Lithuania: Application of participation exemption, abuse provision (CJEU judgment)

The Court of Justice of the European Union (CJEU) issued a judgment providing clarity on the application of the participation exemption and the anti-abuse provision in the Parent-Subsidiary Directive. The CJEU held that it is in line with EU law for a member state to refuse the participation exemption if the subsidiary is an artificial arrangement whose principal objective or one of its principal objectives is to obtain a tax benefit that undermines the purpose of the directive. 

The case identifying information is: Nordcurrent (case C‑228/24)

Summary

In 2018 and 2019 the Lithuanian parent company received dividends from its subsidiary established in the United Kingdom (UK). Lithuania had a participation exemption for these dividends, as prescribed by the Parent-Subsidiary Directive. The Lithuanian tax authorities refused the exemption because they believed that the subsidiary was an artificial arrangement due to the fact that the UK subsidiary only had a small workforce, limited material resources, and no office space of its own. The participation exemption was also refused pursuant to an anti-abuse provision in the Parent-Subsidiary Directive. 

The Lithuanian court noted that:

• The UK subsidiary was not a conduit company as defined by the CJEU in the Danish judgments.
• The UK subsidiary had received income from activities that it performed in its own name. 
• The UK subsidiary had fulfilled a genuine function and had performed genuine activities from its incorporation in 2009 through to the years 2018 and 2019 (the years in dispute).
• At first glance, the UK subsidiary did not immediately provide a tax benefit, because the profits were taxed at 25% in the UK, while those same profits would be taxed at 15% in Lithuania. 

Preliminary ruling request and CJEU answers

The Lithuanian court therefore requested a preliminary ruling from the CJEU. 

• Question: Is it in line with the Parent-Subsidiary Directive to refuse the participation exemption if the parent company receives dividends from a subsidiary that, although generating its own profits—and thus not being a purely “conduit company”—can nevertheless qualify as an abuse company due to the way it was set up?

Answer: The anti-abuse provision in the Parent-Subsidiary Directive allows a member state to not grant a participation exemption to a parent company for dividends received from a subsidiary in another member state if that subsidiary is an artificial arrangement. 

• Question: When assessing whether there is an artificial arrangement is it permissible to only look at the situation at the time of the dividend distributions, although genuine economic activities were being performed before those distributions?

Answer: For the purposes of the anti-abuse provision, one must not only look at the situation at the time of the dividend distribution. The assessment of abuse requires a thorough analysis of all the relevant facts and circumstances surrounding all the steps of the arrangements.

• Question: Is the qualification of the subsidiary as an “artificial arrangement” in and of itself sufficient to conclude that by applying the participation exemption the parent company enjoys a tax benefit that runs counter to the aim or purpose of the Parent-Subsidiary Directive?

Answer: Two elements must be demonstrated for there to be abuse of law: (1) the arrangement is artificial and (2) it was set up for the (principal) objective of obtaining a tax benefit that runs counter to the purpose of the directive.

The Lithuanian court must now decide on whether there actually was abuse in this case. It is not yet known how the Dutch Ministry of Finance will react to the CJEU judgment.

Read an April 2025 report prepared by KPMG’s EU Tax Centre

Read an April 2025 report prepared by the KPMG member firm in the Netherlands