1. Introduction

On April 3, 2025, the Court of Justice of the European Union (C.J.E.U.) handed down its much-anticipated judgment in the Nordcurrent case (C-228/24). The judgment addresses the application of the anti-abuse rule in the E.U. Parent-Subsidiary Directive (P.S.D.) to national participation exemption mechanisms. The ruling has resonance in Belgium, the Netherlands and Luxembourg where similar issues have been hotly debated. This newsletter provides a clear, accessible summary and analysis of the case, explores its practical implications in each of these countries, and offers a perspective on its broader impact.

2. Facts and C.J.E.U.’s assessment

2.1. Background

In 2009 Nordcurrent Group UAB, a Lithuanian video game developer, established a U.K. subsidiary to distribute games internationally. In 2017 and 2018, the functions and risks of the U.K. subsidiary were relocated to the parent corporation in Lithuania. After this relocation, Nordcurrent received dividends from its U.K. subsidiary and claimed exemption from Lithuanian corporate tax under the national participation exemption rules in Lithuania (rules that were implemented when the P.S.D. was transposed into national law in Lithuania). The U.K. subsidiary was then liquidated.

The Lithuanian Revenue Service denied the exemption for the U.K.-source dividends, arguing that the U.K. subsidiary was a "non-genuine arrangement" (i.e., an artificial structure) lacking sufficient substance – having only one employee (the director), no tangible assets, and sharing an address with 97,110 other corporations. The Lithuanian Revenue Service claimed that the arrangement was primarily set up to obtain a tax advantage, thus constituting abuse under the P.S.D.’s General Anti-Avoidance Rule (G.A.A.R.).

Nordcurrent argued that its U.K. subsidiary provided a real commercial advantage as an intermediary between Nordcurrent and various advertising and game distribution platforms until direct agreements could be concluded with such platforms. Following an agreement with Google in 2017, distribution functions and associated risks were gradually transferred from the U.K. subsidiary to Nordcurrent, leaving the U.K. subsidiary responsible only for distribution until its winding-up at the end of 2019. Nordcurrent emphasized that the U.K. subsidiary had operated for valid commercial reasons since its establishment in 2009 and was not merely a conduit entity. This was further evidenced by the fact that the Lithuanian Revenue Service had not questioned the U.K. subsidiary’s activities or reasons for its formation outside the years 2018 and 2019. Nordcurrent also claimed there was no actual tax advantage, as the U.K. subsidiary was profitable and subject to a higher corporate tax rate in the U.K. (24 per cent) than Nordcurrent in Lithuania (15 per cent).

2.2. Legal Issues

The Lithuanian Tax Dispute Commission (Mokestinių ginčų komisija prie Lietuvos Respublikos Vyriausybės) adjourned the hearing of the case and referred the following preliminary questions to the C.J.E.U.:

1. Can Lithuania deny the participation exemption if the subsidiary is not a mere conduit corporation but is still considered a non-genuine arrangement?
2. Should the assessment of abuse focus only on the situation at the time of dividend distribution, or must all relevant facts and circumstances be considered?
3. Is the mere classification of a subsidiary as a non-genuine arrangement sufficient to deny the exemption, or must there also be a tax advantage that defeats the P.S.D.’s purpose?

2.3. The C.J.E.U.’s Answers

1. Abuse not limited to conduit corporations: The C.J.E.U. ruled that the anti-abuse rule applies not only to conduit corporations but also to any arrangement that is not genuine, even if the subsidiary generated its own profit (income).
2. Holistic assessment required: The C.J.E.U. emphasized that all relevant facts and circumstances must be considered – not just those at the time of the dividend distribution, but also the reasons for the subsidiary’s creation and its activities over time.
3. Two-pronged test for abuse: To deny the exemption, both a non-genuine arrangement and a main purpose of obtaining a tax advantage defeating the P.S.D.’s object must have been present at creation or later on, if maintaining the structure is only for obtaining a tax advantage defeating the P.S.D.’s object.

