Euro Tax Flash from KPMG's EU Tax Centre

On May 21, 2026, Advocate General Juliane Kokott of the Court of Justice of the European Union recommended that the Court find that a withholding tax exemption under the Parent-Subsidiary Directive may be denied, on an exceptional basis, even where the direct recipient of the dividends is the beneficial owner and carries out genuine economic activities, if the parent passes them on to the ultimate beneficiary through an artificial arrangement (case C-203/25).

The plaintiff is a Lithuanian entity wholly owned by a Cypriot parent company (HoldCo One). In 2016 and 2017, the parent company received dividends from the plaintiff and another Lithuanian entity. The plaintiff considered that the payments were exempt from dividend withholding tax under the local rules implementing the Parent-Subsidiary Directive (PSD). In February 2017, the shares in HoldCo One were sold by a Belize company – the grandparent of the Lithuanian plaintiff, to a newly set-up Cypriot entity (HoldCo Two). Despite these changes, the ultimate beneficial owner of the dividends (UBO), an individual not resident in Lithuania, who owned both the Belizean and Cypriot companies, remained unchanged.

In 2017 and 2018, HoldCo Two (the new grandparent of the Lithuania entity) granted loans and assigned receivables to the UBO. The combined amount of these loans and receivables was subsequently set off against the UBO’s claims against HoldCo Two. Over that period, the entity did not pay out any dividends to its shareholder (UBO).

Following a tax audit, the Lithuanian tax inspectorate concluded that the dividends paid by the Lithuanian entity to its immediate parent, HoldCo One, should not have benefited from the PSD exemption and were instead subject to the standard 15 percent withholding tax in Lithuania. The Lithuanian tax authorities did not challenge the beneficial owner status of HoldCo One. However, they argued that the transactions involving the dividends formed part of a non-genuine arrangement aimed at obtaining a tax advantage, thus triggering the application of the anti-abuse rule under the PSD, as transposed into Lithuanian law. In particular, the Lithuanian tax authorities concluded that economically the dividends were ultimately paid to the UBO, through a chain of artificial transactions.

Following an appeal raised by the taxpayer, the Lithuanian Tax Disputes Commission (Disputes Commission) acknowledged the rulings of the Court of Justice of the EU (CJEU) in previous jurisprudence commonly referred to as the “Danish cases”¹. Nonetheless, the Disputes Commission noted that facts in the case at hand are different compared to those in the Danish cases since the dividends were paid to an entity with genuine economic activity which, in the tax authorities’ view, participated in a chain of non-genuine transactions.

On this basis, the Disputes Commission expressed doubts about the interpretation of the anti-abuse provision² of the PSD and referred to the CJEU the following questions:

• Is it compatible with the PSD anti-abuse provision for a national tax practice to deny a withholding tax exemption on dividends paid to a genuine parent company established in another EU Member State, solely on the grounds that the payment is a part of a chain of non-genuine transactions?
• Can a chain of dividend transfers be presumed to be artificial or abusive based solely on the similarity of amounts involved at different stages of the transactions?
• Is it compatible with the PSD anti-abuse provision for a national tax practice to deny tax benefits on a cross-border dividend payment based on a chain of non-genuine transactions that occurred entirely after the dividend payment and in another EU Member State?
• Can the tax advantage be attributed to the plaintiff if the tax advantage was ultimately realized by another party – i.e., the ultimate beneficiary, through a chain of non-genuine transactions?
• Can the anti-abuse rule under the PSD apply if the dividends were passed over on a continuous basis – i.e., from one year to one month, instead of “very soon after their receipt” as mentioned in the Danish cases?
• What is the relevance of the plaintiff’s knowledge or intent to undertake non-genuine transactions when applying the anti-abuse rules under the PSD.

For more details, please refer to E-News Issue 213.

