CJEU AG Opinion: PSD Anti-Abuse Rule Can Bite Even a Genuine Beneficial Owner
On 21 May 2026, Advocate General Juliane Kokott delivered her opinion in Case C-203/25, a referral from the Lithuanian Tax Disputes Commission. Her core finding is stark: a withholding tax exemption under the Parent-Subsidiary Directive (PSD) can be denied even where the direct recipient of a dividend qualifies as a genuine beneficial owner carrying out real economic activity, if that dividend is subsequently routed to an ultimate beneficiary through an artificial chain of transactions. For tax directors, group CFOs, and accounting firms advising EU-connected corporate structures, this opinion widens the anti-abuse perimeter significantly beyond where most practitioners had drawn it.
The Lithuanian Case That Reached Luxembourg
The facts in C-203/25 are worth understanding in detail, because the Lithuanian referral turns on a factual pattern that is more nuanced than the earlier "Danish cases" that established the CJEU's existing anti-abuse jurisprudence.
Structure and Timeline
A Lithuanian operating company, the plaintiff in the proceedings, was wholly owned by a Cypriot holding company referred to as HoldCo One. During 2016 and 2017, the Lithuanian entity paid dividends to HoldCo One. The taxpayer treated those dividends as exempt from Lithuanian withholding tax under the domestic rules implementing the PSD. In February 2017, a Belize-registered company, the indirect grandparent, sold its shares in HoldCo One to a newly incorporated Cypriot entity, HoldCo Two. Despite the ownership shuffle, the ultimate beneficial owner of the entire chain, a natural person not resident in Lithuania who controlled both the Belizean and Cypriot vehicles, remained constant throughout.
Between 2017 and 2018, HoldCo Two extended loans to that individual and assigned receivables to him. Those loans and receivables were later set off against claims the individual held against HoldCo Two. Critically, HoldCo Two did not pay any dividends directly to the individual during this period. The Lithuanian tax inspectorate concluded that this sequence, dividend up through HoldCo One, ownership restructuring, then loan and receivable netting at HoldCo Two, amounted to an artificial arrangement whose economic substance was simply the transfer of the dividend proceeds to the individual without Lithuanian withholding tax being applied.
What the Authorities Actually Challenged
Crucially, the Lithuanian tax authorities did not contest that HoldCo One was the beneficial owner of the dividends in the formal sense, nor did they dispute that HoldCo One carried out genuine economic activities. Their argument rested entirely on the broader chain: taken together, the transactions were designed to obtain a tax advantage that runs counter to the purpose of the PSD. The inspectorate assessed the standard 15 percent Lithuanian withholding tax on the dividends.
The Lithuanian Tax Disputes Commission acknowledged the Danish cases but found the factual distinction significant enough to warrant a CJEU referral. The key difference: in the Danish cases, the entities interposed between the payer and the ultimate beneficiary were widely regarded as lacking genuine economic substance. Here, HoldCo One had genuine substance. That difference generated the six questions sent to Luxembourg.
The AG's Legal Analysis and Core Finding
Advocate General Kokott's opinion synthesises the existing PSD case-law and extends it in a direction that narrows the safe harbour that genuine beneficial owner status appeared to provide.
The Neutrality Principle and Its Limits
The AG started from the PSD's foundational design: profits within a corporate group should be taxed only once, at the level of the subsidiary where they are generated. Intra-group distributions from subsidiary to parent are meant to be tax-neutral. It is only when the parent makes its "final" distribution to an individual shareholder that those profits are taxed as capital income, and the Directive itself does not prescribe how that final distribution is taxed at the member state level.
The AG then reiterated the settled abuse test: abuse occurs under the PSD when the conditions for applying the Directive are satisfied only in a purely formal manner, with the sole or principal purpose of obtaining the tax advantage. A conduit company, one whose sole function is to receive and pass on dividends, is the paradigm case. A company may be treated as a conduit where it lacks the economic power to dispose of dividends freely, for example because it is contractually obliged to distribute them, or where its assets are effectively just passed through to another party.
The Critical Extension: No Conduit Required
The AG made clear that the presence of a conduit company is not a necessary condition for finding an artificial arrangement. An assessment of abuse must take into account all relevant circumstances, both before and after the profit distribution, including those arising in other member states. Applied to C-203/25, this means the genuine economic substance of HoldCo One does not immunise the overall structure. If the dividends ultimately reached the individual through a chain of non-genuine transactions, the anti-abuse rule can apply even though each individual link in the chain might, in isolation, look legitimate.
On the specific questions referred, the AG's opinion indicates that a withholding tax exemption may be denied solely on the grounds that a genuine parent is part of a chain of non-genuine transactions. The similarity of amounts flowing through the chain can be a relevant indicator, though not the sole basis for presuming abuse. Critically, the AG accepted that transactions occurring after the dividend payment and in another member state can be relevant to the abuse assessment, a point with wide implications for retrospective audit exposure. The fact that the tax advantage was realised by the individual rather than the Lithuanian plaintiff does not automatically prevent the anti-abuse rule from applying to the plaintiff. And whether the pass-through happened quickly or over an extended period is relevant context, not a strict bright-line test.