3. In-Depth Analysis

3.1. The Anti-Abuse Rule in the P.S.D. Applies to Non-Conduit Corporations and Requires a Holistic and Dynamic Assessment

The P.S.D. aims to eliminate double taxation of profits distributed between EU corporations but also includes a G.A.A.R. to prevent abuse. Article 1, paragraphs 2 and 3 of the P.S.D. denies benefits to arrangements not put in place for valid commercial reasons reflecting economic reality, especially if the main purpose is to achieve a tax advantage. The C.J.E.U. clarified that the anti-abuse rule is not restricted to classic "conduit" or "letterbox" corporations. Even subsidiaries with real activities are in scope of the G.A.A.R. if, in the broader context, their existence or continued operation is primarily tax driven. This builds on earlier case law (notably the Danish cases[1] and Cadbury Schweppes[2]) but extends the principle to a wider range of arrangements.

A key novelty is the C.J.E.U.’s insistence on a holistic, dynamic approach. Revenue Services must consider:

• The full history of the arrangement, from its creation to the dividend payment;
• Changes in business purpose or substance over time; and
• The overall tax effect, including whether the subsidiary’s profits were taxed at a higher rate abroad than they would have been if such activities were not conducted by a subsidiary.

This C.J.E.U.’s holistic approach was foreshadowed by Attorney-General Kokott in the Danish case C-115/16.[3]  Holding and finance corporations require less physical presence – such as office space or numerous employees – than operational entities like manufacturing or sales activities. Instead, the focus is on economic substance: whether the corporation genuinely manages assets, assumes risks, and generates income locally, even if some functions are outsourced or physical presence is limited. This means that limited physical substance does not automatically indicate a lack of genuine economic activity, especially for asset management, holding or finance corporations. 

Whether the substance is adequate, is thus determined by the corporation’s business purpose and ongoing activities, requiring a contextual and dynamic assessment rather than a one-size-fits-all approach. This approach prevents both overly formalistic denials and automatic approvals and requires a nuanced, fact-driven analysis.

3.2. The Two-Pronged Test: Objective Element and Subjective Element

The C.J.E.U. also clarified that abuse requires the presence of an objective element and a subjective element:

1. Objective element: The arrangement is not genuine (lacks valid commercial reasons or economic reality).
2. Subjective element: The main purpose (or one of the main purposes) is to obtain a tax advantage contrary to the P.S.D.’s intent.

Both elements must be present. For example, a subsidiary with little substance is not automatically abusive if there is a genuine business rationale or no undue tax benefit. The C.J.E.U. held that the tax rate in the subsidiary’s country is relevant. If income is taxed at a higher rate abroad, this may indicate the arrangement was not primarily tax motivated. However, the overall tax effect, not just the formal structure, is decisive.

4. Practical Implications: What Does This Mean in Practice?

4.1. In a Broader E.U. Perspective

While much commentary has focused on the C.J.E.U.’s holistic approach, one underexplored implication is the potential shift in how "substance" is to be understood in E.U. tax law. The judgment suggests that substance is not a static laundry list (number of employees, office space, etc.), but a dynamic concept tied to the evolving business reality and purpose of each entity. This should encourage corporations to periodically review and adapt their structures – not just at inception, but throughout their lifecycle – to ensure continued alignment with genuine commercial needs. It also raises questions about the future of "substance over form" in E.U. tax law, potentially influencing areas beyond the P.S.D., such as transfer pricing and anti-hybrid rules.

The key takeaway at this point is that substance matters, but context is of the essence.  Corporations must ensure that subsidiaries have genuine business reasons and sufficient substance to align with those business activities but also be prepared to demonstrate the ongoing commercial rationale for their structures. This requires thorough records of the business purpose, activities, and changes over time for each group entity. The fact-intensive nature of the test following the Nordcurrent ruling may lead to more disputes, as both taxpayers and Revenue Services argue over the "real" purpose and effect of arrangements.