Existence of abuse despite beneficial ownership

The AG recalled that the anti-abuse provision in the PSD must be interpreted by considering the purpose and the objective of the Directive. The AG then noted that the PSD is designed based on a principle of neutrality, where profits within a corporate group are generally taxed only once when realized at the level of the subsidiary, while further intra-group distributions remain tax neutral. ​​To this end, the Directive requires, on the one hand, the Member State of residence of the parent company to exempt from corporation tax any profit distributions received (Article 4) and, on the other hand, prohibits the Member State of residence of the subsidiary from subjecting the distributed profits to withholding tax (Article 5). It is only when the parent company makes its "final" distribution to its shareholder, an individual, that the distributed profits are taxed as capital income. The AG noted that, however, the Directive does not regulate how that final distribution should be taxed by Member States.

The AG highlighted the CJEU’s settled case-law based on which abuse always exists under the PSD when the conditions for applying the Directive are met only in a purely formal manner solely to obtain the tax advantages granted by the Directive. In such cases, a person who does not qualify as a beneficiary under the Directive obtains the advantages conferred by it through a purely formal arrangement, which is not consistent with the purpose of the directive, as taxation does not correspond to real economic transactions. In the AG’s view, the essential element for establishing abuse lies in the criterion related to purpose, i.e., abuse occurs when a subsidiary or parent company is created or a distribution of profits is made solely as a formality.

A group of companies may be regarded as being an artificial arrangement where it is not set up for reasons that reflect economic reality, its structure is purely one of form and its principal objective or one of its principal objectives is to obtain a tax advantage running counter to the aim or purpose of the applicable tax law.

In this context, the Court has already held that a group of companies may be regarded as being an artificial arrangement within the meaning of the Parent-Subsidiary Directive where a "conduit company" is interposed between the company paying the dividends and the entity that is their beneficial owner with the result that payment of tax on the dividends is avoided. The fact that a company acts as a conduit may be established where its sole activity is the receipt of dividends and their transmission to the beneficial owner or to other conduit companies. Indications of an artificial arrangement may also arise where a company does not have the economic power to dispose of the dividends received, in particular because it is contractually obliged to distribute them to a third party. From an economic perspective, this company is therefore not the true beneficiary of the distribution (the "beneficial owner"), but an entity to which the assets are ultimately simply transferred.

The presence of such a conduit company is, however, not an imperative condition for being able to establish the existence of a non-genuine arrangement. The assessment of whether the conditions are met from an economic perspective must take into account all relevant circumstances occurring before or after the profit distribution in question, including, where applicable, those arising in another Member State. Nevertheless, according to the AG, the assessment must remain based on the WHT exemption conditions set out in the PSD.

In the AG’s view, conversely – and consistent with the principles of legal certainty and legitimate expectations⁴, if the PSD conditions are genuinely met in economic terms, this generally indicates that there is no abuse. However, according to the AG, in exceptional circumstances, an abuse within the meaning of Article 1(2) of the Directive may exist even where the arrangement between the subsidiary and the parent company is, in isolation, carried out in line with economic reality. This can be the case if the overall transaction is abusive and results in the granting of a benefit that is contrary to the Directive. However, a direct link must exist between the abusive part of the arrangement and the granting of a tax advantage under EU law, i.e., the distribution from the subsidiary to the parent company that benefits from the tax advantages provided by the PSD is carried out from the outset with the aim of obtaining a tax advantage contrary to the purpose of the Directive. In the AG's view, this is the case, for example, where the PSD is exploited to generate income for the ultimate beneficiary that is unlawfully exempt from taxation in their state of residence - e.g., because the distribution is concealed from that state.

Abuse of national tax law

Building from the conclusions outlined above, the AG distinguished between the abuse of the Directive and the abuse of a Member State’s tax system in the context of the distribution to the ultimate beneficiary. In the case of the latter, the AG takes the view that an abuse of the tax law of a Member States in the context of the distribution to the final beneficiary does constitute, as a rule, a basis for presuming abuse of the Directive. According to the AG, its is for that Member State to counteract domestic tax abuse of its own domestic rules. If that Member State fails to do so, that does not give rise to a subsidiary competence of another Member States to, in this case, deny tax exemptions granted under EU law.

The AG then held that, by contrast, the elements of an overall abusive scheme appear to be present where the distribution from the subsidiary to its parent company is manifestly carried out for the purpose of avoiding taxation in the Member State of the ultimate beneficiary. In this context, the AG reiterated the arguments above on the necessity of a direct link between the abusive part of the arrangement and the granting of a tax advantage under EU law and held that the PSD is not intended to protect such situations.

