Facts
Two Lithuanian companies, among them NEO Group UAB (NEO), are fully held by Retal Industries Limited (Retal), a Cyprus-resident parent company. Retal genuinely performs economic activities and is the beneficial owner of the dividends it receives from its Lithuanian subsidiaries. Initially Retal was held by Clendon Holdings Inc. (Clendon), a Belizean company controlled by an individual tax resident in Cyprus (the Individual). Clendon sold all of its shares in Retal to PPH Polymer Products Holdings Ltd (PPH), a newly incorporated Cyprus company, for approximately EUR 310 million. The purchase price was deferred, and Clendon assigned the resulting debt to the Individual, so that PPH owed a loan to the Individual. The dividends distributed by NEO to Retal, and subsequently by Retal to PPH, seem to be used to repay that loan.
NEO applied the Lithuanian withholding tax exemption following from Article 5 PSD. The Lithuanian tax authorities refused the exemption, invoking the PSD's anti-abuse rule (Article 1(2) and (3) PSD). The tax authorities did not dispute that Retal carried out actual economic activities in Cyprus and was the beneficial owner of the dividends. Irrespective of Retal’s actual economic activity and beneficial ownership status, the tax authorities took the view that the structure and transactions as a whole were intended to procure a tax advantage for the Individual, consisting in the avoidance of Lithuanian withholding tax.
What the CJEU decided
Unlike the Danish cases, where artificiality followed from interposing a conduit company with no economic activity of its own, Retal genuinely carried out economic activities in Cyprus and was the beneficial owner. The CJEU nonetheless held that the absence of a conduit company does not, by itself, mean an arrangement is genuine. A distribution to a company with actual economic activities is not automatically genuine if it forms part of a larger scheme designed to artificially meet the PSD's conditions.
The CJEU also elaborated on the relevant circumstances for the assessment of abuse. In the Danish cases, an indicator of abuse was dividends being passed on very soon after receipt to a party outside the scope of the PSD. This passing on may have occurred in the case of NEO Group UAB as well, albeit in a different form. The CJEU confirms that "passing on" may also take the form of other transactions, such as a share sale or a loan assignment, and may also happen over a longer period of time, provided the same intention is present. The chain of transactions in the case at hand are part of the overall assessment of whether the arrangement is genuine. The CJEU held that the tax advantage defeating the PSD's purpose does not need to be shown at the level of the subsidiary that distributed the dividend and claimed the exemption. It suffices that the advantage can be derived and intended by the individual who controls the group within which the chain of transactions was carried out. In the same vein, it is not required that the subsidiary was aware of the chain of transactions or had the intention to artificially obtain the tax advantage. Instead, it suffices that at least one company in the chain, or the individual benefiting from the chain of transactions, has the intention to obtain the advantage of EU law by artificially meeting the conditions.
Separately, the CJEU took into account (the national interpretation of) an applicable tax treaty, because the national court had included this as relevant legislative context. The CJEU considered that – while tax treaties remain a competence of Member States – they cannot be relied upon to achieve a result contrary to EU law. This could be read as meaning that tax treaties between Member States cannot be relied on as a “fallback” for situations where the anti-abuse rule in the PSD prevents taxpayers from invoking the relevant benefits.
What counts as the relevant tax advantage
One of the key questions arising from the early discussion of this case concerns the identification of the relevant “tax advantage”. While not explicitly mentioned in the facts and circumstances, the arrangement could appear to (also) serve an advantage under Cypriot domestic law by effectively converting a dividend into a loan repayment. In our view, the CJEU's analysis focuses on the advantage conferred by the PSD itself, namely exemption from withholding tax under Article 5, rather than on any separate tax benefit available under national law or in a tax treaty.
This interpretation is consistent with the CJEU’s judgment in Nordcurrent, where the concept of "tax advantage" for purposes of the PSD was limited to the benefits granted by the PSD itself. Other tax benefits do not constitute a "tax advantage" in that sense, although they may still be relevant when assessing whether obtaining the PSD benefit was one of the principal purposes of the arrangement.
On this basis, abuse of the PSD exists where the arrangement is mainly designed to obtain the PSD exemption for a person who falls outside its scope, such as the individual ultimately controlling the group. There is no indication that the CJEU intended to treat abuse of a Member State's own domestic tax rules, such as the Cypriot tax treatment of the loan repayments, as abuse of EU law in its own right.
Impact
The judgment aligns with previous judgments on abuse of EU law, such as the Danish cases and Nordcurrent. Most importantly, the judgment in NEO Group UAB explicitly considers that genuine economic activity and beneficial ownership at the level of the immediate parent cannot form a “safe haven” from the anti-abuse rule in the PSD. Tax authorities can look beyond the subsidiary and parent company for the assessment of abuse, even if the parent company carries out actual economic activities.
Taxpayers should be mindful that the analysis of abuse is not limited to the immediate dividend distribution but may also extend to the subsequent chain of transactions. A withholding tax exemption may therefore be denied where those subsequent steps indicate that the dividend was ultimately deployed as part of an artificial arrangement designed to channel the benefits of the PSD to a person falling outside its scope.
Against that background, it is advisable for taxpayers to carefully monitor and document the commercial and other non-tax considerations underpinning each step of the wider transaction sequence. Such contemporaneous evidence may prove critical in demonstrating that the subsequent transactions were driven by genuine business objectives rather than by a predominant intention to secure the benefits of the PSD.
Should you have questions about this judgment or its impact on your group's holding and financing structures, please contact your usual Loyens & Loeff adviser or one of the specialists mentioned below.
