CJEU: Assessment of conditions for dividend exemption on subsidiary’s part
The Court of Justice of the EU ruled in a dispute (C-228/24) between a Lithuanian company and the tax authorities regarding the application of the abuse of rights concept under Directive 2011/96/EU on the taxation of parent companies and subsidiaries (P/S Directive).
In the case at hand, the tax administrator assessed tax for a Lithuanian parent company on dividends received from its UK-based subsidiary in 2018 and 2019. The Lithuanian tax authority believed that the subsidiary was a non-genuine arrangement and denied the benefits of the P/S Directive, arguing that in the years in question, the subsidiary did not have human resources in the United Kingdom corresponding to its scope of business, nor did it have its own business premises or tangible assets.
The CJEU held that the benefits of the P/S Directive can be denied at the level of the parent company in the situation under review if all the elements constituting an abuse of rights have been fulfilled.
In this respect, the CJEU further held that it is not possible to only consider the situation at the time when the dividend was paid if there were real economic reasons for the existence of the subsidiary before that date. The CJEU also held that the fact that a subsidiary is a conduit company is not in itself sufficient to conclude that a tax advantage was obtained contrary to the P/S Directive (and that therefore the abuse of rights concept may be applied). The tax advantage cannot be interpreted solely as an advantage resulting from the P/S Directive, but the overall tax benefits of the set-up must be assessed.
The CJEU subsequently left it up to the local court to determine whether there had indeed been an abuse of rights in the present case.
The judgment is particularly interesting because it does not examine the economic substance on the part of the parent company, as is usual, but on the part of the subsidiary. The judgment thus confirms the current trend in which tax authorities focus on the human and material resources of companies and their economic substance.
What is also positive about it is the confirmation that to apply the abuse of tax law doctrine, the tax administrator must identify the tax advantage obtained and consider the historical reasons for setting up the structure in question. Merely stating that a company does not have economic substance at the time of the dividend payment is not sufficient.