Why is this case important?
Article 5 of the PSD exempts distributions of profit from a subsidiary to its parent in another member state from withholding tax. Since 2015, Article 1(2) and (3) of the PSD has contained a minimum anti-abuse rule: the benefits of the PSD are not to be granted to an arrangement, or series of arrangements, that 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 PSD and that is not genuine, that is, not put into place for valid commercial reasons which reflect economic reality.
In the Danish cases (T Danmark and Y Denmark, C-116/16 and C-117/16), the CJEU considered conduit structures in which an interposed holding company with little or no substance passed dividends on to the beneficial owner to be abusive.
In Nordcurrent (C-228/24), it confirmed that the anti-abuse rule is not confined to conduit companies and that abuse is assessed over time and not limited to an assessment of the payment for which exemption is sought in isolation (see our analysis here: Anti‑Abuse rules in double tax treaties: Key insights). This decision in NEO GROUP takes these principles a step further.
The facts
The facts in this case are significant, so it is worth taking a bit of time to set these out. NEO, a Lithuanian company, was wholly owned by Retal, a Cypriot company. In 2016 and 2017, Retal received dividends of approximately EUR15 million from NEO and EUR13.5m from another Lithuanian subsidiary. NEO applied the Lithuanian participation exemption and made the payments free from withholding tax.
The Lithuanian tax authority considered that the arrangements fell within the Lithuanian anti-abuse provision that implements Articles 1(2) and (3) of the PSD. The tax authority did not dispute that Retal carried on a genuine economic activity. Instead, it identified a number of transactions carried out by Retal’s shareholders that, together with the dividends, it argued, formed a chain of transactions falling within the abuse provisions.
These transactions included the sale by Retal’s Belize shareholder, Clendon Holdings, of Retal to PPH, a Cypriot company incorporated less than three months earlier, for approximately EUR310m. Payment of the purchase price was deferred to 2027 and the receivable was assigned to PG, a Cypriot-resident individual who was already the beneficial owner of both Clendon Holdings and PPH. PPH’s debt to PG was discharged by way of loans and assignments, with the source of these payments being the dividends from the Lithuanian subsidiaries.
The tax authority concluded that the individual, PG, was the “ultimate beneficiary” of the dividends, applied the Lithuanian anti-abuse rule and assessed EUR2.25m of tax, plus interest and penalties.
The taxpayer challenged this decision and the referring court asked the CJEU to consider various points, including whether the application of the Lithuanian anti-abuse provisions to the payment of dividends to a company that does carry on an economic activity, but that is subsequently used for the purpose of effecting non-genuine transactions, is compatible with the PSD.
What did the CJEU decide?
The CJEU started by noting that the purpose of the PSD is to ensure tax neutrality of the distribution of profits from a member state subsidiary to its parent in another member state and this is achieved by exempting such distributions from withholding tax.
However, the court goes on to note the general principle of EU law that provisions of EU law cannot be relied on for abusive or fraudulent ends. Member states may therefore refuse to apply provisions where they are relied on, not to achieve the objective of the provisions, but with the aim of benefiting from an advantage, even where the relevant conditions are formally met.
To be within the anti-abuse provisions of the PSD, two conditions must be satisfied:
- The arrangement must be non-genuine.
- The arrangement must have been put into place with the main purpose or one of its main purposes being that of obtaining a tax advantage that defeats the object of that directive.
Genuine activity is not a defence on its own
When considering that first condition of the PSD anti-abuse rule, the court took care to note that the classification of a chain of transactions as a “non-genuine arrangement” is not just a question of whether there is a specific type of situation or arrangement, rather it is about adopting an “overall perspective” in identifying potential non-genuine arrangements.
Where there are arrangements that consist of more than one step, “all relevant facts and circumstances must be taken into account in order to establish whether there are one or more steps which are not genuine”. Nordcurrent made it clear it is not about looking at a single payment in isolation. An arrangement that was genuine when established may become non-genuine if it is maintained after the commercial reasons for it fall away.
The CJEU confirmed that the burden of proving abuse lies with the member state that seeks to refuse the exemption. It cited the conduit structures in the Danish cases as an example of where arrangements where a conduit company is interposed between the paying company and the beneficial owner have been viewed as artificial. However, it was quick to state that this did not mean the anti-abuse provisions were confined to conduit companies.
The CJEU therefore held that there can be abuse even though the parent genuinely carries on an economic activity and is not a conduit. It was necessary to consider, not just the activity of the parent, but also the “other relevant elements”, namely in this case the transactions happening above Retal.