As regards the case at hand, the AG noted that it is for the Disputes Commission to assess the existence of such an overall scheme with an abusive purpose, taking into account all the circumstances of the case. In the AG’s view, for such a scheme to exist, the distribution from the Lithuanian entity to HoldCo One would have had to be carried out with the aim of enabling the ultimate beneficiary to evade taxes in Cyprus. The AG took the view that the facts do not appear to support a finding of tax evasion.

In the alternative, if the CJEU were to find the existence of an overall arrangement with an abusive purpose even where there is an abuse of the tax legislation of another Member State, , the AG noted that there may nevertheless be valid economic reasons for relocating the parent company from Belize to Cyprus – for example, greater acceptance by banks and business partners, more favorable contractual terms, or the fact that distributions to an offshore jurisdiction may give rise to tax disadvantages. If that business decision is recognized, the fact that the UBO financed the acquisition cannot, in and of itself, be regarded as creating a tax advantage. Had the newly incorporated Cypriot entity borrowed from a bank instead, repayment of that loan would likewise not have been taxable.

Significance of dividend redistribution and temporal proximity in the abuse analysis

The AG acknowledged that, based on the Danish cases, dividends (almost) fully redistributed shortly after receipt to entities not meeting the Directive’s conditions constitute an indicator of abuse. However, in the AG’s view, the mere onward transfer of dividends does not, in and of itself, constitute a non-genuine arrangement, regardless of whether the amounts redistributed are largely identical or of the order of the transactions. Similarly, the AG held that close temporal proximity between receipt and redistribution of dividends is neither a sufficient nor a necessary condition for establishing abuse.

The relevance of the distributing subsidiary’s knowledge in assessing the alleged abusive arrangement

The AG held that, in a chain of transactions, it is not necessary to prove that the distributing subsidiary knew of, or was negligently unaware of, a non-genuine arrangement. Instead, the key question is whether the arrangement is intended to obtain a tax advantage that is contrary to the purpose of the Directive, assessed in light of all circumstances, including subjective elements such as knowledge or intent. In this regard, the decisive factor is primarily the knowledge of the person who decides to implement the arrangement.

The AG further noted that the decision to distribute dividends is taken by the majority shareholders, whose knowledge is therefore decisive. In the specific case of a multi-tier group where the ultimate beneficiary indirectly owns all entities involved, the AG considered that the sole (indirect) shareholder is the person whose knowledge is determinative – and that it is irrelevant whether the subsidiary knew or should have known about the broader chain of transactions.

Should you have any queries, please do not hesitate to contact KPMG’s EU Tax Centre or, as appropriate, your local KPMG tax advisor.

The AG opinion in in the case at hand is generally consistent with settled CJEU case-law on the concept of abuse under EU law and builds from the CJEU’s interpretation of the anti-abuse provision in the PSD in case C-228/24.

A significant takeaway is the AG’s comments on the need for a direct link between the abusive part of the arrangement and the granting of a tax advantage under EU law, in order for the Member State of the paying subsidiary to be allowed to deny EU-law benefits under the PSD. In this context, the AG rejected an approach under which alleged abuse of domestic rules in the state of the ultimate beneficiary could automatically justify denying the withholding tax exemption under the PSD. The AG further argued that if the anti-abuse provision in the PSD were interpreted in this way, so as to allow each Member State to deny Directive benefits based on alleged abuse occurring in another Member State, it would create significant uncertainty for cross-border corporate groups. This could lead to multiple states refusing tax advantages for the same reason, thereby undermining legal certainty and discouraging cross-border structures. As a result, in the AG’s view, this interpretation would weaken the Directive’s goal of facilitating corporate groups and freedom of establishment within the EU.

The AG also clarified that, whilst onward payments of dividends in comparable amounts and shortly after receipt, constitute an indication of abuse, such elements do not automatically establish abuse. The decisive factor is the knowledge and intention of the person who decides to implement the arrangement.

It is important to note that AG opinions are not binding on the CJEU and it remains to be seen whether the CJEU will follow the AG’s recommendations.