C‑228/24. – „Nordcurrent group” UAB

 The limits on denial of tax benefits related to cross-border dividend payments clarified by a recent CJEU ruling.

The plaintiff in the case is a Lithuanian company that is part of a corporate group engaged in the development and distribution of video game software. The software development was consistently carried out by the plaintiff, whereas the software distribution was initially performed by its subsidiary established in the United Kingdom. Only after 2018 did the plaintiff take over the distribution activities. The UK subsidiary operated profitably and paid dividends to the plaintiff in the years 2018–2019. The plaintiff treated the received dividends as exempt from corporate income tax under the relevant Lithuanian provisions implementing the Parent-Subsidiary Directive. The Lithuanian tax authority conducted a tax audit of the plaintiff, during which it found that the UK subsidiary lacked the personnel and material resources necessary for software distribution. It had no office, employed no staff, and was registered with a corporate service provider managing over 97,000 companies. Based on these circumstances, the tax authority concluded that the distribution activities were in fact conducted by the plaintiff from Lithuania, and that the UK subsidiary had distributed profits derived from “non-genuine transactions”. Consequently, the tax authority denied the corporate tax exemption to the dividend-receiving plaintiff. The plaintiff challenged the tax authority’s decision before the Tax Disputes Commission operating under the Lithuanian Government. The plaintiff argued that the UK subsidiary performed genuine distribution functions under its own company name, effectively acting as an intermediary between the software developer (the plaintiff) and the platforms used for distributing the games. During the review procedure, the Tax Disputes Commission determined that the UK subsidiary did not qualify as a so-called “transparent entity” under Lithuanian law. (Some Member States recognize the legal concept that allows tax authorities to “look through” an entity – created primarily to obtain unlawful tax advantages without engaging in real economic activity – and establish tax liability directly at the level of its owners.) The Commission referred the matter for a preliminary ruling to the Court of Justice of the European Union (CJEU).

In its judgment in case C‑228/24, the CJEU interpreted the provisions of the Parent-Subsidiary Directive that prohibit abuse of rights, focusing on when a Member State is entitled to intervene to prevent unlawful acquisition of tax advantages. The Court reaffirmed that an artificial arrangement exists where it is not set up for reasons that reflect economic reality, its structure is purely one of form and its principal objective or one of its principal objectives is to obtain a tax advantage running counter to the aim or purpose of the applicable tax law. Where a national authority or court finds that such conditions are met, it may deny the unjustified tax advantage – even if the dividend-paying company does not otherwise qualify as a transparent entity. The CJEU also emphasized that in assessing abusive conduct, it is not sufficient to examine only the state of affairs at the time of the dividend payment; the operational history of the relevant company or companies must also be evaluated. Referring to its previous case law, the Court explained that tax benefits may be denied only if the Member State authority proves both (i) the wholly artificial nature of the arrangement (objective element), and (ii) that the main or one of the main purposes of the structure was to achieve a tax benefit that is contrary to the objectives of EU legislation (subjective element). If the tax authority fails to investigate the motives of the parties involved in the arrangement and limits its findings to the assertion that the tax benefit derives from “non-genuine transactions”, the denial of the tax benefit is not justified.

Full English text of the judgement