Withholding tax again before the Court of Justice in C-203/25, Neo Group | In Principle

The advocate general has submitted her opinion to the Court of Justice of the European Union in case C-203/25, concerning the Lithuanian company Neo Group UAB and its dispute with the national tax authority. The opinion examines several new aspects that may be relevant in cases involving the exemption of dividends from withholding tax.

In 2016–2017 Neo Group paid a dividend to its parent company and did not withhold tax at the source, relying on the participation exemption grounded in EU law.

However, the Lithuanian tax administration maintained that the dividends should have been taxed in Lithuania because they were paid to a Cypriot company, and via another Cypriot company reached an individual who is not a tax resident of Lithuania. In the view of the Lithuanian authorities, the arrangements and payments between the second Cypriot company and the individual were not genuine, and the company itself had no employees. The alleged aim of the arrangement was to avoid paying tax on the dividends distributed by Neo Group.

The Lithuanian government’s Tax Disputes Commission sought a preliminary ruling from the Court of Justice. The advocate general in the case, Juliane Kokott, submitted her opinion in May 2026. The opinion provides four interpretive guidelines under the Parent-Subsidiary Directive (2011/96/EU), which is the basis for applying the participation exemption to dividends.

Can abuse occur when the parent company is the beneficial owner of the dividend?

Addressing this issue, the advocate general observed that the fact that the recipient of a payment is genuinely the beneficial owner of the payment does not necessarily mean that the anti-abuse clause was not violated. However, this would be abusive only under exceptional circumstances.

Abuse of the directive may occur if a dividend is paid by the subsidiary to the parent as part of an abusive arrangement.

The limited possibility of finding an abuse in this situation arises primarily from the structure and scope of the directive, as expressed in the two following observations:

• The anti-abuse clause applies to non-genuine arrangements whose aim is to obtain a tax advantage.
• The directive’s aim of ensuring tax neutrality is based on the assumption that the profits of a corporate group are generally subject to corporate income tax at the level of the subsidiary only at the time the profit is earned, and personal income tax is levied only on the “final” distribution of the profit as capital gains to its shareholder who is a natural person.

For these reasons, the advocate general cited a specific example of circumstances in which the directive could be abused, “where a subsidiary distributes dividends to its parent company which is the beneficial owner in order to conceal them by means of further transactions through ‘non-cooperative offshore jurisdictions’, with the result that the State of residence of the final beneficiary does not receive any information about the ‘final’ distribution and is therefore unable to tax it.”

But the advocate general did not agree with the assertion that there cannot be an abuse if the parent company is the beneficial owner of the dividends.

What if the abuse occurs in another state?

In addressing this question, the advocate general stated that, as a rule, abuse of the national tax regulations of a member state does not constitute abuse of the Parent-Subsidiary Directive. If a member state does not effectively combat the abuse of its own tax law, that does not give rise to any subsidiary jurisdiction for other member states for interpretation or enforcement of foreign tax law.

But the advocate general observed that this does not mean that the member states should not respond in the face of tax evasion. It would not be reasonable to oblige member states to refrain from levying withholding tax on profits generated in their territory even where the purpose of the arrangement is to unlawfully avoid taxation of the profits in another member state.

The advocate general based this view on the regulations, indicating that the aim of the directive is not to enable unlawful non-taxation of profit distributions.

Is the connection between cashflows, in time and amount, relevant?

On this issue, the advocate general stated that the mere transmission of dividends does not in itself constitute a non-genuine arrangement, irrespective of whether onward distributions by the parent company correspond to the amounts of the distributions by the subsidiary and at what point in time they occur.

While under the case law of the Court of Justice these circumstances can be indicia of abuse, the tax authorities cannot rely on these circumstances alone in finding an abuse. This arises from the principle grounded in the case law that the existence of abuse should be determined in light of all the relevant facts and circumstances.

Whose awareness of the abuse should be examined?

In examining whether in the case of a chain of transactions, it should be proved that the subsidiary paying the dividends was aware of the existence of the non-genuine arrangement, the advocate general stated that “the awareness of the person who makes the decision to implement the arrangement would seem to be of primary importance.”

For this view, she argued that:

• Otherwise, “a ‘bad faith’ decision-maker could hide behind a ‘good-faith’ intermediary in order to exclude abuse”
• The decision on a distribution of dividends is made by the controlling shareholders (or the sole indirect shareholder), and, accordingly, their awareness is the relevant factor.

Thus she regarded the subsidiary’s awareness as irrelevant.

Importance for practice

I would regard the advocate general’s analysis as sound, because she identified the principles designed to protect taxpayers and the EU taxation system against overreaching by local tax authorities, while not opening the way for bad-faith actors to exploit these principles.

However, the opinion introduces some confusion on four procedural issues.

First, it will be difficult to apply the guidance that the directive ensures fiscal neutrality, assuming that the state in which the final distribution of profits by the parent company to its shareholders takes place will tax it within its own fiscal autonomy, while all this is beyond the scope of the directive. This guidance is vague, and it is difficult to determine whether the advocate general is referring to entities inside or outside the European Union, or how these observations would relate to structures far more complex than those at issue in Neo Group.

Second, the assertion of a presumption that taxation is compliant with the aim of the directive, so long as formal conditions are met, seems unfortunate. The allocation of the burden of proof was the subject of detailed analysis in Danish cases, where the Court of Justice did not introduce a presumption but only made a distinction between the factual circumstances that must be proved by the taxpayer and those that must be proved by the tax authorities. There may not be much of a practical difference, but the notion of presumptions in cases before the Court of Justice has historically been discussed in another context.

Third, the advocate general seems to propose reducing the demands on the tax authorities with respect to the burden of proof. In the Danish cases, which involved intermediary companies, the Court of Justice indicated that it is up to the tax authorities to demonstrate the existence of the constitutive elements of an abusive practice in light of all the relevant aspects, in particular that the company to which the dividends were paid is not the owner of the dividends. In Neo Group, she reasons that a mere showing that the recipient of the dividends is the beneficial owner is no longer sufficient to find that the arrangement is not abusive. It is hard to determine whether this view arises only from differences in the factual situation between the Danish cases and Neo Group, or instead the advocate general is proposing a broader course correction.

Fourth, the advocate general only briefly touched on the issue of proving whose awareness would show the existence of a subjective intent to abuse the law. While her view is logical, it overlooks the specifics of the relationship between the remitter and the taxpayer, the organisational, personal and functional autonomy of the entities, and the need to ensure that remitters can consciously arrange their tax affairs.

It is reassuring, though, that the opinion twice repeats the view that transferring dividends within a corporate group to the parent company exercising control over the group, which ultimately distributes its profits to one or more natural persons, is consistent with the normal functioning of a company. Distributing dividends does not in itself constitute a non-genuine construction, regardless of whether the payments made by the parent company are equal to the amounts paid out by the subsidiary, or the order in which these transactions occurred.

Wojciech Marszałkowski, adwokat, Tax practice, Wardyński & Partners