EU: CJEU Advocate General opinion on application of anti-abuse rule of parent-subsidiary directive

The Court of Justice of the European Union (CJEU) on May 21, 2026, published the opinion of its Advocate General (AG) that the withholding tax exemption under the parent-subsidiary directive (PSD) may be denied even when the direct recipient of the dividends is the beneficial owner and carries out genuine economic activities, if the recipient passes the dividends on to the ultimate beneficiary through an artificial arrangement.

Summary

A Lithuanian entity paid dividends to its Cypriot parent company and treated the dividends as exempt from dividend withholding tax under local rules implementing the PSD. Following a tax audit, the Lithuanian tax authorities applied the PSD’s anti-abuse rule and imposed the standard 15% withholding tax on the dividends on the grounds that the dividends were economically transferred to the ultimate beneficial owner through a chain of artificial transactions. The Lithuanian Tax Disputes Commission subsequently referred several questions to the CJEU.

The AG’s opinion found that if dividend recipient meets the basic beneficial ownership test under the PSD, this generally indicates that there is no abuse. However, in exceptional circumstances, an abuse may exist if the overall transaction was carried out from the outset with the aim of obtaining a tax benefit that is contrary to the PSD. The AG noted that the mere onward transfer of dividends does not, in and of itself, constitute a non-genuine arrangement, and close temporal proximity between receipt and redistribution of dividends is neither a sufficient nor a necessary condition for establishing abuse. In addition, in a chain of transactions, it is not necessary to prove that the distributing subsidiary knew of a non-genuine arrangement, as the decisive factor is primarily the knowledge of the person who decides to implement the arrangement.

Read a May 2026 report prepared by KPMG’s EU Tax Centre