The Tax Disputes Commission referred to the Court of Justice for a ruling on the practice of recognizing artificial arrangements
The Court of Justice of the European Union (hereinafter referred to as the CJEU) accepted for consideration a request from the Tax Disputes Commission under the Government of the Republic of Lithuania (hereinafter referred to as the Commission) for a preliminary ruling on EU Directive [1], which establishes rules for combating abuse.
This is the ninth time that the Commission has referred a case to the ECJ, becoming one of the most active institutions in this area in Lithuania in recent years. The Commission acquired this right when it was recognized as a judicial authority by the ECJ in Case No. C-385/09.
The tax dispute referred to the ECJ by the Commission arose from the tax administrator's conclusion that a company established in Lithuania had incorrectly calculated income tax (hereinafter referred to as IT) on dividends paid to a subsidiary operating in another EU country. It was concluded that the chain of transactions (where the shares of the parent company were sold to a newly established company in a third country shortly after its establishment in order to create a formal debt for the acquisition of the parent company's shares, when, as a result of these transactions, significant sums of money were paid to the ultimate beneficiary in the form of loans and transfers of rights, the source of which – dividends paid by Lithuanian companies) did not reflect economic reality and these transactions were carried out artificially, thus creating the appearance that dividends received from Lithuanian companies were used to cover these debts. Taking into account all the relevant facts and circumstances, it was found that tax benefits were sought, which is contrary to the general tax system of Directive 2011/96/EU, which applies to parent companies and subsidiaries in different Member States, and to its purpose and objective. According to the tax administrator, the company violated Article 34(2) of the Income Tax Act and, by unjustifiably taking advantage of the dividend taxation exemption provided for in that Act, avoided income tax. According to the tax administrator, the aim was to obtain a tax advantage by avoiding tax on dividend payments, as during the period under review the dividends were paid through an artificially created chain of transactions corresponding to the nature of an artificial arrangement.
In view of the uncertainties that have arisen regarding the significance of the status of the dividend recipient, the Commission seeks to clarify, in the first question, whether the practice that has developed in this case, where the tax administrator, taxing the Applicant, applies the anti-abuse rule to it when the recipient of the dividends is a real company, but the dividends paid through it were used as a source for the realization of sham transactions, is compatible with the objectives of Directive 2011/96/EU.
Another question referred by the Commission to the CJEU concerns the similarity of the amount of dividend payments to the amounts that could be found in a chain of transactions. In the second question, the Commission seeks to clarify whether the existence of a chain of dividend transfers could be presumed on the basis of the similarity of the amounts of dividends transferred in the chain of transactions (similar amounts in similar periods). Another question that the Commission seeks to clarify is whether it is compatible with the application of the anti-abuse rule that the effect is applied at the first stage of the dividend payment chain, when the artificial transactions that led to the recognition of the chain of transactions as a construct involving persons from other EU Member States took place in another EU Member State.
The Commission also raises the question of determining the tax benefit at the level of the ultimate beneficiary. The Commission seeks to clarify whether the tax benefit can be recognized for the Applicant as a participant in the chain of transactions if, as a result of the creation of such a chain, the tax benefit is received by the ultimate beneficiary, a resident, using the dividends paid by the Applicant to realize this benefit.
The Commission also submits to the ECJ a question concerning the period of dividend payments and their duration, seeking to clarify whether the period of further dividend payments in the chain is relevant for the assessment of the artificial nature of the transaction. In the sixth and final question, the Commission seeks to clarify what impact the Applicant's knowledge of its participation in a chain of sham transactions may have on the application of the anti-abuse rule. There is no evidence in the case that the Applicant knew or could have known about the existence of the sham transactions, but the Applicant is a subsidiary of a group of companies that is dependent on the decisions taken by its shareholder.
In order to make fair and transparent decisions in this case, it is necessary to wait for important answers from the ECJ, which will determine the further course of the tax dispute.
[1] The exemption of dividends is provided for by 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 aims to exempt dividends and other distributions of profits paid by subsidiaries to their parent companies from taxes withheld at source and to eliminate double taxation of such income at the level of the parent company.
Last updated: 04-12-2025
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