CJEU clarifies anti-abuse rule in the PSD regarding participation exemption
CJEU clarifies anti-abuse rule in the PSD regarding participation exemption
On April 3, 2025, the CJEU ruled that national participation exemptions can be denied under the general anti-avoidance rule (GAAR) of the Parent Subsidiary Directive (PSD) in EU-situations in cases of abuse (Nordcurrent Group, case C-228/24). For an arrangement to be considered ‘abusive’, it requires both (i) a ‘non-genuine arrangement’; (ii) which has been set up with the (main) purpose of obtaining a tax advantage that defeats the object of purpose of the PSD. The tax advantage should be evaluated based on the overall tax position of the arrangement in the Member State. Further, the qualification 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 concerning the relationship between the GAAR and the participation exemption. They complement existing case law on abuse of withholding tax exemptions (e.g. ‘Danish cases’ T Danmark and Y Denmark, cases C-116/16 and C-117/16).
The Lithuanian Tax Dispute Commission found that 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, it considered that the UK Sub fulfilled a real function and carried out real activities from its establishment in 2009 until 2018 and 2019. The Lithuanian Tax Dispute Commission determined that the UK subsidiary did not directly obtain a tax advantage because the profits in the UK were subject to a higher tax rate than they would have been in Lithuania.
However, the CJEU's clarification on considering all facts and circumstances regarding a ‘non-genuine arrangement’ and a ‘(main) purpose of obtaining a tax advantage’ under the GAAR of the PSD is beneficial for EU taxpayers. It clarifies that the corporate tax burden in the Member State in question could be a relevant factor. It prevents EU tax authorities from disqualifying structures solely due to lacking valid commercial reasons or substance.
A past comment from the European Commission may have led to the belief that the national participation exemptions were not impacted by the introduction of the GAAR in de PSD. The question now is what effect the latest CJEU decision will have on Member States, such as the Netherlands, that followed this European Commission comment. MNE groups are recommended to monitor developments in this area and review the position of their investments in EU based subsidiaries. BDO can assist with such a review. We will keep you informed on any developments regarding this topic.
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Facts of the case
In 2018 and 2019, the Lithuania-based gaming company Nordcurrent received dividends from its subsidiary in the United Kingdom (UK Sub). This dividend would be exempt at the level of Nordcurrent based on the national participation exemption, which is an implementation of article 4 PSD. The Lithuanian tax authorities deemed the UK Sub to be a ‘non-genuine arrangement’, created to obtain a tax advantage and therefore refused the application of the participation exemption to dividends received from the UK Sub. This decision was based on the facts that the UK Sub had few staff, limited material resources and no office space of its own. The refusal of the participation exemption was based on the GAAR of the PSD. Nordcurrent contested the decision of the Lithuanian tax authorities before the Lithuanian Tax Dispute Commission, leading to a referral to the CJEU.The Lithuanian Tax Dispute Commission found that 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, it considered that the UK Sub fulfilled a real function and carried out real activities from its establishment in 2009 until 2018 and 2019. The Lithuanian Tax Dispute Commission determined that the UK subsidiary did not directly obtain a tax advantage 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 answer the following three questions:- Is it consistent with the objectives of the GAAR of the PSD to refuse 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 if there is a ‘non-genuine arrangement’, even though there were commercial reasons for establishing the subsidiary initially?
- Is the qualification of an arrangement as ‘non-genuine’ under the GAAR of the PSD alone sufficient to conclude that, by benefiting from a participation exemption, a parent company obtained a ‘tax advantage’?
CJEU’s judgment
The CJEU rules as follows:- As long as the two elements of abuse are present, EU Member States can deny national participation exemptions in EU situations if a subsidiary is deemed an ‘non-genuine arrangement’, even if it is not a conduit company and its dividends come from activities in its name.
- Assessing if an arrangement is ‘non-genuine’ under the GAAR of the PSD involves examining all relevant facts and circumstances, not just those at the time of dividend distribution or arrangement formation. 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.
- A subsidiary being qualified as a ‘non-genuine arrangement’ alone is not enough to deny the participation exemption under the GAAR of the PSD. Two conditions must be met to constitute abuse: (i) a non-genuine arrangement; (ii) which has been set up with the (main) purpose of obtaining a tax advantage that defeats the object of purpose of the PSD. The CJEU further noted that the existence of a tax advantage must be assessed considering 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 tax burden, but this would not necessarily be connected to an abuse of rights in relation to benefits granted under the PSD.
Impact of the judgment
The CJEU’s findings in this case are the first concerning the relationship between the GAAR and the participation exemption and may have an adverse impact for EU taxpayers with EU subsidiaries in certain specific circumstances.However, the CJEU's clarification on considering all facts and circumstances regarding a ‘non-genuine arrangement’ and a ‘(main) purpose of obtaining a tax advantage’ under the GAAR of the PSD is beneficial for EU taxpayers. It clarifies that the corporate tax burden in the Member State in question could be a relevant factor. It prevents EU tax authorities from disqualifying structures solely due to lacking valid commercial reasons or substance.
A past comment from the European Commission may have led to the belief that the national participation exemptions were not impacted by the introduction of the GAAR in de PSD. The question now is what effect the latest CJEU decision will have on Member States, such as the Netherlands, that followed this European Commission comment. MNE groups are recommended to monitor developments in this area and review the position of their investments in EU based subsidiaries. BDO can assist with such a review. We will keep you informed on any developments regarding this topic.
Contact your BDO tax advisor
Contact