4.2. Belgian Implications: How Does Nordcurrent Affect Belgium?

Belgium has long grappled with the application of anti-abuse rules to the participation exemption and the different withholding tax exemptions, especially in complex international structures. Belgium has implemented both general and specific anti-abuse rules (G.A.A.R. and S.A.A.R.) in its tax legislation.

Particularly notable is S.A.A.R. for the application of the dividend withholding tax (W.H.T.) exemption under the P.S.D., as set out in Section 266, 4^th limb of the Belgian Income Tax Code (B.I.T.C.)). This provision transposes the P.S.D. anti-abuse provision into Belgian law. The exemption from W.H.T. does not apply to dividends linked to legal acts or series of acts that are artificial and primarily aimed at achieving a tax benefit. While the formal burden of proof of tax abuse lies in principle with the Revenue Service, in practice, taxpayers are often required to provide evidence that no tax abuse is at hand.

On the other hand, Section 344 B.I.T.C. is a general anti-abuse rule (G.A.A.R.) which also impacts the application of the participation exemption. Taxpayers are prevented from achieving tax benefits through artificial arrangements that lack valid commercial reasons and do not reflect economic reality. When applying the participation exemption – which allows parent corporations to receive dividends from subsidiaries free of corporate income tax (under certain conditions) – Article 344 B.I.T.C. allows the Belgian Revenue Service to disregard transactions or structures that are primarily tax-motivated and circumvent the intent of the B.I.T.C. (or of any decrees promulgated thereunder). As a result, even if the formal requirements for the participation exemption are met, the exemption may be denied if the arrangement is deemed abusive under Article 344 B.I.T.C.

The criteria for tax abuse – or conversely, for establishing the existence of genuine business reasons (i.e., substance requirements) – as developed by the Belgian courts are the same in relation to the participation exemption and the various withholding tax exemptions.

On December 1, 2020, the Ghent Court of Appeals applied the Belgian G.A.A.R. in line with the E.U. anti-abuse principle, emphasizing an assessment of all facts and circumstances. This approach was confirmed by the Court of Cassation on November 30, 2023, making it easier for courts to find abuse in complex structures as the artificial nature of the structure and the intentions of the ultimate beneficiaries become more apparent if all the relevant transactions carried out by related corporations are taken into account.

The Court clearly outlined the criteria to establish tax abuse (fraus legis). For tax abuse to be present – as explained by the C.J.E.U. in the Danish cases and now by the Court of Cassation – the Revenue Service must demonstrate that both the objective and the subjective conditions are met, meaning:

• The acts are primarily or substantially tax-driven (subjective condition);
• The tax advantage frustrates the purpose of the P.S.D. (objective condition).

That ruling also implied that a taxpayer could counter allegations of tax abuse by applying a "look through approach." Specifically, the subjective condition is not met if the taxpayer can establish that the tax benefit would also have been granted in the absence of the interposed corporation.

The Nordcurrent ruling confirms this two-pronged test (objective and subjective element) but has significant consequences for the application of the "look through approach” as a defense against allegations of tax abuse. The C.J.E.U. indeed emphasizes that the objective and subjective conditions must be assessed separately, and that merely establishing the existence of an artificial arrangement is not sufficient to find abuse; the subjective element must be established independently. However, it also states that the overall tax effect must be considered, including the tax burden at the level of the subsidiary. The look through defense remains available, but it is no longer sufficient to simply demonstrate that the ultimate shareholder would also have been entitled to the tax benefit; it must be shown that the entire structure, in its context and over its lifetime, was not primarily aimed at obtaining an improper tax advantage.

