EU Court clarifies dividend-exemption abuse beyond conduit companies

The anti-abuse amendment

Council Directive 2011/96/EU is the Parent-Subsidiary Directive. Article 1 of Council Directive (EU) 2015/121 replaced its Article 1(2) with paragraphs (2)–(4). The amendment requires both a non-genuine arrangement and a main purpose of securing a tax advantage contrary to the Directive’s purpose. Commercial reasons must reflect economic reality. Recital 8 permits scrutiny of individual non-genuine steps without prejudicing genuine parts.^[2]

The case concerned Lithuanian dividends paid to a Cypriot parent. The Court interpreted Articles 1(2), 1(3) and 5 of Directive 2011/96/EU; the national body must assess the facts.^[1]

Assessing the wider chain

A parent’s actual business activity does not itself prevent refusal of the exemption where it participates in a non-genuine chain. Similar transferred amounts and repeated payments may indicate abuse, but cannot create a general presumption. The tax authority retains the burden of establishing abuse.^[1]

The overall examination can include foreign transactions and events before or after the dividend. The abusive advantage may arise at another stage, including for the individual controlling the group. It is unnecessary to establish that the subsidiary itself knew or could have known of the chain if that awareness or potential awareness is demonstrated for a participating group company or the benefiting individual.^[1]

For multinational groups, the practical implication is to assess the commercial rationale across the arrangement, rather than treat substance at the immediate parent as conclusive. The amendment’s proportionate, fact-sensitive approach preserves the distinction between non-genuine steps and genuine commercial operations.^[1][2]