the application of the Anti-Abuse Provision:

• The Anti-Abuse Provision may also apply in relation to dividends distributed by a company considered to be a "non-genuine arrangement" where that company is not even considered as a conduit company. A conduit company is merely one type of "non-genuine arrangement". Therefore, in assessing the existence of a "non genuine arrangement", a holistic analysis of valid business reasons that reflect an economic reality should be considered.
• In analysing whether or not a company is a "non-genuine arrangement", the analysis should not only take into account the situation existing at the time of payment of the dividends but should also take into account all facts and circumstances, including those prior to the payment of the dividends. The analysis shall therefore not be strictly limited to the fact and circumstances available at the time of the distribution.
• In order for the Anti-Abuse Provision to apply, it is not sufficient that a "non-genuine arrangement" exists, but there must also be an intention to achieve a tax advantage contrary to the object or purpose of the Parent-Subsidiary Directive. In this context, the CJEU clarifies that the existence of a "non-genuine arrangement" does not automatically induce that a tax advantage is obtained as a consequence of the dividend exemption under the Parent-Subsidiary Directive. The Anti-Abuse Provision requires the demonstration of cumulative conditions: (i) a "non-genuine arrangement"; and (ii) the obtention of a tax advantage contrary to the objective of the Parent-Subsidiary Directive. In the appreciation of the existence of a tax advantage, a holistic approach should be considered to appreciate the overall tax benefit of implementing such arrangement in said Member State. In this respect and in the present case, the CJEU states that the fact that the profits made by the UK subsidiary were taxed at a higher rate than in the Member State of the Parent Company is a relevant factor, among others, in assessing whether there was such an intention to obtain a tax advantage.

Final remarks

This judgment provides further clarification for further cross-border structuring and dividend repatriation strategy across the EU. This CJEU judgment rules on the Anti-Abuse Provision from the perspective of the parent company receiving the dividends and provides valuable guidance to companies with cross-border subsidiaries in the EU and which want to benefit from the participation exemption regime. It demonstrates that the Anti-Abuse Provision is not an instrument that automatically denies the benefits of the Parent-Subsidiary Directive, but a tool that requires a holistic analysis of the facts and grounds underlying the establishment and the functioning of the subsidiary.

How can we help?

The Ashurst tax partners are available to assist you in establishing a dedicated cross-border structuring platform and an adequate cash repatriation strategy for your EU platform. Please feel free to reach out to us for further insights.