Advocate General (AG) Kokott, in her opinion issued in May 2026, had accepted that abuse could exist where the parent is the genuine beneficial owner, but only exceptionally; as a rule, she considered there would be no abuse, and she emphasised that the anti-abuse rule must be read strictly and applied cautiously. The CJEU ultimately reached the same outcome but without adopting the “exceptionally” wording.
Practical implications
This departure from the AG’s recommendation is unhelpful: the AG’s approach would have provided greater certainty and, without the AG’s proposed guardrails, structures in which the parent has real substance become more vulnerable to challenge.
It remains essential that the recipient of the dividends has genuine economic activities, but following Nordcurrent and NEO GROUP this may no longer be enough. Tax authorities can be expected to test the commercial rationale for each step, including restructurings, acquisitions and intra-group financing above the immediate parent.
Nordcurrent also clarified that an arrangement originally put in place for valid commercial reasons may become non-genuine if it is maintained after the circumstances justifying it have changed. Structures and transactions should therefore be reviewed periodically, particularly after acquisitions, disposals or refinancings.
There is a real concern that applying this level of scrutiny to entities with substance will only increase the time needed for tax authorities to consider relief and WHT refund applications: only exacerbating existing delays in processing such claims.
Beneficial ownership under the treaty does not help
The CJEU considered the provisions of the Lithuania-Cyprus treaty, which provides that the tax authorities of the subsidiary paying a dividend cannot tax those dividends if the parent company is the beneficial owner. The CJEU accepted that it did not have the jurisdiction to rule on treaty infringements or the interaction with national law.
However, it did have jurisdiction to rule on EU law, and the CJEU noted the referring court’s view that, under the OECD Commentary, beneficial ownership does not mean that treaty relief is automatically due in cases of abuse. It held that, following Denkavit (C-170/05), treaties between member states, even where based on the OECD Model Convention, cannot be relied on to achieve a result contrary to EU law.
As such, the fact that Retal may have been the beneficial owner of the dividends for treaty purposes did not assist here. This is consistent with OECD commentary, which treats the beneficial ownership requirement as addressing only a specific type of abuse (the interposition of a conduit) rather than abusive arrangements generally.
Practical implications
Groups should not assume that a treaty rate will be available where the PSD anti-abuse rule may be invoked. NEO GROUP should be read alongside the 2026 decision of the Spanish Supreme Court in Velcro (ruling no. 20/2026), which relied on the primacy of EU law to hold that, where there are indicators of an abusive arrangement (such as a conduit structure), and the Interest and Royalties Directive exemption does not apply because the beneficial ownership requirement (as developed in the Danish cases) is not met, a double tax treaty between the relevant member states regulating the same matter will not apply either.
There are technical questions about that reasoning, and the concern has been that it could be extended to deny treaty relief on dividends even under the PSD exemption, which contains no beneficial ownership requirement.
NEO GROUP makes that extension more likely, although, as the CJEU has no jurisdiction to rule on the treaty itself, it does not go as far as Velcro. Double tax treaties and the PSD are distinct legal frameworks, each with its own rules on when benefits apply and when they may be denied, even though treaties normally operate alongside EU law.
Even so, tax authorities and national courts may read the two decisions together as supporting the view that, once PSD benefits are denied for abuse, intra-EU treaty relief should fall away too. Separately, the principal purpose test in treaties may be applied in accordance with the Danish cases, Nordcurrent and now NEO GROUP, so groups may face parallel anti-abuse challenges under the PSD and the treaty.
Corresponding amounts and timing are relevant indicators
The CJEU held that correspondence between the dividends received by the parent and the amounts that ultimately benefit the controlling person is a relevant indication of abuse. The fact that amounts received by a parent are passed on within a short period of time is also an indicator of abuse, but is not a requisite feature of abuse. In this case, the fact that amounts were passed on continuously over a period, rather than within a short time did not prevent there being a non-genuine arrangement.
Helpfully, the CJEU made it clear that elements such as those above cannot give rise to a general presumption of abuse, and the tax authority must still carry out an objective analysis of all relevant facts and circumstances.
Practical implications
The AG had expressed the opinion that matching amounts and close timing are neither sufficient nor mandatory to show a non-genuine arrangement, and that simply passing dividends on is not in itself abusive. Whilst the rejection of a presumption by the CJEU is helpful, treating ordinary upstream cash flows as indicators of abuse is not, as it potentially gives tax authorities a starting point for arguments based largely on payment patterns.
