CJEU Rules on the Anti-Abuse Clause in the Parent-Subsidiary Directive: Nordcurrent Case (C-228/24)

On Friday, 5 April, the Court of Justice of the European Union (CJEU) answered the preliminary questions in the case of Nordcurrent Group UAB (Nordcurrent) (C-228/24). The questions concerned the relationship between the application of the participation exemption and the anti-abuse provision under the Parent-Subsidiary Directive. The CJEU ruled that (i) the anti-abuse provision in the Parent-Subsidiary Directive also applies to the participation exemption, (ii) the application of the anti-abuse provision is not limited to so-called conduit companies, (iii) when assessing whether an artificial arrangement exists, not only the facts and circumstances at the time of the dividend distribution are relevant, but also the history of the structure, and (iv) the “subjective test” (i.e. whether the structure was set up with the main purpose or one of the main purposes of obtaining a tax advantage) must be assessed independently.

Impact

For the Netherlands, this case may have significant consequences now that the application of the participation exemption can be denied if the conditions of the anti-abuse provision under the Parent-Subsidiary Directive are met. This may impact various holding structures. The CJEU’s clarification that all circumstances of a structure must be considered in determining whether there is abuse is particularly welcome. It once again highlights the importance of thorough preparation and careful documentation from the outset to demonstrate the economic reality and non-artificial nature of a structure.

The Nordcurrent Case

In 2009, Lithuanian company Nordcurrent established a subsidiary in the United Kingdom (Nordcurrent Ltd). This subsidiary acted as an intermediary between Nordcurrent and various advertising and game distribution platforms. Between 2017 and 2019, Nordcurrent Ltd transferred all of its activities to Nordcurrent, after which a decision was made to liquidate Nordcurrent Ltd. In 2018 and 2019, Nordcurrent received dividends from Nordcurrent Ltd. Under Lithuanian tax law, these dividends are in principle exempt from taxation, provided that, in accordance with the anti-abuse clause of the Parent-Subsidiary Directive, the arrangement is not considered artificial and not primarily aimed at obtaining a tax advantage. According to the Lithuanian tax authorities, Nordcurrent Ltd qualified as an “artificial arrangement” because it lacked sufficient personnel, its own business premises, and tangible assets during 2018 and 2019.

The questions

The Lithuanian court raised doubts about the application of the anti-abuse clause, arguing that (i) Nordcurrent Ltd could not be regarded as a conduit company, (ii) the Lithuanian tax authorities did not question the activities of Nordcurrent Ltd from its incorporation until the dividend distribution, and (iii) according to Nordcurrent, no tax advantage was achieved because the corporate tax rate in the UK was higher than the rate that would have been applied in Lithuania. The court therefore posed the following questions:

1. Is it consistent with the Parent-Subsidiary Directive to deny a tax exemption on dividends from a company established in another Member State that does not qualify as a conduit company?
2. In determining whether an artificial arrangement exists, should only the circumstances at the time of the dividend distribution be considered, even if genuine economic circumstances existed prior to that distribution?
3. Does a finding that an artificial arrangement exists automatically mean that applying the participation exemption results in a tax advantage contrary to the Parent-Subsidiary Directive?

The answers

The CJEU answered the first question affirmatively, stating that the anti-abuse provision is not limited to conduit companies. In response to the second question, the CJEU ruled that circumstances preceding the dividend distribution are also relevant in assessing potential abuse. Finally, the Court clarified that denying the participation exemption solely based on the existence of an ‘artificial arrangement’ would be contrary to the Parent-Subsidiary Directive. It must also be demonstrated that the structure was set up with the main purpose of obtaining a tax advantage. In this regard, the CJEU considered it relevant that the profits realized by Nordcurrent Ltd were subject to a higher tax rate in the UK than the rate that would have been applied in Lithuania when assessing whether obtaining a tax advantage was indeed a main purpose of the structure.

Questions?

If you have any questions with regard to the above, please feel free to contact Gerbrand Hidding or Roemer Schimmelpenningh.