ECJ verdict in Nordcurrent case provides some clarity on PSD anti-abuse rule

On 3 April 2025, the European Court of Justice (ECJ) delivered its judgment in the Nordcurrent case, which addresses the application of the anti-abuse rule in the Parent-Subsidiary Directive (PSD).

The ruling is particularly significant as it addresses some of the questions that remained following the "Danish cases" (T Danmark and Y Denmark Aps, C-116/16 and C-117/16).

Facts of the case and legal context

Nordcurrent, a Lithuanian video game creator and distribution company, established a subsidiary in the United Kingdom (UK Subsidiary) in 2009. The decision to establish the subsidiary was driven by market conditions that posed significant challenges to Nordcurrent directly distributing the games it develops.

Eventually, Nordcurrent managed to establish direct contractual relationships with distributors itself, which limited the need for the UK Subsidiary's distribution role. In 2017, the UK Subsidiary's software distribution functions were transferred to Nordcurrent, and by 2018, the company's business model shifted further, transferring all risks related to game development, financing and advertising to Nordcurrent in Lithuania. Consequently, the decision was made to wind down the UK Subsidiary, and the liquidation process was completed in 2021. In the years in question, the UK Corporation tax rate (24 percent) was higher than the Lithuanian corporate income tax rate (15 percent).

As of 1 January 2016, EU member states must implement the general anti-abuse rule (GAAR) in their legislation with respect to the PSD.

The Lithuanian tax authorities (LTA) challenged Nordcurrent's use of the participation exemption in the Lithuanian corporate income tax on dividends received from the UK Subsidiary in 2018 and 2019. Although the legal requirements for the exemption were formally met, the LTA denied the exemption arguing that the UK Subsidiary constituted a non-genuine arrangement due to its limited economic activity and minimal staffing in 2018-2019.

The Lithuanian court raised the following preliminary questions to the ECJ:

1. Is the PSD anti-abuse rule limited to the situations where a conduit company is involved?
2. Must only the facts and circumstances at the date of the dividend distribution be taken into account?
3. For the anti-abuse rule to apply, is it sufficient that a subsidiary is considered to be a non-genuine arrangement?

Decision of the European Court of Justice

Regarding the first question, the ECJ ruled that the anti-abuse rule may also deny the exemption if a subsidiary is not a conduit company and the dividends stem from commercial activities carried out by the subsidiary itself.

Regarding the second question, the ECJ ruled that all steps of an arrangement must be examined to determine whether the arrangement is genuine or not. This means that the examination cannot be limited to facts and circumstances as they exist on the date the profit is distributed. The facts and circumstances present at the time of the incorporation of the subsidiary, but also the facts and circumstances present subsequently, must all be taken into account.

Regarding the third question, the ECJ reiterates that the anti-abuse rule consists of two elements that both must be met:

1. There must be a non-genuine arrangement; and
2. The arrangement must have been put into place with the main purpose, or one of its main purposes, being that of obtaining a tax advantage that defeats the object of the PSD.

Thus, the anti-abuse rule cannot apply when only one of these two conditions is fulfilled.

In addition, the ECJ elaborated on the meaning of "tax advantage," which is not defined in the PSD. In response to does this relate to the exemptions as referred to in the PSD or to "tax savings" in a broader sense? the ECJ concluded that tax advantages cannot be considered in isolation, and all facts and circumstances must be taken into account. Therefore, the fact that the UK corporation tax was higher than the Lithuanian corporate income tax must be taken into account to determine whether the subjective element has been met.

Our observations

It is the first time the ECJ provided guidance as to the interpretation of the PSD GAAR with respect to dividends received by the parent company. The ECJ clarified that the PSD GAAR applies not only to conduit companies to convert a non-PSD shareholding into a PSD shareholding, but to all situations.

The ECJ's judgment emphasizes once again that all relevant facts and circumstances must be examined, and not only those on the dates close to the dividend.

Finally, the ECJ confirmed that the motive to set up a structure must be examined in a broader sense. In the case at hand, it is true that possibly Lithuanian taxable income was converted into exempt dividend income; however, as the UK tax on the income from which the dividend was distributed was much higher than the Lithuanian income tax, it seems unlikely that the UK Subsidiary was established to avoid Lithuanian income tax. From a glance it seems that the Lithuanian tax authorities could have achieved their objective by applying a transfer pricing adjustment.

If you wish to discuss the above with our tax advisers, our contact details can be found on the side of this alert.