Publish Date
Oct 19, 2026
Asia Tax Update
Since the PSD was first adopted in 1990, the test for access to its benefits has shifted from a largely formal one (qualifying legal form, a minimum holding and, optionally, a minimum holding period) to an analysis of substance and purpose. Beyond the long-standing carve-out for domestic and treaty anti-abuse provisions (now Article 1(4)), Directive 2015/121[2] introduced a general anti-abuse rule (“GAAR”) in Article 1(2) and (3) PSD: the benefits are denied to an arrangement, or series of arrangements, that is put in place for the main purpose or one of the main purposes of obtaining a tax advantage defeating the object or purpose of the PSD and that is not genuine, i.e. not put in place for valid commercial reasons which reflect economic reality.
The turning point came with the CJEU’s landmark judgments of 26 February 2019 in the so-called Danish beneficial ownership cases[3] (N Luxembourg 1 and Others, C-115/16 et al., under the Interest and Royalties Directive, and T Danmark and Y Denmark, C-116/16 and C-117/16, under the PSD). The CJEU held that the general principle of EU law prohibiting abusive practices requires Member States to refuse directive benefits in cases of abuse, even absent a specific domestic or treaty-based anti-abuse provision. It identified indicia of abuse, in particular in cases of conduit companies which pass on all or almost all of the income within a short timeframe after receipt to entities that do not themselves qualify for the PSD, and with only limited substance. The burden of proof lies with the tax authorities, but they are not required to identify the actual beneficial owner. The CJEU judgments in the Danish cases triggered several questions, notably whether beneficial ownership was blurred into a wider concept of abuse.
Since then, tax authorities and national courts across Europe have increasingly focused on substance, decision-making and the onward flow of funds and dividends. In Nordcurrent group[4] (C-228/24, 3 April 2025), the CJEU dealt with the interpretation of the PSD GAAR, confirming that the rule applies to any type of non-genuine arrangement, that all relevant facts and circumstances must be considered (not only those existing at the date of a particular step), and that an arrangement originally put in place for valid commercial reasons may become non-genuine if it is maintained after those reasons have ceased to apply. The NEO GROUP case builds on this case law and addresses a question not specifically addressed by the Danish cases: can the anti-abuse rule also apply where the recipient parent company is not a conduit but carries on a genuine economic activity? In other words, can the assessment of abuse be made at the transaction level considering the chain of transactions, rather than entity level?
The facts of the case are straightforward: NEO, a Lithuanian company, has been wholly owned since 2008 by Retal, a Cypriot company carrying on a genuine economic activity. In 2016 and 2017, NEO distributed dividends of EUR 15 million to Retal (and a Lithuanian sister company distributed a further EUR 13.5 million), applying the Lithuanian participation exemption implementing Article 5 PSD (holding of at least 10% for an uninterrupted period of at least 12 months). The Belize entity holding the shares in Retal had sold all Retal shares to a newly incorporated Cypriot company (PPH) for EUR 310.4 million, with the payment deferred to 2027. The purchase price receivable was subsequently assigned to the individual controlling the group, who was resident in Cyprus. Retal distributed similar amounts to PPH, which used the funds, through loans and assignments of rights, to settle its debt to that individual. The Lithuanian tax authority treated the chain as a non-genuine arrangement and assessed withholding tax of EUR 2.25 million, plus default interest and a penalty, on NEO as the distributing company.
Key Findings of the CJEU
The NEO GROUP case is an important decision of the CJEU, not because of the conceptual tests for the existence of abuse, but because of the far-reaching analysis that may be undertaken by local tax authorities to argue that there is abuse. Fundamentally this decision may change how certain tax authorities assess abuse along six lines: (i) What is examined: from the entity to the arrangement; (ii) where: beyond the source State; (iii) when: analysis over a continued period of time; (iv) who: tax advantage can arise at any stage of the chain; (v) whose intention: spread across the group; (vi) matching amounts transferred along the chain indicate abuse either if transfer occurs shortly after the transaction or over a continued period, but cannot constitute a general presumption of abuse.
One of the most important take-aways is that the NEO GROUP materially narrows the “operating holding company” defense that many groups have relied on since the Danish cases. Substance at the level of the dividend recipient remains necessary but is no longer sufficient: tax authorities may look through the entire ownership chain up to the ultimate parent or individual shareholder, inside or outside the EU, and assess both how the structure came about and what happens to the cash after it is received.
As an interpretation of existing law, the judgment also applies for distributions in open years. We expect its reasoning to influence treaty (beneficial ownership and principal purpose test) and domestic anti-abuse analyses, including for holding companies resident outside the EU. Key pain points include:
Groups should map dividend chains end to end, test them against these parameters and refresh group-level rationale and funds-flow documentation before the next distribution cycle. The judgment does confirm that the burden of proof rests with the tax authorities and that matching amounts alone does not create a presumption of abuse. These are important points for defending well-documented structures.
[1] CJEU, 15 October 2026, NEO GROUP, C-203/25 (provisional text).
[2] Council Directive 2011/96/EU of 30 November 2011 (Parent-Subsidiary Directive), as amended by Council Directive (EU) 2015/121 of 27 January 2015.
[3] CJEU, 26 February 2019, N Luxembourg 1 and Others, C-115/16, C-118/16, C-119/16 and C-299/16, EU:C:2019:134 T Danmark and Y Denmark, C-116/16 and C-117/16, EU:C:2019:135.
[4] CJEU, 3 April 2025, Nordcurrent group, C-228/24, EU:C:2025:239.
This alert is general in nature and is provided for information only. It is based on the provisional text of the judgment, which may be subject to editorial changes, and does not constitute legal, accounting or tax advice. It may not be applicable to, or suitable for, specific circumstances and should not be relied upon as a substitute for professional advice tailored to the facts. Recipients should consult a qualified Alvarez & Marsal professional before taking any action. A&M assumes no obligation to update this material for subsequent developments.