CJEU in NEO GROUP (C-203/25): a genuine parent company is no longer a safe harbour under the Parent-Subsidiary Directive general anti-abuse rule

Introduction: The Evolution of the Meaning of Abuse and Beneficial Ownership in the PSD

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?

Detailed Discussion

Facts of the Case

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

1. A genuine parent company is not a safe harbour. The anti-abuse rule applies to any type of non-genuine arrangement. The conduit company scenario of the Danish cases was only one example (paras 56, 62). The fact that the first step is a distribution to a parent with real economic activity does not in itself exclude abuse and tax authorities should assess the entire ownership and transaction chain, including share sales, loans and debt assignments (paras 62–63, 70). The beneficial ownership under tax treaty does not change this: the CJEU referred to the interpretation of this requirement under para 12.5 of the OECD Commentary on Article 10 considering however that the beneficial ownership does not automatically secure treaty relief in all cases (para. 68). The CJEU stressed that treaty relief should not be granted in cases of abuse and treaties between Member States cannot be relied on to achieve a result contrary to EU law (paras 68–69). Interestingly, and by making these statements, the CJEU appears to confirm that beneficial ownership and abuse are indeed two separate tests clarifying a question that has remained open since its reasoning in the Danish cases judgments.
2. Matching amounts and continuous flows are relevant indicia. The correspondence between the dividends received and the amounts from which the controlling person ultimately benefits is an indication of abuse, but does not create a general presumption (paras 74–75). Onward payment “very soon” after receipt is not required: the existence of regular transfers over a longer period can equally evidence a non-genuine arrangement (paras 76–78). The burden of proof remains with the tax authority, which cannot however be required to provide impossible evidence (para 59).
3. Cross-border scope and location of the tax advantage. The source State must conduct an overall examination that includes transactions outside its territory, carried out before or after the distribution, and may take subsequent changes in circumstances into account (paras 81–84). The tax advantage need not arise for the distributing subsidiary; it may be obtained at any stage of the chain, including by the controlling individual resident in another Member State. This is consistent with the principle of proportionality, and the fundamental freedoms cannot be invoked to shield an established abuse (paras 85–89).
4. Intent may be established at group level. In addition to the objective test, abuse requires a subjective element: the intention to obtain an advantage by artificially creating the conditions for it (paras 91–93). It suffices that this is demonstrated for at least one group company in the chain, or for the person benefiting from the advantage. It is not necessary to show that the distributing subsidiary itself was or could have been aware of the arrangement (paras 98–99). The Lithuanian referring body must now apply this guidance to the facts.

Conclusion: Why Is This an important Case and What This means for US MNE Groups and Their Holding Structures?

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:

• Dividend-funded intra-group debt: distributions used, directly or indirectly, to service or repay debt arising from internal share sales, vendor notes, deferred purchase prices or debt push-downs — the fact pattern in NEO GROUP.
• Systematic upstreaming: repatriation policies and cash-pooling arrangements where amounts passed on mirror the dividends received; a time lag between receipt and onward payment no longer neutralizes this indicator. Note that this is only an indicator and not abusive per se.
• Legacy and post-transaction structures: holding companies maintained after an acquisition, integration, divestiture or carve-out has removed their original commercial rationale (Nordcurrent).
• Withholding agent exposure: the distributing subsidiary bears the withholding tax, interest and penalties exposure based on intent at shareholder or group level that it may neither control nor know about. This is relevant for M&A due diligence, SPA indemnities and W&I coverage for open years.
• Non-EU ultimate owners: where the ultimate parent would have obtained the same relief on a direct holding, this remains an important argument that no tax advantage arises, although the Danish cases indicate that this alone does not exclude abuse. Where the direct route would give a higher rate, the advantage can be in scope.
• Documentation and existing positions: beneficial ownership memoranda, rulings and positions accepted by tax authorities before NEO GROUP may focus on recipient-level substance and timing rather than the full chain and post-distribution use of funds.

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.

Key References

[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.

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