The case revolved around Nordcurrent, a Lithuanian video game developer, and its UK subsidiary established in 2009 for the distribution of games. The subsidiary ceased operations in 2019 and was liquidated following the relocation of its functions to Lithuania. During audits for 2018 and 2019, Lithuanian tax authorities labelled the subsidiary a “non-genuine arrangement,” designed to secure a tax benefit, and denied Nordcurrent the dividend participation exemption under the PSD. This decision led to additional tax assessments and penalties, which Nordcurrent contested, eventually bringing the issue to the CJEU.

The CJEU addressed three key questions in its judgment, offering nuanced interpretations that shape the application of the PSD's anti-abuse provisions.

1. Applicability beyond conduit companies

The CJEU determined that anti-abuse rules under the PSD are not confined to conduit arrangements. Even if a subsidiary operates in its own name and generates profits independently, it can still be assessed as a non-genuine arrangement if abuse is evident. This interpretation underscores the broad scope of the anti-abuse provision, emphasising a holistic assessment of facts and circumstances.

2. Comprehensive timeline assessment

A central element of the ruling was the Court’s insistence on evaluating all relevant facts, including the full lifecycle of an arrangement. Tax authorities cannot limit their analysis to a specific point in time, such as the date of dividend payments. For instance, although the Nordcurrent subsidiary was initially set up for valid commercial reasons, its ongoing existence and activities during the years under scrutiny required evaluation to determine its genuine nature.

The Court also noted that an arrangement that starts as genuine may evolve into a non-genuine one due to changed circumstances, or vice versa. This ruling protects taxpayers by ensuring that only arrangements with clear and intentional abuse are penalised.

3. Conditions for denial of tax benefits

Importantly, the Court clarified that labelling a subsidiary as a non-genuine arrangement is not sufficient grounds for denying tax advantages. Two conditions must coexist to justify such denial:

• The arrangement must be devoid of legitimate commercial purposes that align with economic reality, indicating its non-genuine nature.
• The arrangement’s main purpose must be to obtain a tax advantage that undermines the Directive’s objectives.

The Court also broadened the interpretation of "tax advantage," demanding a holistic examination of the tax impact across jurisdictions. For example, Nordcurrent argued that its UK subsidiary paid a higher corporate tax rate than it would have in Lithuania, a factor that influenced the assessment of whether the structure was abusive.

This decision offers both challenges and safeguards for companies leveraging cross-border tax structures within the EU. By emphasising the need for a detailed, comprehensive analysis, the judgment ensures fairness while granting tax authorities tools to combat abuse. Businesses need to ensure their corporate arrangements serve legitimate economic purposes and adapt to changing circumstances to avoid classification as non-genuine.

• The CJEU reaffirmed the PSD’s broad anti-abuse scope, requiring a thorough and multi-faceted evaluation of arrangements.
• Denial of tax exemptions demands proof of both a non-genuine arrangement and a tax advantage that contravenes the PSD's intent.
• Evolving arrangements must reflect economic substance to withstand scrutiny under the Directive.

For companies with cross-border subsidiaries, this ruling underscores the importance of maintaining transparency, demonstrating valid commercial rationale, and reviewing structures in light of regulation and business changes.

CJEU’s decision can be found here.