What is new in the field of international taxation? The Court of Justice of the EU has ruled on the issue of the general anti-abuse rule in the Parent-Subsidiary Directive or on the comparability of foreign and domestic investment funds and their impact on the free movement of capital. The OECD confirmed the continuation of work on Pillar I and II. More information on these and other updates can be found in our article.
Abuse of Rights and Dividend Exemption Through the Eyes of CJEU
The European Court of Justice (“CJEU”) in the Nordcurrent Group case (C-228/24) dealt with the interpretation of the general anti-abuse rule (“GAAR”) according to Article 1 paragraphs 2 and 3 of the Parent-Subsidiary Directive (“Directive”) concerning the tax exemption of dividends.
A Lithuanian parent company received dividends from a UK subsidiary which previously carried out economic activities, yet these were effectively taken over by its parent company over time. The Lithuanian tax authority refused to apply the tax exemption on dividends from this UK company with reference to the fact that during the periods when the dividend exemption was challenged, it was an “arrangement without economic substance”, where the UK subsidiary had only one employee, no longer had any operational premises in Britain, and the proceeds of the company originated solely from services provided to the parent company.
The CJEU concluded in the ruling that the GAAR rule according to the Directive allows Member States to refuse the corporate income tax exemption on dividends if two cumulative elements are fulfilled: (i) the existence of a non-genuine arrangement and (ii) a tax advantage.
The key here is that when assessing whether it is a non-genuine arrangement, the tax administrator must consider all circumstances of the specific case, including the development of the structure over time – not only the situation at the time of the dividend payout. The CJEU pointed out that the revenues of the British subsidiary were subject to a higher income tax rate than if they were realized directly by the Lithuanian parent company. Moreover, the Court confirmed that abuse can occur even if the subsidiary is not a “pass-through” entity and carried out its own economic activity.
The ruling therefore extends the application framework of the GAAR rule in relation to the Directive to cases where the economic reality of the structure changes over time. At the same time, it provides important guidance for tax authorities and taxpayers – refusal of the tax exemption is not possible without a comprehensive assessment of the circumstances and impacts of the given arrangement, including cross-border ones.
Taxation of US Fund’s Profit in Austria
The CJEU assessed whether a national regulation that does not allow a foreign legal entity (LE) to reclaim tax on income from capital assets (as domestic LE entities are entitled to), although the foreign LE has the same characteristics as a domestic tax-transparent entity, despite lacking legal personality, is contrary to the free movement of capital.
The essence of the dispute was whether the US fund could request the return of the entire withholding tax (the difference in taxation had already been returned to shareholders based on the double taxation treaty between Austria and the USA), when its profits were immediately distributed among shareholders and the features of an Austrian tax-transparent collective investment fund were effectively fulfilled.
The CJEU reminded that the comparability of cross-border situations with domestic situations must be assessed with regard to the objective, subject, and content of the relevant national provisions. The Austrian court concluded that the US fund (Austrian non-resident) fulfills the characteristics of an investment fund and thus should be tax-transparent from an Austrian perspective, despite its legal personality. The CJEU concluded that the difference in legal personality is not necessarily an obstacle in comparing the described entities and that it is not contrary to EU law to refuse the return of tax to the US fund, as its profit was distributed and paid directly to shareholders, thereby no federal tax was paid and the profit was taxed at the level of the shareholders.
On April 11, 2025, the OECD issued a brief statement summarizing the meeting of the Inclusive Framework on BEPS in Cape Town. Member states agreed on the importance of ensuring stability and legal certainty in the international tax system, specifically regarding the implementation of Pillar II and ongoing negotiations on Pillar I. Negotiations will continue. The statement is available on the OECD website.
Regarding Pillar II, in the Czech Republic, we are still awaiting the approval of an important amendment to the supplementary tax act, proposing to shift the deadline for filing returns for the first reporting period from October 2025 to June 2026, as we have already informed you in the article Upcoming amendment to the Top-Up Taxes Act is delayed in the legislative process.
In relation to Pillar II at the EU level, the adoption of the “DAC 9” directive by the EU Council (ECOFIN) on April 14, 2025, also plays a role. It aims to facilitate companies in fulfilling obligations related to the top-up tax through the submission of just one tax return centrally for the entire group. This return should replace the obligation to submit separate returns in each country where the group operates. The directive came into effect on May 7, 2025, and must be transposed into domestic law by the end of 2025.
