The European Court NEO GROUP Tax Case: The Impact on Irish and Luxembourg Holding Company Structures

The decision clarifies that an EU Member State may deny the withholding tax exemption for dividends where the distribution forms part of a non-genuine chain of transactions, even where the immediate EU holding company carries on a genuine economic activity, is the beneficial owner of the dividends and is not a conduit company.

This update reviews the case, looks at the reasoning of the ECJ and considers the impact on Irish and Luxembourg holding company structures often utilised by international corporate groups and investment funds.

Background

NEO GROUP (“NEO”), a Lithuanian company, was a wholly owned subsidiary of Retal, a Cypriot company that also wholly owned a second Lithuanian company. In 2016 and 2017, both Lithuanian companies paid dividends to Retal free of Lithuanian withholding tax under Lithuania’s implementation of the PSD.

The Lithuanian tax authorities did not dispute that Retal carried on a real economic activity and was the beneficial owner of the dividends.  However, they challenged the availability of the exemption based on a series of transactions which took place above the holding companies and after the initial distribution, namely:

• Retal’s Belize shareholder sold Retal to a newly incorporated Cypriot company (“PPH”) with the price deferred until 2027;
• The receivable was transferred to PG, a Cypriot-resident individual who already ultimately owned both the seller and PPH;
• Retal paid PPH dividends in amounts similar to those it received from Lithuania; and
• PG received loans and assignments of rights from PPH, funded by those dividends, which were used to extinguish PPH’s debt to PG.

The ECJ decision notes that the Lithuanian tax authority concluded that the transfer of the shares in Retal formed part of a non-genuine arrangement designed to obtain a tax advantage. While it is not clear from the decision what precisely that tax advantage was, this was the position of the Lithuanian tax authority and appears to us to be fundamental to the ultimate decision of the ECJ.

The ECJ’s Reasoning

The PSD Anti-Avoidance Rule

Under the PSD’s anti-abuse rule, benefits are denied to an arrangement, or series of arrangements, that (i) has as its main purpose, or one of its main purposes, obtaining a tax advantage that defeats the object or purpose of the PSD, and (ii) is not genuine, i.e. not put into place for valid commercial reasons reflecting economic reality. The ECJ confirmed that the rule applies to any type of non-genuine arrangement and requires an objective, overall assessment of all relevant facts and circumstances.

Abuse is not Limited to Conduit Companies

Conduit structures, as considered in the previous ECJ Danish conduit company cases ² are only one example of abuse. A first-step distribution to a parent with actual economic activity “does not, in itself” excludes abuse and is not a safe harbour. Tax authorities must therefore consider the other elements in the chain above the immediate parent, such as share sales, loan agreements and debt assignments.

Beneficial Ownership and Genuine Economic Activity by the Holding Company are Not a Shield

Beneficial ownership of the dividends by the holding company does not protect against the anti-abuse rule.

Alternative Relief under a Double Tax Treaty

The ECJ considered the fact that the relief might also be available under a double tax treaty rather than the PSD but concluded that treaty relief cannot be used to reach a result contrary to EU law.

Timing and Matching Amounts of Cash Flows are Indications, not Tests

As held in the ECJ Danish beneficial ownership cases, passing on all, or almost all, of the dividends very soon after receipt remains an indication of abuse, as does correspondence between the amount of the dividends received and the amounts that ultimately benefit the controlling person. However, matching amounts do not create a presumption of abuse, and a short time lag is not required. Onward flows spread over time, including by way of loans or debt assignments, can be “just as contrary” to the PSD as a one-off arrangement.

No Territorial or Temporal Limits on the Analysis

The source state where the dividends are paid may consider transactions carried out abroad by non-residents, both before and after the distribution. The tax advantage need not accrue to the paying subsidiary; it may arise at any stage of the chain, including for the individual ultimately controlling the group. Notably, abuse was in issue even though that individual was resident in another EU Member State. The ECJ found this approach consistent with the principle of proportionality and held that the EU fundamental freedoms cannot be relied on against domestic rules preventing abuse of the PSD.

The Subjective Element can be shown anywhere in the Group

Abuse still requires a subjective element, namely the intention to obtain an advantage by artificially creating the conditions for it. The paying subsidiary need not have known of the abusive chain. It is sufficient that at least one group company in the chain, or the individual benefiting from the advantage, was or could have been aware of it.

The burden of proof remains on the tax authorities, which must objectively analyse all relevant facts and circumstances. Whether abuse exists on the facts is for the referring (in this case, Lithuanian) body to decide.

Practical Implications for Irish and Luxembourg Holding Company Structures

Irish and Luxembourg holding companies are commonly utilised by international corporate groups and investment funds for the holding of investments, including shares in subsidiary companies, across the EU.

As regards outbound dividends paid by Irish and Luxembourg holding companies, the impact of the ECJ decision may be relatively limited as both Ireland and Luxembourg have domestic dividend withholding tax exemption regimes for dividends to shareholders that do not rely on the PSD. However, for tax treaty-based relief claims, the determination by the ECJ that treaty relief in an EU context cannot be used to reach a result contrary to EU law should be noted.

As regards inbound dividends paid to Irish and Luxembourg holding companies, there are important takeaways for the holding company structure:

• Is there an upstream tax advantage? We think this is central to the decision and that this should be reviewed and documented in the case of any holding company structure. For example, would the ultimate parent company have been subject to a similar tax position anyway? Also if an investment fund holds investments through an Irish or a Luxembourg holding company, is there actually any tax advantage – where are the investors based and how would they have been taxed?
• From entity substance to arrangement substance. Substance and beneficial ownership at the level of the holding company remain relevant but are no longer decisive. Authorities may look through the entire holding chain, so the commercial rationale of the whole structure must be substantiated.
• Upstream financing under scrutiny. Acquisition structures involving deferred consideration, vendor or shareholder loans, intercompany loans or assignments of receivables are particularly exposed where dividend income effectively services that debt, particularly where amounts track dividends received over time. The commercial reasons for such upstream payments should be documented at the level of the relevant entities.
• No safe harbour from timing of the fund flows. It is still important following the Danish conduit company cases to avoid immediate or back-to-back fund flows through the holding company, and to have a decision-making process at the holding company over how to utilise the dividends received. However, simply spreading payments over time will not, of itself, defeat a challenge.
• Governance at the level of the holding company is key. The board of the holding company should consider and document all decisions, including the decision-making process around how to apply dividends received, in other words, whether to hold or invest or to dividend them up.
• No safe harbour for EU ownership. An EU resident ultimate owner does not exclude abuse.
• Exposure at source. A paying subsidiary may bear the withholding tax risk for arrangements it does not know of. Information rights, tax indemnities and documentation of the group’s commercial rationale are advisable, including in M&A transactions and fund acquisitions.
• Wider reach. The reasoning may also be relevant to comparable anti-abuse rules in other EU directives and their domestic implementation, including in Ireland and Luxembourg, and double tax treaties in an EU context.

Groups with Irish and Luxembourg holding, acquisition and fund structures that rely on the PSD exemption, and indeed on withholding tax reliefs generally, should assess the impact of the case, review transactions above the immediate parent (particularly where ultimate shareholders sit outside the source dividend-paying state) and document the commercial rationale for each step.

For further information, please reach out to your usual Maples Group contact or any of the persons listed on the page.

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¹ CJEU Case C-203/25.
² CJEU Cases T Denmark and Y Denmark, C-116/16 and C-117/16.