Belgian courts have on occasion also ruled in favor of the taxpayer. On October 30, 2023, the Constitutional Court ruled on a landmark case, thereby stating that the Belgian G.A.A.R. only complies with the constitutional principle of legal certainty in tax matters, if interpreted as follows:

1. The Revenue Service bears the burden of proof of tax avoidance “which frustrates the objectives of a precisely identified tax provision” and is not merely “not aligned” with these objectives;
2. The Revenue Service is able to corroborate that the objectives of a tax provision are frustrated “only if the objectives of the tax provision appear in a manner sufficiently clear from the text [of the provision] and, as the case may be, from the legislative history of the tax provision.”;
3. In this regard, the Revenue Service must consider “the general context of the relevant tax provisions already in place to combat certain abusive uses” of the tax provision in question.

On October 26, 2023, the Court of Cassation ruled that tax abuse can only be established if the objectives of the tax provision are clear from the statute or, as the case may be, legislative history. Earlier the Court of Cassation (November 25, 2021) had confirmed that although artificial arrangements to avoid dividend withholding tax (by qualifying the transaction as a tax-exempt return of paid-up capital) can be recharacterized as a dividend distribution under the anti-abuse rules, any return of paid-up capital made pursuant to a valid decision to reduce the capital taken in accordance with the provisions of the Code on Corporations and Associations is tax exempt.

In an interesting case regarding holding company structures, a shareholder sold all of the shares of Corporation A to Corporation B, which was jointly owned by the seller’s son and a private equity fund. With few exceptions,[4] Belgium does not tax capital gains on shares realized by private individuals. To finance the purchase of the shares, Corporation B took out a bank loan, which was swiftly replaced by a loan granted by Corporation A and a subsidiary of Corporation A.

On September 6, 2022, the Antwerp Court of Appeals clarified that a taxpayer’s involvement in a series of transactions and its choice to engage in the structure suffices to establish tax abuse, even if the taxpayer did not formally participate in every legal act that made up the overall transaction. In that case the Court of Cassation on January 11, 2024, confirmed the judgment of the Court of Appeals that unity of intent does not require formal participation in any and all legal acts. Additionally, the Antwerp Court of Appeals stated that the non-tax motives behind the transactions “must neither be negligible nor purely artificial” in order to successfully rebut allegations of tax abuse. The Court of Cassation seconded this.

The Office for Advance Tax Rulings (O.A.T.R.) has issued several rulings[5] clarifying the application of Article 266, 4^th limb Income Tax Code (I.T.C.). These rulings consistently emphasize the need for genuine economic activity, sufficient substance (personnel, premises, assets), and valid business reasons for the structure. The absence of these elements is a strong indication of abuse.

The Nordcurrent ruling reinforces this approach of the Belgian courts: only structures with genuine substance and valid business reasons will withstand scrutiny. Taxpayers should ensure robust documentation and be prepared for a thorough, fact-based assessment by the Belgian Revenue Service and courts.

4.3. Dutch Implications: How Does Nordcurrent Affect the Netherlands?

4.3.1. Dividend Withholding Tax and Conditional Withholding Tax on Dividends, Interest and Royalties

In Dutch tax law the two-pronged test was effectively implemented and, therefore, it is expected that Nordcurrent has no or limited impact on the dividend W.H.T. and the Conditional W.H.T. on interest and royalties.

4.3.2. Participation Exemption

In Nordcurrent the targeted G.A.A.R. of the P.S.D. addresses “artificial arrangements” at the subsidiary level, which also impacts the application of the participation exemption at the parent company level. This is applicable as long as both the subjective (intent and artificiality) and the objective elements (purpose and scope) of the G.A.A.R. are met. An “artificial arrangement” at the parent corporation level can also affect a participation exemption, similar to how it can impact a withholding exemption (see C.J.E.U. judgment of February 26, 2019, ECLI:EU:C:2019:135 (T&Y Danmark), V-N 2019/14.11).

The Netherlands has deliberately not implemented the G.A.A.R. as referred to in Article 1(2) and (3) of the P.S.D. into the Corporate Income Tax Act 1969 (“C.I.T.A.”). As the general G.A.A.R. (fraus legis) would be sufficient to tackle this. This year, the G.A.A.R. as referred to in the first European Anti-Tax Avoidance Directive (ATAD1) has been implemented in Article 29i of CITA. According to the legislator, this 'ATAD G.A.A.R.' is interpreted in line with the Dutch doctrine of fraus legis.