Regarding Pillar I, the implementation of complex rules for allocating profits of multinationals, especially technological companies (Amount A) is still in a very early stage. Concerning simplified transfer pricing rules (Amount B), the development remains quite limited. The OECD released a consolidated report on Amount B on February 24, 2025, but real implementation has been undertaken by only a few states so far. According to unofficial information from the tax administration, intensive discussions regarding potential implementation of Amount B are not yet occurring in the Czech Republic.
Luxembourg Intends to Support Startups
The Luxembourg government has proposed a bill introducing a tax deduction for Luxembourg tax residents investing in young innovative firms. The proposal aims to support these companies’ access to financing during the initial years of their operations.
The tax deduction is intended for direct monetary investments in shares of companies with tax residency in Luxembourg or in countries within the European Economic Area that have a permanent establishment in Luxembourg, are younger than five years, have fewer than 50 employees, and their balance sheet or turnover does not exceed 10 million euros. These criteria should apply to the entire group if the company is part of it.
A startup shall be considered innovative if, at the end of the relevant financial period, if it has at least two full-time employees and at least 15% of its operating expenses were spent on research and development in at least one of the three fiscal periods preceding the tax year for which the tax deduction is applied.
Liechtenstein Expands Its Double Tax Treaty Network
The Liechtenstein government approved two new double taxation treaties, expanding the range of countries with which it has such bilateral agreements to include Croatia and Ireland. Liechtenstein currently has effective treaties with 30 countries (including the Czech Republic) or is negotiating them. Recently, Liechtenstein has become an attractive jurisdiction for asset management structures similar to Czech trust funds. By expanding its network of double taxation treaties, Liechtenstein further enhances its tax jurisdiction attractiveness.
France May Tax the Entire Salary of a CEO Even When Part of Their Work is Done Abroad
A French court concluded that the salary of the CEO of a French company is subject to taxation exclusively in France, despite the person having spent most of the year in the United Kingdom. The CEO, who qualified as a French tax resident despite residing in the United Kingdom, sought to exempt their salary for the time spent outside France from French taxation according to Article 15 of the double taxation treaty between the UK and France.
However, the court decided that the director’s activities should be regarded as being performed within France throughout the entire period because the actual management location of the company was in Paris, where the director regularly stayed and communicated with employees at the Paris headquarters. The fact that the director spent a substantial part of the tax period in the UK and resided there for work purposes was deemed irrelevant by the court, and France was granted the right to fully tax the director’s salary.
Italian Court Grants Withholding Tax Exemption Based on “Look-Through” Approach
The Italian Supreme Court confirmed the application of the “look-through” approach concerning the fulfillment of conditions for interest exemption from Italian withholding tax.
In the examined case, it involved interest on a loan paid by an Italian company to its parent company based in Luxembourg. This parent company financed the loan with funds from its shareholder, who was a Luxembourg investment fund. Interest was paid to the Luxembourg company without Italian withholding tax based on the EU Directive on a common system of taxation of interest and royalty payments (“Directive”) in 2015 and 2017.
During the tax audit, the Italian tax authority concluded that the Luxembourg parent company was not the beneficial owner of the interest, and thus the exemption according to the Directive could not be applied. The Italian company subsequently taxed the interest with a withholding tax of 10% according to the Italy-Luxembourg double taxation treaty and also submitted a request for the refund of this tax with reference to a specific provision of the Italian Income Tax Act that allows interest exemption from withholding tax if paid to a selected group of creditors – such as banks, insurance companies based in the EU, and selected foreign institutional investors. The taxpayer in its request argued that the beneficial owner of the interest was precisely such a foreign institutional investor (Luxembourg investment fund) and that the conditions for exemption were met. The Italian tax authority did not respond to the request (“implicitly denied it”), and the taxpayer subsequently sought the tax refund through the courts.
The Supreme Court acknowledged that the “look-through” approach, i.e., assessing the beneficial owner of income throughout the structure in relation to the conditions for granting exemption under Italian law, is permissible. It decided that the Luxembourg fund, despite not being the direct recipient of the interest, was the beneficial owner of the income and met the conditions for exemption under Italian legislation.
This case may also serve as inspiration for Czech taxpayers, as the concept of beneficial ownership and (non)application of the “look-through” approach is also increasingly in the focus of the Czech tax administration, especially in the area of royalty payments and license agreements.
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