Background to the Case Before the Court of Justice of the EU

The Court of Justice of the European Union (CJEU) received a request for a preliminary ruling from the Lithuanian Government’s Tax Disputes Commission in a case concerning a Lithuanian parent company receiving dividends from its UK-based subsidiary.

The request concerned the compatibility of Lithuanian tax practice with Council Directive 2011/96/EU of 30 November 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States.

The Lithuanian parent company had held shares in its UK subsidiary since 2009, using it for many years as the vehicle for distributing computer games. The UK entity had been created specifically for digital distribution, as the Lithuanian parent faced difficulties entering into such distribution agreements directly. The UK subsidiary was liquidated in 2021, once the parent company succeeded in contracting directly with electronic platforms. Consequently, the existence and operation of the UK subsidiary were economically justified throughout its lifetime.

However, the Lithuanian tax authority concluded that the subsidiary was an artificial entity due to the lack of so‑called economic substance in the UK (no employees, no office, no office equipment). In Polish practice, this would be referred to as the absence of “genuine economic activity.” As a result, the authority held that the dividends received by the parent company in 2018–2019 could not benefit from the dividend exemption under Directive 2011/96/EU. In the authority’s view, the exemption had been abused.

The relevant time horizon when assessing abuse of tax law

According to the CJEU, when assessing whether tax abuse has occurred within the meaning of Directive 2011/96/EU, one must consider not only the period during which the dividend was paid but also the periods preceding the distribution and those following the payment.

The Court stressed that all circumstances relevant to the case must be assessed collectively to determine whether an abuse of the dividend exemption has occurred. Only the examination of the creation, operation, and dissolution of the relevant entity can answer whether it was established for genuine economic reasons or merely to obtain a tax advantage contrary to the purpose of the directive.

Lack of economic substance does not automatically constitute tax abuse

Importantly, the Court emphasised the independence and significance of each element of the anti‑abuse clause under Directive 2011/96/EU. The Lithuanian authority – similarly to Polish tax authorities – derived the alleged abuse solely from the lack of economic substance (in Poland referred to as the lack of genuine economic activity) of the UK subsidiary.

The CJEU highlighted that the artificial nature of an arrangement is only one component of the anti‑abuse test. To establish tax abuse, it is also necessary to demonstrate the intention to obtain a tax advantage that is incompatible with the purpose of Directive 2011/96/EU. Moreover, obtaining this unjustified tax advantage must be one of the main motives of the taxpayer’s actions.

No definition of “tax advantage” in the directive

The Court also noted that Directive 2011/96/EU does not define the concept of a “tax advantage.” Therefore, the overall tax burden must be taken into account – in this case, including the corporate income tax paid by the UK subsidiary.

The parent company demonstrated that if the subsidiary’s operations had been conducted in Lithuania – as desired by the Lithuanian authority – the resulting income would have been taxed less heavily than in the UK. Consequently, the total tax burden at group level would have been lower, even without the dividend exemption.

What does this judgment mean for polish withholding tax payers?

For Polish payers of withholding tax on outbound dividend payments, the CJEU ruling provides three important arguments in disputes with domestic tax authorities:

1. Broader time horizon for assessing genuine economic activity.

Polish payers may demand that tax authorities analyse the existence of genuine economic activity over a longer timeframe. Where such analysis has not been performed, taxpayers may challenge the assessment.

2. Requirement to examine all elements of tax abuse, not just economic substance.

Tax authorities cannot rely solely on the lack of genuine economic activity while ignoring the taxpayer’s intent or the question of whether the alleged tax advantage contradicts the purpose of Directive 2011/96/EU.

3. Possibility to demonstrate the absence of any real tax advantage at the level of the EU‑based group.

In some situations, taxpayers may point out that no measurable tax benefit has been obtained from an EU‑wide perspective.