The question is therefore whether Nordcurrent with guidance on the G.A.A.R. of the P.S.D. would impact the Dutch participation exemption as the Dutch G.A.A.R. is applicable and the G.A.A.R. of the P.S.D. was not implemented in Dutch tax law. This could be debated because of a statement by the European Commission, which “confirmed” that the amendments “are not intended to affect national participation exemption systems insofar as these are compatible with the Treaty provisions”.[6] This was interpreted by many experts as Dutch G.A.A.R. was sufficient to prevent abuse and, therefore, the specific G.A.A.R. of the P.S.D. is not applicable. If this would be the case, Nordcurrent had no effect prior to implementation of Article 29i Corporate Income Tax Act (I.T.A.). Other experts believed that the P.S.D. G.A.A.R. was still applicable, and that the fact that the legislator did not (explicitly) implement Article 1(2) P.S.D. in this context is irrelevant (see C.J.E.U. judgment of November 13, 1990, C-106/89 (Marleasing), Jurispr. p. I-4135). Also, given the implementation of the A.T.A.D. G.A.A.R., we believe it is likely that Nordcurrent could have an impact on the Dutch participation exemption, especially for years prior to 2025 and for 2025 and onwards Nordcurrent can be used as guidance on Article 29i I.T.A..

Another question that was addressed was to know when it should be checked whether an artificial arrangement (at incorporation or at dividend distribution or considering the whole structure) was at hand. The outcome is an assessment of all facts and circumstances. The C.J.E.U. further clarifies that both the facts and circumstances at the establishment of the (subsidiary) corporation, as well as at the time of the dividend distribution, must be considered. However, it remains unclear how the assessment should be made when a situation changes from “economically real” to “artificial” (or vice versa). Nonetheless, the C.J.E.U. emphasized that it cannot be ruled out that “a structure initially set up for business reasons reflecting economic reality may, at a certain point, be deemed artificial due to the maintenance of the structure despite a change in circumstances.” This implies an ongoing assessment. The C.J.E.U. does not address the statement further, possibly because it is not an E.U. (co-)legislator since only the European Commission has the right of initiative.

Furthermore, this case seems to create some tension with the Dutch Supreme Court's judgment of January 10, 2020.[7] In that judgment regarding the substantial interest scheme as referred to in Article 17(3)(b) .I.T.A., the Supreme Court considered the time of distribution decisive. However, in line with Nordcurrent, we believe that both elements are relevant to determining an artificial arrangement (i.e., a continuous test).

4.3.3. Other Potential Impact: DAC6, Pillar 2 and Unshell

The interpretation given by the C.J.E.U. to the concept of "tax advantage" may be instrumental for the similar concept in the main benefit test of the mandatory disclosure rules for cross-border arrangements (DAC6) and the anticipated integration of Unshell[8] into DAC6.

It may also pre-emptively address preliminary questions regarding the E.U. Pillar 2 Directive[9] and the significance of E.C. statements and F.A.Q.s. For example, regarding the relationship between O.E.C.D. Safe Harbours and Article 32 of the E.U. Pillar 2 Directive. With this judgment in hand, these statements may eventually prove irrelevant as well.

4.4. Luxembourgish Implications: How Does Nordcurrent Affect Holding Corporation Arrangements in or with Luxembourg?

For Luxembourg, the decision aligns closely with existing domestic practice and legislation.

4.4.1. Luxembourg’s Anti-Abuse Framework

Luxembourg’s tax framework provides for both general and specific anti-abuse provisions.

