When assessing eligibility for a dividend withholding tax exemption, transactions elsewhere within the corporate group may be just as relevant as the activities of the company receiving the dividends. This follows from the judgment of the Court of Justice of the European Union (“CJEU”) of 15 October 2026 in Case C-203/25 (Neo Group), which clarifies the interpretation of the anti-abuse rule under the Parent-Subsidiary Directive (2011/96/EU) (“the Directive”).
The Directive provides for an exemption from withholding tax on dividends where certain conditions are met. However, it also contains an anti-abuse rule allowing the exemption to be denied where an arrangement, or a series of arrangements, is not genuine and has been put in place for the main purpose, or one of the main purposes, of obtaining a tax advantage that defeats the object or purpose of the Directive.
While earlier case law focused primarily on conduit companies lacking genuine economic activity, Neo Group concerned a different situation. The potential abuse did not arise from the activities of the direct recipient of the dividends, but primarily from a wider chain of transactions within the corporate group.
he Lithuanian company Neo Group paid dividends to its Cypriot parent company, Retal Industries, applying a withholding tax exemption.
As part of a group restructuring, the ownership structure changed. A newly established Cypriot company, PPH, acquired shares in Retal Industries from a Belize-based company, with payment of the purchase price deferred until 2027. The resulting receivable was subsequently assigned to the individual who ultimately controlled the group.
Retal Industries made a series of dividend payments to PPH. Through further transactions, mainly loans, assignments of receivables and set-offs, the funds originating from those dividends ultimately reached the group’s ultimate owner and were used to settle PPH’s obligation to pay the purchase price.
The Lithuanian tax authorities considered the chain of transactions to be an artificial arrangement designed to obtain a tax advantage in the form of a withholding tax exemption in Lithuania. They therefore denied Neo Group the exemption and assessed additional withholding tax.
In its judgment, the CJEU clarified which circumstances tax authorities may consider when assessing potential abuse of the dividend withholding tax exemption. The key findings are as follows:
According to the CJEU, the withholding tax exemption may be denied even if the parent company carries on genuine economic activity and is the beneficial owner of the dividends. The assessment must also consider other transactions within the group that may form part of an artificial arrangement aimed at obtaining a tax advantage that defeats the object or purpose of the Directive.
Successive transfers of identical or similar amounts within a group may indicate potential abuse. This applies not only to transfers made shortly after a dividend payment, but also to those spread over a longer period. However, similarities in the amounts transferred or the timing of the transactions are not sufficient on their own to establish abuse. The tax authorities must assess all the circumstances of the individual case.
Tax authorities are not limited to examining transactions carried out in the country of the company paying the dividends. They may also consider transactions taking place abroad, both before and after the dividend payment. A tax advantage obtained by the group’s ultimate owner may also be relevant. It is therefore not decisive where, or at what stage in the chain of transactions, the advantage arises.
To deny the exemption, the tax authorities do not need to prove that the company paying the dividends was aware of the abusive arrangement. It is sufficient to establish that at least one company involved in the chain of transactions, or the individual who ultimately benefited from the tax advantage, knew or could have known about the arrangement.
When applying the dividend withholding tax exemption, companies should not rely solely on evidence that the parent company carries on genuine economic activity and is the beneficial owner of the dividends. The judgment highlights the need to consider the wider arrangements within the group, particularly the commercial rationale behind individual transactions and how they relate to one another. It is therefore particularly important to properly document the valid commercial reasons for transactions such as group restructurings, assignments of receivables and intra-group financing arrangements.
At the same time, a complex group structure, subsequent transfers of funds or a tax advantage obtained by the ultimate owner do not, in themselves, constitute abuse. Although these factors may be relevant to the assessment, the burden of proof remains with the tax authorities. They must establish, based on all relevant facts and circumstances, that the conditions for denying the exemption have been met.
The specific facts will also be decisive in the Neo Group case itself. The CJEU did not determine whether abuse had actually occurred, leaving that assessment to the referring body.
For companies paying dividends, the judgment serves as a reminder that simply confirming the recipient’s beneficial ownership may no longer be sufficient. In the event of a tax audit, they should also be prepared to explain the wider chain of transactions and demonstrate that they have not become part of an abusive arrangement. This adds a new layer of complexity to the practical aspects of dividend distributions.
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