On 3 April 2025, in the case of Nordcurrent Group UAB (C-228/24) ("Nordcurrent") the Court of Justice of the European Union (the "CJEU") provided a preliminary ruling on the interpretation of the anti-abuse provisions in Article 1(2) of the EU Parent-Subsidiary Directive (2011/96/EU) (the "Directive").
The case involved a Lithuanian parent company, Nordcurrent Group UAB (the "Parent Company") and its subsidiary resident in United Kingdom, Nordcurrent Ltd ("UK Subsidiary"). The Lithuanian Tax Authority (the "LTA") challenged the exemption from Lithuanian corporation tax in respect of dividends distributed to the Parent Company by the UK Subsidiary. In order to determine whether the UK Subsidiary was an abusive arrangement the LTA referred three questions to the CJEU for a preliminary ruling on the interpretation and application of the anti-abuse provisions in the Directive.
The Directive
Under the Directive, dividends and other profit distributions paid by subsidiary companies to their parent companies are exempt from withholding taxes and double taxation of such income at the level of the parent company.1 Article 1(2) of the Directive includes anti-abuse provisions that treat arrangements put in place for a main purpose of obtaining a tax advantage that defeats the object or purpose of the Directive as "not genuine having regard to all relevant facts and circumstances."2
Article 1(3) of the Directive states that a genuine arrangement is one that is "put into place for valid commercial reasons which reflect economic reality."
As of 1 January 2016, EU Member States were required to implement the general anti-abuse rule in their legislation with respect to the Directive. Under Lithuanian law, dividends are taxed at a 15 per cent. corporation tax rate with exceptions for dividends from entities within the European Economic Area where profits are subject to similar taxation.3
Background
The Parent Company, a Lithuanian video game development and publishing company established the UK Subsidiary in 2009. The decision to set up the UK Subsidiary was driven by market conditions which meant that the Parent Company had no opportunity to sell games directly from Lithuania. The UK Subsidiary acted as an intermediary between the Parent Company and various advertising and game distribution platforms. The UK Subsidiary generated revenue that was subject to corporation tax in the United Kingdom ("UK") at the rate of 24 per cent.
Over time, the Parent Company established direct contractual relationships with distributors itself limiting the need for the UK Subsidiary. By 2018, the UK Subsidiary transferred its functions and risks to the Parent Company, and became a letterbox company that no longer employed staff, maintained physical premises or generated independent economic activity. In 2018 and 2019, despite the UK Subsidiary's inactive status, the Parent Company continued to rely on the exemption from Lithuanian corporation tax in respect of the dividend payments received by the UK Subsidiary.
The LTA argued the UK Subsidiary should not be entitled to the dividend exemption for the period of 2018-2019 because the UK Subsidiary did not carry out substantial economic activities in the UK during this period making it a non-genuine arrangement for the purposes of the anti-abuse provisions.
The Parent Company argued the anti-abuse provisions did not apply. It was argued the UK Subsidiary was a genuine arrangement set up for valid commercial reasons and no tax advantage was achieved because the UK Subsidiary was paying a higher tax rate in the UK (24 per cent.) compared to Lithuania (15 per cent.).
The case was referred to the CJEU for a preliminary ruling.
The three questions
The following three questions were addressed by the CJEU:
- Whether the anti-abuse provisions in Article 1(2) of the Directive are limited to conduit companies?
- Does the qualification of an arrangement as 'non-genuine' take into account all the facts and circumstances of the case, or only those that existed at the time of the dividend distribution?
- If the UK Subsidiary was considered to be a non-genuine arrangement would that classification alone indicate a tax advantage was being sought by the Parent Company?
The CJEU's Preliminary Ruling
In response to the first question, the CJEU confirmed the anti-abuse provisions are not limited to specific situations or types of arrangements. The CJEU referred to the judgment in T Danmark and Y Denmark ("Denmark")4 and confirmed that the anti-abuse provisions were not limited to arrangements involving conduit companies. The CJEU held that a letterbox or front subsidiary could be regarded as having the characteristics of a wholly artificial arrangement.
In regard to the second question, the CJEU confirmed an arrangement would be 'non-genuine' if it was not put in place for valid commercial reasons which reflect economic reality. The CJEU emphasised that in order to determine whether an arrangement is in place for valid commercial reasons, all relevant facts and circumstances need to be taken into account. The CJEU ruled that the determination of abuse cannot be based solely on the status of the company at the time of dividend distribution. A subsidiary that had real substance and economic activity in the past cannot automatically be viewed as abusive merely because it later became inactive.
Regarding the third question, the CJEU followed the interpretation of the Denmark judgment and held that the qualification of a subsidiary as a non-genuine arrangement does not automatically establish the necessary tax avoidance purpose. In order to apply, the anti-abuse provisions require two conditions to be satisfied. Firstly, the existence of a non-genuine arrangement. Secondly, the arrangement must have been put into place with the main purpose or one of its main purposes being that of obtaining a tax advantage.
The CJEU clarified the meaning of 'tax advantage,' which is not defined in the Directive. The CJEU found that the tax advantage must not be assessed in isolation, and therefore it was necessary to take account of all the facts and circumstances. Accordingly, the CJEU concluded it was relevant that the profits made by the UK Subsidiary were subject to a higher tax rate in the UK than the rate of corporation tax which would have been applied in Lithuania. The classification of the UK Subsidiary's activities as being 'non-genuine' was therefore not sufficient by itself to meet all the requirements of determining that a tax advantage was present as a main purpose.
Impact
The UK Subsidiary had engaged in genuine commercial operations for nearly a decade and the subsequent dividend payments were not artificially engineered to exploit the Directive. Nordcurrent underscores the CJEU's commitment to a fact-sensitive approach in applying the exemption to the Directive. While the ruling affirms Member States' right to deny relief in abusive cases, it equally guards against arbitrary denial based on isolated facts of formal inactivity. For UK practitioners, the judgment reinforces familiar principles already embedded in domestic anti-avoidance frameworks and provides useful interpretive guidance in cross-border group structuring and tax governance.
Footnotes
1. Article 3 Council Directive 2011/96/EU.
2. Article 1(2) Council Directive 2011/96/EU.
3. Article 35 Lietuvos Respublikos pelno mokesčio įstatymas (Law of the Republic of Lithuania on corporation tax; 'the Law on corporation tax').
4. T Danmark and Y Denmark (C-116/16 and C-117.16, EU:C:2019:135).
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