The Court of Justice ruled on a case brought by the Tax Disputes Commission regarding the assessment of artificial arrangements for the payment of dividends
On April 3, 2025, the Court of Justice of the European Union (hereinafter referred to as the Court of Justice, CJEU) announced its decision in case C-228/24 UAB Nordcurrent Group (hereinafter referred to as Nordcurrent) versus the State Tax Inspectorate, in which it examined a request for a preliminary ruling submitted by the Tax Disputes Commission (hereinafter referred to as the Commission).
This ECJ ruling established certain guidelines on how to interpret the anti-abuse rule aimed at preventing abuse of the dividend tax exemption[1]. In its ruling, the ECJ provided guidance for the first time on the application of Directive 2011/96/EU in cases where the taxation of dividends at the level of the recipient of the dividends – the parent company – is disputed. The ECJ's explanations, which have become binding on all EU Member States, are relevant for the assessment of situations involving dividend payments within a group of companies or the application of the participation exemption rule when entities with characteristics of an artificial arrangement are identified.
The new clarification will provide more clarity on the possible assessment of situations arising in practice, not only for courts and tax administrators, but also for companies dealing with dividend payments. The guidelines set out in the decision will help to ensure consistent and uniform application of the directive throughout the EU, i.e. its provisions will have to be taken into account not only by courts when making decisions, but also by tax administrators when applying legal norms.
The tax dispute referred to the CJEU arose from a decision in which the tax administrator concluded that a Lithuanian company (the applicant) had to calculate income tax on dividends received from a subsidiary established in another EU country. In the contested decision, the tax administrator stated that, during the period under review, the subsidiary company met the criteria of a sham entity established for non-commercial reasons.
In pursuit of its primary objective of examining the complaint properly and objectively and adopting a lawful and well-founded decision, the Commission referred the matter to the CJEU in order to ascertain whether the national practice was consistent with the objectives of the anti-abuse rule and whether it is contrary to the subject matter and purpose of Directive 2011/96/EU. The Commission's referral was explained in more detail in the Commission's information note https://mgk.lrv.lt/lt/naujienos/mokestiniu-gincu-komisija-kreipesi-i-teisingumo-teisma-del-dividendu-lengvatos/.
In its judgment, the ECJ takes a consistent position that the fictitious nature of an arrangement must be determined on the basis of all relevant facts and circumstances, and that such an arrangement is characterized by the absence of valid commercial reasons reflecting economic reality. The ECJ does not assess the facts in its judgments and cannot determine whether there is abuse in a particular case.
The Court provided the following answers to the questions:
1. It is not prohibited for a Member State to apply a national practice whereby a parent company is not exempt from income tax on dividends received from a subsidiary established in another Member State on the grounds that the subsidiary is a fictitious entity, even though it is not an intermediate company, provided that there are elements of abuse and that the profits distributed as dividends were generated by activities carried out on behalf of that same subsidiary.
2. A national practice which, in recognizing a subsidiary established in another Member State as a sham entity, takes into account only the situation existing during the periods in which dividends were paid, even though the establishment of that subsidiary is based on valid commercial reasons and the reality of its activities prior to those periods is not disputed.
3. Where a parent company has received dividends from a subsidiary recognized as a sham entity, such recognition alone is not sufficient to establish that the parent company, by applying the dividend tax exemption, obtained a tax advantage contrary to the object or purpose of Directive 2011/96, as amended.
[1] 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, as amended by Council Directive (EU) 2015/121 of 27 January 2015. Council Directive (EU) 2015/121 of 27 January 2015, Articles 1(2) and 1(3) lay down anti-abuse rules.
Source of the photo used in the information report: "Court of Justice of the European Union".
Last updated: 20-11-2025
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