CJEU further clarifies the anti-abuse rule under the EU Parent-Subsidiary Directive: NEO Group (C-203/25)

Overview

On 15 October 2026, the Court of Justice of the European Union (“CJEU”) delivered its judgment in NEO Group (C‑203/25), following a request for a preliminary ruling from a Lithuanian court. The judgement further develops the CJEU’s case law on the abuse of rights in EU direct tax law, building on the Danish beneficial ownership cases (T Danmark and Y Denmark, C‑116/16 and C‑117/16) and, more recently, Nordcurrent (C-228/24).

Under the Parent-Subsidiary Directive (“PSD”), dividends and other profit distributions made by subsidiaries to qualifying parent companies in other EU Member States are, in principle, exempt from withholding tax. However, the benefits of the PSD must be denied in respect of arrangements which are not genuine and have been put in place with the main purpose, or one of the main purposes, of obtaining a tax advantage that defeats the object or purpose of the PSD.

The NEO Group judgement confirms the broad scope of the EU anti-abuse principle and, importantly, that its application is not confined to traditional conduit or intermediary structures.

Background

NEO Group UAB (“NEO”), a Lithuanian company, is wholly owned by Retal Industries Limited (“Retal”), a company incorporated in Cyprus. In 2016 and 2017, Retal received dividends of approximately EUR 28.5 million from NEO and another Lithuanian subsidiary, on which no withholding tax was levied.

Following a tax audit, the Lithuanian tax authorities concluded that the dividend distributions formed part of a broader series of transactions. In particular, the shares in Retal had been sold for EUR 310.4 million to a recently incorporated Cypriot company, with payment of the purchase price being deferred until 2027. The resulting receivable was assigned to PG, a Cyprus-resident individual who was the beneficial owner of both the seller and purchaser. PG subsequently received significant amounts through loans and assignments of rights that were funded by the dividends distributed by the Lithuanian companies.

Against that background, the Lithuanian tax authorities considered that the withholding tax exemption should not apply and issued an assessment of EUR 2.25 million against NEO, together with interest and a penalty. Importantly, the authorities did not dispute that Retal itself carried on a genuine economic activity.

CJEU’s Findings

The CJEU first clarified that the involvement of a conduit company is only one possible manifestation of abuse. The fact that the parent company carries on a genuine economic activity does not, in itself, preclude a finding of abuse. Rather, the competent tax authorities must assess the arrangement as a whole, taking into account all relevant facts and circumstances, which may include share transfers, loan agreements and assignments of receivables.

As regards the tax treaty between Lithuania and Cyprus, the CJEU recalled that it has no jurisdiction to interpret bilateral tax treaties between Member States and must therefore take account of the interpretation provided by the referring court. Nevertheless, a tax treaty between Member States, including one based on the OECD Model Convention, cannot be relied upon to achieve an outcome that is contrary to EU law.

The CJEU then considered the circumstances that may constitute indications of abuse. In particular, the fact that amounts transferred through a chain of transactions are similar or identical to the dividends distributed may be relevant. The same applies where relevant funds take place at regular intervals over a period of time rather than immediately following the dividend distribution. The CJEU emphasised that an arrangement producing effects that are repeated over time is no less capable of being abusive than a one-off arrangement. At the same time, such circumstances are indicators only and cannot, in themselves, give rise to a general presumption of abuse.

mportantly, the assessment is not confined to transactions taking place in the Member State of the distributing company. Tax authorities may also take into account transactions carried out in other Member States, both before and after the relevant distribution. Nor must the tax advantage arise at the level of the distributing subsidiary. Where the relevant tax advantage arises elsewhere in the chain, including at the level of the individual ultimately controlling the group, this does not, in itself, prevent the Member State of the distributing company, from applying the PSD anti-abuse rule and levying withholding tax where the conditions for establishing abuse are otherwise satisfied. The CJEU considered this approach consistent with the principle of proportionality.

Finally, the CJEU confirmed that a finding of abuse continues to require a subjective element, namely an intention to obtain an advantage under EU law by artificially creating the conditions for obtaining it. However, that subjective element does not need to be established at the level of the distributing subsidiary itself. It is sufficient that the requisite intention is established in respect of at least one of the group companies participating in the chain or the natural person benefiting from the advantage. Accordingly, the distributing subsidiary itself need not have been aware of the arrangement, provided that at least one such participant or beneficiary was, or could have been, aware of the relevant chain of transactions.

Whether the circumstances in NEO Group ultimately constitute abuse remains for the national court to determine. The burden of proving the elements of abuse rests on the tax authorities, although the CJEU reiterated that they cannot be required to produce evidence that would be impossible for them to provide.

Observations and takeaways

The judgement represents a significant further development of the CJEU’s approach to the application of the EU anti-abuse principle. The analysis is not confined to the characteristics or substance of the intermediate recipient of a dividend. Instead, the economic reality of the structure and the relevant transactions as a whole may be taken into account.

The judgement also demonstrates that a substance analysis limited to the immediate dividend recipient may no longer be sufficient. Even where that recipient conducts genuine economic activity and is not a conduit company, the wider transaction chain may still fall within the PSD anti-abuse rule.

Tax authorities may look beyond the immediate parent company and examine the wider chain of entities, shareholders and transactions to determine whether an abusive arrangement exists and whether the required intention to obtain an undue tax advantage is present.

The judgement is particularly relevant to structures that rely on the PSD exemption. Against this background, businesses should consider:

• Reviewing existing holding structures, taking into account dividend and related cash flows over an appropriate period rather than considering individual distributions in isolation;
• Documenting the genuine commercial rationale for the structure and relevant transactions as a whole;
• Paying particular attention to transactions at shareholder level, including deferred purchase prices, vendor loans, assignments of receivables and other arrangements that may be connected with the dividend flows;
• Considering appropriate contractual protections in transactions;
• Preparing for increased scrutiny in tax audits by ensuring that information concerning the full chain of relevant transactions is available, consistent and appropriately documented. This may include transactions outside the source Member State and transactions at the level of the ultimate shareholder.

Businesses may also wish to reassess the basis on which withholding tax relief is claimed for future distributions, whether under the PSD or an applicable tax treaty, in light of the broader factual analysis reflected in the judgement.

If you would like to discuss how this judgement may affect your operations, we are happy to assist.