Anti-abuse clause under the Parent-Subsidiary Directive: the CJEU clarifies the conditions for denying dividend exemption

by Anna Miotto

Abstract

In the decision of 3 April 2025, case C-228/2024, the EU Court of Justice (CJEU) provided significant clarifications regarding the scope of application of the anti-abuse clause of Directive 2011/96/EU (the so-called "Parent-Subsidiary Directive"), stating that, for the purposes of disapplying the dividend exemption regime provided by the Directive, the mere classification of a subsidiary as a non-genuine arrangement is not sufficient, as it is also necessary to demonstrate the existence of an abusive practice aimed at obtaining a tax advantage contrary to the purpose of EU law.

The Case

The case concerned a dispute between a company established in Lithuania and the Lithuanian State Tax Inspectorate, which had denied the company the corporate tax exemption on dividends received in 2018 and 2019 from its UK-based subsidiary, classifying the latter as a “non-genuine arrangement” pursuant to anti-abuse legislation.

According to the Inspectorate, the subsidiary lacked a genuine economic presence in the UK: it did not have an operational headquarters, tangible assets, or adequate staff (except for a director who was also active in other companies). In fact, the development and distribution of video games were carried out directly by the Lithuanian parent company.

The latter contested this conclusion, arguing that its subsidiary had a real economic function (i.e., acting as intermediary with distribution platforms) and pointing out that it did not benefit from any tax advantage, as the UK corporate tax rate (24%) was higher than that of Lithuania (15%).

The national court referred three questions to the CJEU, concerning:

  1. whether the anti-abuse clause applies to a non-interposed, operational subsidiary;
  2. whether the abuse assessment must be limited to the situation at the time of the dividend distribution, or may also consider the circumstances surrounding the establishment of the subsidiary;
  3. whether the mere classification of the subsidiary as a “non-genuine arrangement” is sufficient to deny the tax benefit provided for in the Parent-Subsidiary Directive.

The Decision

As regards to the first question, the Court held that the anti-abuse clause set forth in Article 1(2) and(3) of the Parent-Subsidiary Directive does not preclude Member States from denying the dividend exemption to a parent company even where the subsidiary is not a “mere conduit” company, and the profits derive from the subsidiary’s own activities. However, that exclusion is permissible only where the essential elements of an abusive practice are met, namely when the structure is non-genuine and lacks valid economic reasons reflecting the substance of the transaction.

As to the second question, the Court clarified that it is not consistent with the purpose of the anti-abuse clause to limit the assessment solely to the circumstances at the time of dividend distribution. Rather, it is necessary to consider all the relevant facts and circumstances, including any developments occurring after the incorporation of the subsidiary, to determine whether a given phase of the arrangement is to be regarded as artificial.

In other words, even an initially genuine arrangement may become artificial over time if it is maintained despite a change in the original circumstances. Consequently, an administrative practice that restricts the assessment to the date of dividend distribution is incompatible with EU law.

With respect to the third question, the Court clarified that two cumulative conditions must be met in order to deny the tax exemption provided by the Directive: on the one hand, the existence of a non-genuine arrangement, that is a lack of valid economic reasons and real economic substance; on the other hand, the main purpose (or one of the main purposes) of the artificial arrangement must be to obtain a tax advantage contrary to the purpose of the Directive.

It follows that the mere absence of economic substance is not sufficient to establish an abuse of rights: there must also be a subjective intention to obtain an undue tax advantage. According to the Court, that advantage cannot consist merely in the dividend exemption as provided for in the Directive but must involve a tax saving considering the differences in tax rates between the Member States of the parent and subsidiary companies.

The decision is part of a consolidated line of case law  concerning abuse of law in taxation and represents a further step in defining the delicate balance between the right of establishment and the need to counteract abusive practices.

From an operational perspective, the principles laid down by the CJEU require EU corporate groups to: properly document the economic and commercial reasons underlying the establishment of foreign subsidiaries; ensure that subsidiaries have an effective economic substance, in terms of human resources, material infrastructure, and operational autonomy; continuously monitor the adequacy of existing structures, also taking into account any changes in the original circumstances.