Tax Disputes Commission refers dividend relief to Court of Justice
photo source - Court of Justice of the European Union
The Court of Justice of the European Union (CJEU) has accepted a request from the Tax Disputes Commission for a preliminary ruling on income tax calculated in accordance with the provisions of Directive[1] aimed at preventing abuse of the dividend relief. This is the sixth time that the Commission has referred a case to the ECJ. The Commission acquired this right when it was recognised as a judicial authority by the Court of Justice in its judgment of 21 October 2010 in Case C-385/09.
The tax dispute referred to the ECJ arose from a decision in which the tax administrator concluded that a Lithuanian company should have calculated income tax (hereinafter referred to as IT) on dividends received from a subsidiary established in another EU country. It was found that, during the period under review, the subsidiary company met the criteria of a sham entity established without valid commercial reasons. According to the tax administrator, the Lithuanian company that received dividends from the subsidiary company obtained a tax advantage, i.e. violated Article 35(2) of the Income Tax Act and, by taking advantage of the tax relief (tax exemption) provided for in that article, avoided paying IT on the dividends received.
In examining the dispute, the Commission noted that the ECJ had provided interpretative guidelines in previous cases on actions constituting abuse of rights and related evidence when untaxed amounts are paid through intermediate entities. However, the ECJ has not yet ruled on the application of the anti-abuse rule in Directive 2011/96/EU[2] in cases where the application of the dividend tax exemption at the level of the recipient of the dividends, i.e. the parent company, is questioned. A clarification by the ECJ would help to ensure consistent and uniform application of the Directive in different Member States.
The Commission seeks to clarify whether national practices are consistent with the objectives of the anti-abuse rule in Directive 2011/96/EU and whether they are contrary to the subject matter and purpose of Directive 2011/96/EU.
In view of the different treatment of tax benefits, the Commission questioned whether the rule in the Directive could be interpreted as meaning that, where a parent company receives dividends from a subsidiary established in another Member State which is recognised as a constituent entity, such recognition alone is sufficient to establish that the parent company, having applied the dividend exemption, has received a tax advantage that is contrary to the subject matter and purpose of the Directive. Furthermore, the Commission questioned whether the fact that the profits earned by the subsidiary were subject to tax in the Member State of establishment was relevant in negating the existence of a tax advantage contrary to the object or purpose of the Directive. At the same time, the Commission questioned whether national practice where the Member State of the parent company refuses to apply the dividend relief on the grounds that the subsidiary is considered to be a mere vehicle, when the profits distributed as dividends in the subsidiary were generated from the distribution of electronic products created by the parent company. This issue is important because, if the subsidiary were eliminated, there would be no dividends at all. It is also important for the Commission to clarify whether, when recognizing a subsidiary established in another Member State as a separate entity, the determination of the separate entity can be made without assessing the circumstances related to the establishment and activities of the subsidiary prior to the period of dividend distribution.
The answers to these questions are necessary in order to resolve the tax dispute between the company and the central tax administrator, as it is the interpretation of the EU legal provisions under consideration that determines the validity of the taxation and the tax administrator's right to calculate the tax.
The Commission considers that referring the matter to the Court of Justice at the pre-litigation stage of the tax dispute is appropriate in order to ensure the expeditious resolution of tax disputes.
The Commission recalls that the provisions of Directive 2011/96/EU providing for the non-taxation of dividends received from abroad are implemented in Article 35(2) of the Income Tax Act. The relief applies if the dividends are received for shares, capital or other rights in foreign entities that are registered or otherwise organised in a European Economic Area country and whose profits are subject to CIT or an equivalent tax. According to Article 32(6) of the Income Tax Act, "the provisions on the non-taxation of dividends shall not apply to an entity or entities if their main purpose or one of their main purposes was to obtain a tax advantage that is contrary to Council Directive 2011/96/EU of 30 November 2011 The arrangement may involve more than one step or part. An arrangement or several arrangements are considered to be artificial to the extent that they were not established for valid commercial reasons. An arrangement may involve more than one step or part. An arrangement or a series of arrangements shall be considered to be artificial to the extent that they were not established for valid commercial reasons reflecting economic reality.
[1] The non-taxation of dividends is provided for in Council Directive 2011/96/EU of 30 November 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (Directive 2011/96/EU), which sets out the objective of exempting dividends and other profit distributions paid by subsidiaries to parent companies from withholding taxes and eliminating double taxation of such income at the level of the parent company (Recital 3).
[2] Article 1(2) and (3) of Directive 2011/96/EU provide that "2. Member States shall not grant the benefits of this Directive in respect of an arrangement or series of arrangements if the main purpose or one of the main purposes of the arrangement or series of arrangements was to obtain a tax advantage contrary to the object or purpose of this Directive, and are therefore, in the light of all relevant facts and circumstances, artificial. The anti-abuse rule of the Directive was introduced in order to prevent abuse of the Directive and to ensure that it is applied more consistently across Member States.
Last updated: 21-11-2025
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