In brief
On 15 October 2026, the Court of Justice of the European Union (CJEU) ruled in Neo Group (C-203/25) that the Parent-Subsidiary Directive withholding tax exemption may be denied where a dividend forms part of a wider non-genuine arrangement. Genuine activity and beneficial ownership at the direct parent level remain relevant, but are not conclusive. Multinational groups and investors should be able to explain the commercial rationale of connected transactions across the ownership chain, including steps occurring before or after a distribution.
In more detail
- The anti-abuse rule can apply even where the direct parent carries on a genuine economic activity and is the beneficial owner of the dividends;
- Transactions and tax advantages arising further up the corporate chain or in another Member State can be taken into account;
- Similarities in the amounts involved, or the timing of onward transfers, can constitute indications of abuse; and
- The distributing subsidiary must have been (or could have been) aware of the existence of a chain of non-genuine transactions.
The CJEU’s findings
Genuine activity at the level of the direct parent is not conclusive
The CJEU (re)confirms that the anti-abuse rule is not limited to conduit structures. The direct parent’s genuine economic activity remains a relevant factor, but does not create a safe harbour against the distribution forming part of a wider non-genuine arrangement.
Further, while the treaty exemption remains a matter for the national court, the CJEU noted that, on the referring court's reading of the Lithuania-Cyprus treaty in light of the OECD Commentary, beneficial ownership does not automatically secure treaty relief in abusive situations, and that treaties between Member States cannot be relied upon to achieve a result contrary to EU law.
The arrangement must be assessed as a whole
The objective assessment may extend to other entities in the chain, to transactions in another Member State and to steps before or after the distribution. The tax advantage need not arise in the source Member State, provided that the arrangement as a whole defeats the object or purpose of the Directive. Here, the CJEU goes further than Advocate General Kokott, who, while accepting the relevance of such circumstances, considered that abuse of another Member State's tax law does not, as a rule, amount to abuse of the Directive, save where the distribution forms part of an overall plan clearly aimed at enabling tax evasion in the ultimate beneficiary’s Member State (not the case here, in her view). She cautioned that several Member States in the chain could otherwise deny the exemption on the same upstreaming of profits. The CJEU did not address this concern, leaving open the risk of overlapping challenges and resulting double taxation.
Matching amounts and onward transfers are indications, not proof
The fact that amounts passed along the chain are similar or identical to the dividends, and are ultimately transferred to the ultimate shareholder, may point to a coordinated arrangement. The transfers do not have to be immediate: payments spread over time may also be relevant. These factors are, however, only indications and must be assessed together with all other relevant circumstances; they do not, in themselves, create a presumption of abuse.
The distributing subsidiary does not need to be aware of the abuse
The distributing subsidiary's knowledge of the potentially abusive arrangement is not a prerequisite for applying the anti-abuse rule, provided that the required knowledge/subjective element is established at the level of at least one of the companies in the group participating in that chain of transactions or to the natural person who, as a result of the creation of that chain of transactions, benefits from that advantage.
Practical implications and key takeaways
The practical reach of the Neo Group judgment should be assessed with some caution. The CJEU did not determine whether the arrangement was abusive. That assessment remains for the referring court, and the judgment provides only limited detail on the alleged tax advantage and the particular features of the wider arrangement that the Lithuanian tax authorities considered artificial.
Nevertheless, the judgment materially broadens the perspective from which the Parent-Subsidiary Directive anti-abuse rule may be applied. For multinational groups and investors with cross-border investments in the EU, the principal practical implication is that economic substance of the direct parent, whilst remaining relevant, does not exclude the possibility that the dividend is deemed to form part of a wider non-genuine arrangement, considering other group levels and steps taking place before or after the distribution. Groups should therefore be able to explain not only the role and activities of the direct parent, but also the commercial rationale of connected transactions implemented elsewhere in the structure, before or after the distribution. In that regard, the judgment introduces a degree of uncertainty for taxpayers: a distributing company may need to take into account transactions and tax consequences elsewhere in the ownership chain over which it has no or limited visibility or control, and it remains unclear how far up the chain, and how far in time, that analysis may extend.
At the same time, the burden of proof of an abuse remains with the tax authorities. Matching amounts do not, in themselves, give rise to a general presumption of abuse. The tax authorities must still demonstrate, on the basis of an overall assessment of all relevant facts and circumstances, that the arrangement is not genuine and that one of its main purposes is to obtain a tax advantage that defeats the object or purpose of the PSD.
The latter requirement raises an important question which Neo Group leaves largely unanswered: when does a tax advantage defeat the object or purpose of the PSD? Since the elimination of withholding tax on qualifying intra-EU distributions is itself one of the benefits intended by the PSD, the mere application of that exemption, or more generally a lower tax burden, should not in itself establish abuse. The Court also does not clearly articulate when a tax advantage arising elsewhere in the chain is sufficiently connected to the object or purpose of the PSD to justify denying the exemption. Neo Group should therefore not be read as establishing that any tax advantage obtained higher up the chain, or any subsequent tax-efficient use of dividends received under the PSD, necessarily defeats the purpose of the Directive.
The key takeaway is therefore one of balance: substance at the level of the direct parent is not sufficient to close the enquiry, but neither are potentially artificial elements elsewhere in the chain sufficient, on their own, to deny the exemption. Ultimately, the question remains whether, viewed as a whole, the arrangement is non-genuine and pursues a tax advantage that defeats the object or purpose of the PSD.
Against this background, groups may wish to consider the potential impact of the broader arrangement-wide approach adopted in Neo Group on their existing holding and financing structures, notably where exempt dividends are subsequently passed further up the ownership chain. This does not mean that such structures are necessarily problematic: as mentioned, Neo Group does not create a presumption of abuse based on particular features. While tax authorities may look beyond the substance of the immediate parent, they must still establish both an artificial arrangement and the requisite subjective element.
Chloé Delbosse, Junior Associate, has contributed to this legal update.