CJEU Further Clarifies PSD Anti-Abuse Rule

On 15 October 2026, the Court of Justice of the European Union (CJEU) delivered its judgment in NEO Group (C-203/25) on the anti-abuse provision in the EU Parent-Subsidiary Directive (PSD). The judgment builds on T Danmark and Y Denmark (C-116/16 and C-117/16) and, in particular, Nordcurrent (C-228/24; see our earlier news item), but also contains several new elements. It is also relevant to the Dutch anti-abuse rules for dividend withholding tax and corporate income tax. This alert summarizes the rulings of the court and explains their practical implications.

Background of the Case

The Lithuanian company NEO Group distributed dividends to its Cypriot parent company, Retal, and applied the withholding tax exemption based on the PSD. Retal conducted genuine economic activity and was not a conduit company. Above Retal, however, a series of transactions had been implemented. Retal’s shares were sold to a recently incorporated Cypriot holding company, with payment of the purchase price deferred. The purchase price receivable was then assigned to a Cyprus-resident individual, who ultimately controlled all the companies involved. Over time, Retal paid dividends to the new holding company in amounts similar to those received from Lithuania. Through loans and assignments of rights, the funds ultimately reached the individual and were used to settle the purchase price debt.

The Lithuanian tax authorities treated this as a non-genuine chain of transactions conducted outside Lithuania to avoid Lithuanian tax on the dividends. They denied the withholding tax exemption and assessed tax on the dividends from NEO. The Lithuanian Tax Disputes Commission subsequently asked the CJEU whether that approach was compatible with the PSD anti-abuse provision.

Decision of the CJEU

The CJEU addressed the questions in four rulings. Whether abuse occurred in the NEO Group case itself, remains for the Lithuanian referring court to determine.

1. A parent company’s genuine economic activity does not rule out abuse

The PSD’s anti-abuse provision may permit the source state to levy withholding tax on dividends where a parent company in another member state participates in a chain of transactions — some or all of which are not genuine — that transfers the dividends to the person who directly or indirectly controls the companies involved. This remains possible even if the parent company carries on genuine economic activity and is not a conduit company.

The CJEU also states that a tax treaty between the member states concerned — even one based on the OECD model treaty — cannot be relied on to achieve a result contrary to EU law.

2. Matching amounts and recurring onward payments may indicate a non-genuine arrangement

When a subsidiary distributes dividends to its parent company, these dividends are often passed on further within the structure. According to the CJEU, the following facts may provide relevant indications that the tax authorities can rely on to establish a non-genuine arrangement:

• Amounts passed on within a chain of transactions — some or all of which are not genuine — that are identical or similar to the dividends distributed.
• Onward payments that do not take place shortly after the dividend distribution, but over an uninterrupted period.

These indications are evidence to be weighed in an objective assessment of all relevant facts and circumstances — not a substitute for that assessment. The burden of proof lies primarily with the tax authorities seeking to deny the PSD benefit.

Immediacy is not required. A non-genuine arrangement whose effects recur over time, may equally defeat the object or purpose of the PSD. The tax authorities therefore cannot be required to limit their examination to a short period. Where changes in group structure and financing arrangements form part of the alleged scheme, the tax authorities should examine the full period and all contributing elements. However, the CJEU stressed that these indicators cannot create a general presumption of abuse.

3. Transactions outside the source state count, and the tax advantage may arise elsewhere in the chain

The PSD’s anti-abuse provision may apply even if the allegedly non-genuine transactions occurred outside the source state and involved non-resident persons. The relevant tax advantage may arise at any point in the chain, including at the level of the person who ultimately benefits from the dividend exemption.

Because the PSD necessarily concerns cross-border situations, the source state must consider relevant transactions outside its territory, regardless of whether they occur before or after the dividend distribution. The advantage need not arise at the level of the distributing subsidiary that applied the exemption. Otherwise, the source state would be unable to counter such unjustified advantages.

The CJEU does not, however, further define when a tax advantage defeats the PSD’s object or purpose. It reiterates that the PSD seeks to exempt dividends from withholding tax and eliminate double taxation at the level of the parent company, thereby facilitating EU-level groupings of companies.

4. The distributing subsidiary need not be aware of the abuse; awareness of one participant in the chain is sufficient

The PSD anti-abuse provision may apply without proof that the distributing subsidiary knew or could have known that the distribution formed part of a non-genuine chain of transactions established principally to obtain a tax advantage contrary to the PSD. It is sufficient to show that at least one participating group company — or the individual who benefits — was or could have been aware of the non-genuine chain.

What does this mean for you?

The decision is highly relevant to the interpretation of the PSD anti-abuse provision. This affects also Dutch anti-abuse rules, in particular the Dutch dividend withholding tax exemption and the non-resident corporate income tax rules for substantial interest holders. The judgment may also affect the application of the participation exemption.

The CJEU does not provide a stand-alone abuse test. Instead, it identifies factors that must be assessed together in light of all relevant facts and circumstances. Whether the judgment affects a specific situation requires a careful analysis of the structure, the cash flows and the background to each step, including steps taken outside the Netherlands.

Groups should document the commercial rationale for both the overall structure and each material step at group level, regardless of whether dividends are, or will soon be, distributed. Businesses already discussing the Dutch withholding tax exemption or non-resident corporate income tax liability with the Dutch Tax Administration — and those considering a future distribution or restructuring — should assess the potential implications of the CJEU decision for their organization.

Do you have any questions? Please contact your BDO adviser.