A difficult question is what happens where amounts pass all the way up a chain of companies, each with genuine activities, and end up in the hands of an individual. The judgment does not say that this is abusive in itself, and a non-genuine step remains essential, but could this open the door to member states arguing that upstreaming within a group forms part of an arrangement. From an evidentiary perspective, this now means that groups will have to have sufficient contemporaneous evidence to show that each step has a commercial rationale.
The source state can look across borders and through time
The CJEU held that the tax authority of the subsidiary’s member state must carry out an overall examination that includes transactions carried out outside that state, by non-residents, before or after the distribution.
The tax advantage need not be obtained by the paying subsidiary; it may be obtained by the controlling individual resident in another member state, at any step of the chain. The CJEU considered this consistent with the principle of proportionality and rejected arguments based on freedom of establishment and the free movement of capital.
The AG considered that abuse of a member state’s own tax law does not normally amount to abuse of the PSD and that it is for that state, rather than EU law, to deal with it. The one exception to this would be where the distribution is made so that the final beneficiary can evade tax; on the facts, she did not think tax evasion appeared to be established.
The CJEU did not adopt the AG's tax-evasion threshold. Taken to its logical extreme, its approach could allow each member state in the chain to apply its own anti-abuse rules, potentially resulting in multiple taxation, subject to the caveat outlined below. This is concerning: source states may now scrutinise transactions far removed from the dividend payment, increasing the risk of overlapping claims by several member states in relation to the same chain.
There is, however, an important limit implicit in the judgment. The tax advantage that the source state is entitled to deny is the PSD withholding tax exemption itself. On that reading, the subsidiary’s member state should be able to refuse the exemption only if it shows that the transactions through which the dividend is subsequently channelled form part of an artificial arrangement that defeats the object and purpose of the PSD.
It should not be open to that state to invoke the PSD anti-abuse rule to counter other forms of abuse it perceives elsewhere in the structure, such as abuse of another member state’s tax rules, which are unconnected to the use made of the distributed profits.
The broader analysis therefore arguably does not give the source state a general licence to police the whole group; it remains anchored to the misuse of the directive’s own benefit. This is consistent with the AG’s concern that abuse of a member state’s own tax law is not, in itself, abuse of the PSD, even though the CJEU did not adopt her tax-evasion threshold.
Practical implications
The judgment contains no mechanism to allocate between member states the right to address abuse and no priority rule requiring a member state to refrain from acting to combat abuse unless another member state in the chain has failed to do so.
Arguably this could lead to parallel challenges in more than one member state and the need to consider treaty (bilateral or multilateral) mutual agreement procedures or the EU Tax Dispute Resolution Directive at an early stage.
However, in addition to the limitation outlined above, an additional potential argument, explored further below, is that the NEO GROUP decision is limited to situations involving abuse by individuals and that the decision should not be extended to genuine investment structures put in place by corporate groups or funds, which would helpfully restrict the situations where this approach could be applied.
The paying subsidiary need not know
A concerning element of the CJEU’s decision relates to the second limb of the abuse test, namely that relating to the “main purpose” of the transaction, and whose purpose this refers to. The CJEU held that looking only at the purpose of the paying subsidiary would undermine the effectiveness of the PSD anti-abuse provision.
It therefore concluded that the subjective element of abuse does not need to be established at the level of the paying subsidiary. It is sufficient that at least one of the companies in the group participating in the chain of transactions, or the natural person who benefits at the end of it, had or could have had knowledge of the arrangement.
Practical implications
This is particularly troubling in joint ventures and other companies that are not wholly owned (as the definition of “parent” requires only a 10% holding); a subsidiary unaware of arrangements above it could incur withholding tax liability, to the detriment of minority shareholders, because of steps taken by a controlling shareholder.
Standard shareholders’ agreement tax provisions may not address this risk, so parties should consider specific protections, including indemnities, information covenants and conduct-of-claims provisions.
Against this background, and having regard to proportionality considerations, it would have been preferable for the CJEU to hold that any withholding tax liability should be imposed on the controlling shareholder involved in the alleged artificial arrangements.
That shareholder should both be aware of the arrangements and be best placed to explain their economic rationale. As the person arguably benefiting from the artificial arrangements, it would also be better positioned to defend the claim and more likely to have the funds available to satisfy any resulting liability.
