On 15 October 2026, the Court of Justice of the European Union (“CJEU”) delivered its judgment in the Neo Group case, confirming that the genuine economic activity of a parent company does not, in itself, prevent the denial of the withholding tax exemption under the Parent-Subsidiary Directive (“PSD”) where the dividend distribution forms part of a wider non-genuine arrangement. Additionally, relevant indicia of abuse can be found outside the distributing company’s jurisdiction, and the abusive intention may be established at the level of another group company, rather than at the level of the distributing subsidiary itself.
Background
Neo Group UAB (“NEO”), a Lithuanian company, distributed EUR 15 million in dividends to its Cypriot parent, Retal Industries Ltd (“Retal”), in 2016 and 2017 without applying withholding tax. Another Lithuanian subsidiary distributed approximately EUR 13.49 million to Retal during the same period.
The Lithuanian tax authority challenged the exemption in light of a wider restructuring. Retal’s shares were sold by Clendon, a Belizean company, to PPH, a newly incorporated Cypriot company, for EUR 310.4 million, payable in 2027 without security. The ultimate controlling shareholder remained unchanged.
According to the tax authority, the restructuring artificially created indebtedness, enabling the ultimate shareholder to receive funds originating from the Lithuanian dividends through subsequent distributions, loans and assignments of receivables. Its assessment relied particularly on the timing of the transactions and the correspondence between the amounts transferred.
NEO disputed that assessment, arguing that the restructuring aimed to remove offshore entities from the group and relocate the management of the group’s parent company to Cyprus. It also maintained that Retal had already been entitled to the withholding tax exemption before the restructuring.
Importantly, the tax authority did not dispute Retal’s actual economic activity. The Lithuanian Tax Disputes Commission therefore sought clarification on whether the PSD’s general anti-abuse rule (“GAAR”) could apply despite the genuine nature of the immediate parent company.
The CJEU’s judgment
1. Economic substance does not exclude abuse
The Court recalled that denying PSD benefits requires two cumulative conditions: a non-genuine arrangement, not put into place for valid commercial reasons which reflect economic reality, and a main purpose, or one of the main purposes, of obtaining a tax advantage that defeats the object or purpose of the Directive.
The GAAR is not limited to conduit companies. Even where the immediate parent company carries on genuine economic activities, individual steps within a wider arrangement may be non-genuine.
Building on its judgment in Nordcurrent Group (C-228/24) (see our previous Newsflash), the Court reaffirmed that the PSD GAAR requires both a non-genuine arrangement lacking valid commercial reasons reflecting economic reality and a tax advantage that defeats the object or purpose of the Directive. While Nordcurrent Group clarified the scope and timing of the abuse assessment, Neo Group takes the analysis a step further: the genuine economic activity of the immediate parent company does not rule out abuse where that company forms part of a wider non-genuine arrangement.
NEO also relied on the Lithuania–Cyprus double tax treaty, which provided for a 0% withholding tax rate where the recipient company was the beneficial owner of the dividends and directly held at least 10% of the distributing company's capital. While NEO argued that Retal qualified as beneficial owner, the Court clarified that such status would not, in itself, preclude the application of the PSD GAAR.
Advocate General Kokott reached a broadly similar conclusion in her opinion, although she placed greater emphasis on the exceptional nature of abuse where the immediate recipient is the genuine beneficial owner of the dividends.
2. Financial flows may provide indications of abuse
The Court held that the correspondence between the amounts transferred through successive transactions and the dividends initially distributed may constitute a relevant indication of a non-genuine arrangement. Transfers occurring continuously over a period may also be relevant, even if they do not take place immediately after the initial distribution.
This is a notable departure from the Advocate General’s Opinion. She considered that, where the parent company is not a conduit company, neither the correspondence of amounts nor the proximity in time between distributions constitutes, as such, an indication of, or a condition for, abuse.
The Court nevertheless confirmed that such indications must be assessed in light of all relevant facts and circumstances and cannot, by themselves, establish even a presumption of abuse.
3. The entire chain of transactions matters, including steps outside the subsidiary’s Member State
The Court confirmed that the source Member State may deny the PSD withholding tax exemption by reference to a wider non-genuine arrangement, even where the relevant transactions take place in another Member State and the tax advantage arises at another stage of the chain, including at the level of the ultimate shareholder.
The Advocate General had taken a more restrictive approach, distinguishing abuse of the PSD from abuse of another Member State’s national tax legislation. The Court did not retain that distinction as an independent limitation on the GAAR.
In addition, the Court confirmed that this approach is consistent with the principle of proportionality. Since the anti-abuse rule concerns inherently cross-border situations, an interpretation allowing an overall examination that includes transactions carried out outside the subsidiary's Member State is appropriate to attain the objective of combating abuse and does not go beyond what is necessary, as the abusive nature of such arrangements can often only be established through such an analysis.
Finally, as to the subjective element of abuse, namely the intention to obtain an advantage from EU rules by artificially creating the conditions for obtaining it, the Court held that the distributing subsidiary need not have been aware of the allegedly non-genuine arrangement, provided that the relevant awareness can be established at the level of at least one participating group company or the natural person benefiting from the tax advantage. On this point, the Court substantially followed the Advocate General.
Key takeaway
Following the judgement in the Nordcurrent Group case, the Neo Group case reinforces the importance of examining the overall chain of transactions rather than the economic substance of the immediate dividend recipient in isolation.
The correspondence and timing of financial flows, the commercial rationale of a restructuring even if it does not directly involve the distributing company, and the position of the ultimate beneficiary may all be relevant. However, the existence of a non-genuine arrangement and a tax advantage defeating the PSD’s object or purpose must still be established: these indicia, taken alone, do not rise to the level of a presumption of abuse.
The CJEU did not determine whether the restructuring at issue was abusive, leaving that assessment to the referring body.
The judgment coincides with the recent European Commission’s Tax Omnibus proposal, which notably seeks to ease access to PSD benefits by removing the minimum shareholding and holding-period requirements (see our recent Newsflash). Future easier access to PSD benefits does not remove the need to substantiate the commercial rationale and economic reality of the arrangements through which they are claimed.
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