On 3 April 2025, the Court of Justice of the European Union (CJEU) issued a judgment in the case Nordcurrent Group (C-228/24), which deals with the question of whether national participation exemptions can be denied under the General Anti-Avoidance Rule of Article 1(2) and (3) of the Parent-Subsidiary Directive (GAAR PSD) in cases of abuse. Being the first CJEU’s judgment on the application of the GAAR PSD in a case dealing with a national participation exemption (i.e. an exemption at the level of the parent company for benefits derived from a participation in a qualifying subsidiary), the Court’s finding in this case complements existing case law in this area on withholding tax exemptions (e.g. T Danmark and Y Denmark, Cases C-116/16 and C-117/16).

Facts

Nordcurrent, a Lithuanian video game development and publishing company, established a subsidiary in the United Kingdom (UK Subsidiary) in 2009 for the sale and distribution of games, because of restrictions to sell video games via app stores directly from Lithuania. The UK Subsidiary realized profits in the UK which were regularly subject to UK corporate income tax. In 2017-2018, Nordcurrent relocated the functions and risks from the UK Subsidiary to the parent company in Lithuania, and the UK Subsidiary was liquidated a few years later. Nordcurrent applied the national participation exemption to dividends received from the UK Subsidiary in 2018 and 2019. Following an audit for the years 2018 and 2019, the Lithuanian tax authorities found that the UK Subsidiary had no ‘substance’ in these years. They deemed the UK Subsidiary to be a ‘non-genuine arrangement’ created to obtain a tax advantage, refusing the application of the participation exemption to dividends received from the UK Subsidiary. Nordcurrent contested this before the Lithuanian Tax Dispute Commission, leading to a referral to the CJEU.

The questions

The following three questions were addressed by the CJEU in the Nordcurrent case: (i) Must the GAAR PSD be interpreted as precluding the denial of a national participation exemption on the basis of a non-conduit subsidiary being qualified a ‘non-genuine arrangement’?; (ii) Does the qualification of an arrangement as ‘non-genuine’ require taking into account all the facts and circumstances of the case, or only those that existed at the time of the dividend distribution?; and (iii) Is the qualification of an arrangement as ‘non-genuine’ under the GAAR PSD alone sufficient to conclude that, by benefiting from a participation exemption, a parent company obtained a ‘tax advantage’?

The judgment

The CJEU first found that Member States can deny the benefits of national participation exemptions under the GAAR PSD if each of the elements of an abusive arrangement is met. The Court noted that the application of the GAAR PSD is possible also when a subsidiary distributing dividends is not a conduit company, and the profits distributed were made in the course of business activity carried out by the latter in its own name. The qualification of arrangements as abusive is therefore not limited to conduit companies.

Secondly, the CJEU ruled that the assessment of whether an arrangement qualifies as ‘non-genuine’ under the GAAR PSD requires taking into account all facts and circumstances (including the history of the arrangement) and not only the facts at the time of the dividend distribution or formation of the arrangement. In this regard, the CJEU noted that it cannot be ruled out that an arrangement, originally put in place for valid commercial reasons which reflects economic reality, may be regarded as non-genuine from a certain point in time (or vice versa), because it was maintained despite a change in circumstances.

Thirdly, the CJEU found that the qualification of a subsidiary as a ‘non-genuine arrangement’ is not sufficient to refuse the participation exemption under the GAAR PSD as two conditions are required for such purposes, namely the existence of (i) a non-genuine arrangement; and (ii) a tax advantage. It further noted that the existence of tax advantage must not be assessed in isolation and demands considering the overall tax position of the arrangement.

Impact

The CJEU’s judgement that national participation exemptions can be denied under the GAAR PSD, in the case of specific non-genuine arrangements, is new and may have an adverse impact for EU taxpayers with subsidiaries in certain specific circumstances.

The CJEU’s clarification about a broad mandate to consider ‘all facts and circumstances’ both in relation to the ‘non-genuine’ and ‘tax advantage’ requirements in applying the GAAR PSD is helpful for EU taxpayers. First, it precludes tax authorities’ attempts to take a narrow approach to disqualify structures based on a lack of valid commercial reasons or substance at a specific time or stage of an investment arrangement. Secondly, it provides taxpayers with additional objective elements to argue and demonstrate that their investment arrangement has valid business purposes or was not set up to obtain a tax advantage.

Contact

Should you have queries or need any assistance in the assessment of your corporate structures following this CJEU’s judgment, please contact your trusted adviser at Loyens & Loeff or one of the specialists mentioned below.