NEO GROUP in context: the Danish cases, Nordcurrent and where this leaves the case law
NEO GROUP builds directly on CJEU jurisprudence and in particular, the Nordcurrent and the Danish cases, both of which it cites repeatedly but it moves the analysis on in three important respects.
First, the focus shifts from the entity to the arrangement. In the Danish cases the problem was the recipient’s lack of substance, and in Nordcurrent it was the subsidiary’s lack of genuine activity over time; in NEO GROUP the recipient was accepted to be genuine, and abuse was found in steps taken above it.
Second, the CJEU loosens one of the Danish cases indicators. Passing dividends on within a very short time remains relevant, but a short time is not required, and regular transfers over a period may also point to abuse.
Third, the territorial and personal reach of the rule is extended. The source state may take account of steps taken abroad by non-residents at any stage of the chain, the tax advantage may arise in the hands of the controlling individual, and the subjective element may be established at the level of any group company in the chain or the ultimate beneficiary. That extension nonetheless has limits: what arguably must be shown is an artificial use of the PSD exemption, not abuse in the abstract.
Taken together, the three decisions show a consistent trajectory. The PSD anti-abuse rule is now firmly an overall, economic-reality test that applies to any type of arrangement, across borders and over time, rather than a rule aimed at a recognisable category of conduit structures. Substance at the level of a single entity is no longer the main battleground; the question is whether each step in the arrangement as a whole is supported by valid commercial reasons.
Perhaps the most significant contribution of NEO GROUP is to clarify that the specific EU anti-abuse rule allows the tax authority to carry out a global and dynamic test, considering all transactions carried out before or after the distribution and receipt of the dividends by a company with economic substance.
This is consistent with the approach already taken by some high national courts, such as the Dutch Supreme Court (Hoge Raad) ruling of July 18, 20251 where it ruled that economic substance of the intermediate shareholder of the Dutch dividend distributing company in itself is insufficient if the economic substance has no connection with the activities of the subsidiary distributing the dividends and that all facts and circumstances prior to and post dividend distribution should be taken into account in accordance with the Nordcurrent case.
NEO GROUP does not replace the earlier case law but complements it. It should be read as part of a chain of CJEU decisions on the prohibition of abusive practices under the PSD, including Eqiom (Case C-6/16), GS (C-440/17), the Danish cases, Deister Holding (C-504/16) and Nordcurrent. Each of those decisions responds to questions referred to in its own factual and legal context.
A significant point to note is that NEO GROUP concerned the application of a national rule implementing the PSD anti-abuse rule to a potential abuse of the dividend exemption by an individual. One could argue that it should not be extrapolated mechanically to genuine investment structures put in place by corporate groups or funds, which have their own body of case law (the Danish cases, Deister Holding, Eqiom and Nordcurrent), although unfortunately the CJEU did not expressly make this distinction.
In addition, structures that rely on double tax treaty relief rather than the PSD, particularly those treaties with non-EU countries, may call for a different analysis depending on the treaty’s anti-abuse provisions, including beneficial ownership analysis in light of OECD Commentary.
Dealing with these issues in practice
NEO GROUP does not alter the CJEU’s case law on the burden of proving abuse, which remains on the tax authority, and the taxpayer must have the opportunity to rebut its arguments.
The authority must show not only that there is a non-genuine arrangement or series of arrangements, but that its main purpose or one of its main purposes is obtaining a tax advantage that defeats the object and purpose of the PSD. In doing so, it must apply the indicators of artificiality (and of its absence) developed in the case law, which are normally assessed as a whole rather than individually (for example, the onward distribution of dividends by the company receiving the dividends).
However, the tax authority cannot be required to provide evidence that it would be impossible for it to adduce, and NEO GROUP widens the facts it can rely on. Groups should:
- document a valid commercial reason for every step in a dividend chain, including restructurings, acquisitions and intra-group financing above the immediate parent
- review existing structures periodically, as an arrangement that was genuine when established may cease to be so
- consider where dividends ultimately end up and how they are taxed there
- in joint ventures, consider protections in shareholders’ agreements against withholding tax liabilities caused by a shareholder’s arrangements, and
- be prepared for parallel challenges in more than one member state and consider dispute resolution options at an early stage.
Some limits to the PSD anti-abuse rule do remain. As with the Danish cases and Nordcurrent, much will depend on how national courts apply these principles. Building and evidencing commercial substance across the whole chain, not just in the company receiving the dividends, will be more important than ever.
Footnote
1. Dutch Supreme Court July 18, 2025, ECLI:NL:HR:2025:1162.