Practical Implications for EU Corporate Groups
The AG's opinion is not a binding judgment. The CJEU may follow it in whole, in part, or depart from it. However, AG opinions in EU tax cases carry significant weight and are followed by the Court in the majority of instances. Tax teams should treat this as a credible signal of where the law is heading.
Who Faces Elevated Risk
The most immediate exposure sits with groups that have one or more of the following characteristics: a holding structure involving intermediate entities in low-tax EU or third-country jurisdictions where substance may be thin at some tiers even if strong at the immediate parent level; dividend flows that are followed by loans, receivable assignments, or other financial instruments that economically replicate a further distribution to an individual UBO; a UBO who is not resident in the member state of the operating subsidiary; and restructurings, particularly share sales between group vehicles, that occur close in time to significant dividend payments.
For accounting firms advising such clients, the opinion signals that documentary evidence of economic substance at the immediate parent is necessary but no longer sufficient. The audit file needs to capture the purpose and commercial rationale of every tier in the chain, and should record what happens to funds after they leave the immediate recipient.
Accounting and Reporting Considerations
From a financial reporting perspective, groups applying IFRS or EU-equivalent GAAP need to consider whether any uncertain tax positions (UTPs) arising from dividend flows within structures resembling C-203/25 are adequately provided for under IAS 12 and IFRIC 23. The AG opinion constitutes new information that may affect the probability assessment of whether a tax authority will challenge a position and whether that challenge will succeed. Tax directors and auditors should revisit provisions taken in prior periods and assess whether they remain adequate.
For groups using crypto accounting software or digital asset accounting software to track treasury flows, the same substance-over-form analysis applies to any digital asset distributions routed through multi-tier holding structures. The legal principle the AG is articulating is not sector-specific: it applies wherever intra-group flows are used to move value to an ultimate beneficiary while preserving a formal PSD exemption at an intermediate level.
The opinion also has direct relevance for transfer pricing documentation. Where intercompany loans or receivable assignments are used in a manner that economically replicates a dividend to the UBO, those instruments need to be documented not only for arm's length pricing purposes but also for PSD anti-abuse purposes. The two analyses are increasingly connected.
Steps to Take Now
Before the CJEU issues its final judgment, tax and finance teams should consider the following actions. First, map every current dividend flow within the group and identify whether any intermediate entity, even one with genuine substance, passes value upstream to an individual UBO through non-dividend instruments such as loans or receivable netting. Second, review transfer pricing documentation for intercompany financing arrangements that follow dividend receipts. Third, assess UTP disclosures under IFRIC 23 for any structure that shares material features with the C-203/25 fact pattern. Fourth, brief audit committees on the potential exposure and timeline for the final judgment. Fifth, consider whether voluntary disclosures or amended returns are appropriate in jurisdictions where audit risk is elevated.
This is also a good moment to assess whether the group's crypto bookkeeping software or broader treasury management systems produce the transaction-level audit trail needed to demonstrate the commercial rationale of each distribution and the independence of each treasury decision. Regulators and tax authorities across the EU are increasingly treating documentation gaps as a signal of abuse rather than a neutral fact.
For context on how AI-driven supervision is changing the way EU and other regulators detect cross-border structuring, see our piece on what the EU's convergence of DeFi and traditional finance means for corporate tax teams. The trend toward data-driven enforcement makes robust transaction documentation even more important. And for a comparative view of how information exchange frameworks are tightening globally, our analysis of Australia's CARF reporting framework and what it signals for global information exchange provides useful context.
Frequently Asked Questions
Does the AG opinion mean that having genuine economic substance no longer protects a holding company from PSD anti-abuse challenges?
Not exactly, but it does mean that substance at the immediate parent level is no longer a complete defence on its own. The AG's view is that the anti-abuse analysis must look at the entire transaction chain. If the economic outcome is that dividends ultimately reach an individual UBO through artificial steps, the exemption can be denied even if the direct recipient has real substance.
How does this differ from the earlier Danish cases?
The Danish cases involved intermediate entities that lacked genuine economic substance, so they were treated as conduits in the traditional sense. C-203/25 goes further: it asks whether the anti-abuse rule applies even when the intermediate entity does have genuine substance, and the AG says yes, where the broader arrangement is artificial.
Are AG opinions binding on the CJEU?
No. An Advocate General's opinion is a formal recommendation to the Court, not a judgment. The CJEU is not bound to follow it. In practice, however, the Court follows AG opinions in the majority of referred cases, making this opinion a strong indicator of the likely direction of the final ruling.
Which tax jurisdictions are most immediately affected?
The referral came from Lithuania and the judgment will formally interpret the PSD, which applies across all EU member states. Any member state that has transposed the PSD anti-abuse provision, which all are required to do, could apply a similar analysis to dividend flows in comparable fact patterns.
How should CFOs and accounting firms respond before the final judgment?
The priority is to conduct a structure review that maps dividend flows against subsequent financial instrument transactions affecting the UBO, update IFRIC 23 assessments for potentially affected positions, and ensure that intercompany loan and receivable documentation explains commercial rationale independent of any tax benefit. Firms should also consider whether their digital asset accounting software produces a sufficient transaction-level audit trail to support that documentation.