The P.S.D.’s specific anti-abuse rule (S.A.A.R.) is transposed into the Luxembourg Income Tax Law (L.I.T.L.) under Article 147(2) for withholding tax exemptions and Article 166(2bis) for dividend income exemptions from corporate income tax. It ensures that:

1. The S.A.A.R. applies to Corporations established in a Member State;
2. The exemption is denied if the dividends were already deducted (not taxable with corporate income tax) in the source Member State;
3. The exemption is further denied if the dividends result from legal acts or a series of acts that are artificial and primarily aimed at obtaining a tax advantage;
4. The tax advantage must go against the purpose of the P.S.D.

The two last points (3 and 4) mirror the P.S.D.’s two-pronged test for abuse.

In parallel, Luxembourg applies a General Anti-Abuse Rule (G.A.A.R.) under §6 of the Tax Adaptation Law (Steueranpassungsgesetz). This provision is broader and applies to all cases of abuse of law, based on four criteria:

1. Use of private law instruments;
2. Tax reduction due to avoidance of tax law;
3. Use of an inadequate legal path;
4. Absence of economic or commercial justification for the chosen path.

4.4.2. Clarification from Luxembourg Courts

Until mid-2024, it remained unclear which provision – S.A.A.R. or G.A.A.R. – should prevail in cases involving the participation exemption. This ambiguity was resolved by the Luxembourg Administrative Court’s decision of July 31, 2024, which ruled for the first time on the application of the S.A.A.R. in a participation exemption case. The Court upheld the tax authorities’ denial of the exemption, which had been challenged under both the G.A.A.R. and the S.A.A.R. However, the Court clarified that under the principle of lex specialis derogat legi generali,[10] the S.A.A.R. must be applied first, with the G.A.A.R. serving as a complementary tool only when the S.A.A.R. lacks precision.

4.4.3. Practical Impact of Nordcurrent in Luxembourg

The Nordcurrent ruling confirms that Member States can deny the participation exemption under the P.S.D.’s G.A.A.R. However, Luxembourg’s legal framework already incorporates a similar two-pronged test under Article 166(2bis) and 147(2) L.I.T.L., and the substance-over-form approach is well-established in practice. As such, the ruling does not materially alter Luxembourg’s tax landscape but rather validates its current approach.

In conclusion, while the Nordcurrent decision may lead to legislative or interpretative developments in other E.U. jurisdictions, its impact in Luxembourg is largely confirmatory. The decision strengthens the legitimacy of Luxembourg’s existing anti-abuse mechanisms.

[1] C-116/16 and C-117/16.

[2] C-196/04.

[3] Paragraph 67: “Since companies that focus on asset management, by definition, may carry out little activity, this criterion should perhaps not require high demands. When there is indeed a valid incorporation, the company is actually reachable at its registered address and has the necessary material and personnel resources to achieve its objective – in this case, the management of a loan agreement – the structure in question cannot be considered disconnected from the economic reality."

[4] Unless the sale of the shares is deemed not to be “normal management of private assets.” Following a recent change in the legislation, capital gains on shares and other financial assets will be subject to a capital gains tax of up to 10 per cent, if realized on or after January 1, 2026.

[5] For example: Ruling No. 2018.1201 (26 February 2019); Ruling No. 2021.0099 (March 16, 2021); Ruling No. 2021.0767 (October 19, 2021); Ruling No. 2021.1116 (January 18, 2022); Ruling Nos. 2021.1223 and 2021.1224 (January 25, 2022); Ruling No. 2022.0329 (June 14, 2022); Ruling No. 2023.0095 (March 14, 2023); Ruling No. 2023.0321 (June 13, 2023).

[6] See www.data.consilium.europa.eu/doc/document/ST-5547-2015-ADD-1/en/pdf

[7] ECLI:NL:HR:2020:21, BNB 2020/80, V-N 2020/4.8).

[8] Proposal for a COUNCIL DIRECTIVE laying down rules to prevent the misuse of shell entities for tax purposes and amending Directive 2011/16/EU, COM/2021/565, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A52021PC0565

[9] Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union, ST/8778/2022/INIT, OJ L 328, 22.12.2022, pp. 1–58.

[10] A specific statutory rule prevails over a general statutory rule.