The CJEU's Grand Chamber judgments of 26 February 2019 in joined cases C-116/16 and C-117/16 – the Danish beneficial ownership cases – fundamentally reframed how EU directives protect cross-border dividend, interest and royalty flows within the European Union. The Court confirmed that the benefits of the Parent-Subsidiary Directive 2011/96/EU and the Interest and Royalties Directive 2003/49/EC may be denied to arrangements that constitute abuse of EU law, even where the Member State in question has not enacted a specific domestic anti-abuse rule. This principle continues to evolve, most recently through the CJEU's ruling in C-228/24 Nordcurrent Group (3 April 2025), which extended the same logic to national participation exemptions and clarified the two-limb test that tax authorities and courts must apply.
The Danish Cases: What the Grand Chamber Decided
Before February 2019, a widespread assumption in international tax structuring was that EU directives provided hard shields against withholding tax, and that a Member State needed an explicit domestic anti-abuse provision before it could pierce those shields. The Grand Chamber dismantled that assumption in one step. Acting on references from the Danish courts, the CJEU held that a general principle of EU law prohibiting abuse of rights is inherent in the directives themselves. No additional domestic legislative vehicle is required.
For the dividend stream, the Court analysed the Parent-Subsidiary Directive 2011/96/EU, which eliminates or reduces withholding tax on profit distributions between associated companies in different Member States. For interest and royalty flows, the Court scrutinised the Interest and Royalties Directive 2003/49/EC. In both contexts the Grand Chamber concluded that if a payment is routed through a conduit entity that lacks genuine substance and the principal purpose of the structure is to obtain the directive benefit, the benefit may be refused.
The practical consequence was immediate: tax authorities across the EU gained a doctrinal anchor to challenge structures where intermediary entities – often holding companies in low-tax or treaty-favoured jurisdictions – serve primarily as pass-through vehicles rather than genuine principals of the income.
The Two-Limb Abuse Test and Its Open Questions
Following the Danish cases, the abuse analysis turned on two cumulative elements. The Nordcurrent Group ruling of 3 April 2025 (C-228/24) made this explicit in the context of national participation exemptions, confirming the framework that had already been inferred from the 2019 judgments:
- Objective element: the arrangement must be non-genuine – that is, it must not reflect economic reality. Courts and tax administrations look at whether the intermediary entity has real decision-making capacity, qualified personnel, adequate premises, and a genuine connection to the income it receives.
- Subjective element: the main purpose, or one of the main purposes, of the arrangement must be to obtain a tax advantage that would otherwise not be available.
Both limbs must be satisfied. A structure with real substance but a tax-motivated design may survive the subjective limb but still be vulnerable if the objective limb is met through other evidence. Conversely, a substance-light entity will not automatically fail if the purpose analysis points to genuine commercial rationale – though in practice substance and purpose are closely correlated in audit findings.
Several significant questions remain open or subject to evolving national interpretation. It is not yet settled how "main purpose" should be weighed when a structure serves multiple objectives, only one of which is fiscal. National revenue authorities differ in their evidential standards. The interplay between the EU general anti-avoidance principle and bilateral tax treaty provisions – including the OECD's principal purpose test embedded in post-BEPS treaties – has not been fully harmonised by the CJEU, leaving a layer of uncertainty for groups that combine EU directive access with treaty network planning.
If your group's holding structure was designed before 2019 or has not been reviewed since, the analytical framework has changed materially. We would encourage you to seek an assessment before a tax audit triggers the issue. You are welcome to contact the Ferraz & Whitmore tax team at info@ferrazwhitmore.com or through our contacts page.
The Nordcurrent Group Ruling: Extending the Logic to Participation Exemptions
The April 2025 ruling in C-228/24 is significant for a reason that goes beyond its immediate facts. The CJEU confirmed that the anti-abuse rule embedded in Article 1(2) of the Parent-Subsidiary Directive 2011/96/EU applies not only to the withholding tax relief at source but also to the participation exemption at the level of the recipient. This closes a gap that some advisers had identified: a domestic exemption on incoming dividends, even if framed as a unilateral measure rather than a directive implementation, can be within the scope of the GAAR if the dividend originates from an EU entity in circumstances covered by the directive.
The ruling reinforces that Member States applying a participation exemption must still satisfy themselves that the upstream arrangement is not abusive. National tax administrations – guided by their domestic implementation of the directive's anti-abuse clause and by the evolving CJEU case law – are therefore empowered to look through an exemption claim and assess the economic substance of the group structure as a whole. The Nordcurrent Group decision has attracted commentary from practitioners including the analysis published by Loyens & Loeff, which noted the ruling's clarifying effect on the scope of the GAAR in the PSD context.
Practical Impact: Where Tax Risk Crystallises
For multinational groups and investment funds operating across EU borders, the Danish cases and their progeny create identifiable risk points in the following scenarios:
- Holding companies with thin substance: Entities established in EU Member States primarily to channel dividends upward to non-EU parents face heightened scrutiny if they lack genuine functions. Revenue authorities in several Member States have intensified transfer pricing and substance reviews in the post-2019 environment.
- Back-to-back financing structures: Interest flows routed through intermediaries that on-lend at matching rates with minimal economic risk exposure are a target for denial of the Interest and Royalties Directive exemption.
- Treaty shopping combined with directive access: Where a group uses both a tax treaty and a directive – for example, invoking a parent-subsidiary relationship under both a bilateral convention and the PSD – the principal purpose test in the treaty and the EU abuse doctrine may reinforce each other, narrowing available relief.
- Restructurings and step-transactions: Where intercompany payments follow a recent group reorganisation, the sequence of steps can be read as evidence of subjective purpose by auditors applying the Danish framework.
- Funds and private equity: Investment vehicles that aggregate returns across jurisdictions often rely on holding layers for regulatory or investor-relations reasons. Those rationales need to be carefully documented to rebut a finding that tax advantage was the main driver.
Tax risk management in this environment requires more than a periodic legal opinion. Groups should maintain a live record of substance indicators – board minutes evidencing genuine decision-making, payroll and office presence data, benchmarked service agreements – that can be produced promptly if a tax audit opens.
For groups with exposure in Denmark specifically, our dedicated practice page on tax structuring in Denmark addresses the post-2019 environment in that jurisdiction.
Cross-Border Implications: Treaties, Third Countries and Suspension Risks
The Danish cases operate within the EU internal market framework, but their implications extend to groups with non-EU parents or subsidiaries. When a non-EU investor routes capital into EU subsidiaries through an EU holding entity, the question is whether that holding entity is a genuine beneficial owner of dividends or interest, or a conduit. If the latter, neither the directive nor the relevant bilateral tax treaty will shield the payment, even if the treaty formally applies at the level of the EU holding company.
The OECD/G20 Inclusive Framework's BEPS Action 6 principal purpose test, now incorporated into many renegotiated bilateral conventions, travels alongside the EU doctrine. A group that fails the EU abuse test will in most cases also fail the treaty PPT, making dual denial a realistic outcome. This convergence matters particularly for investors from jurisdictions where treaty networks are already under pressure – a topic we have analysed separately in the context of treaty suspension risks.
Reporting and transparency obligations amplify these risks. The European Commission, ESMA and EBA have all been active in promoting cross-border information sharing and in developing regulatory expectations around substance. DAC6 mandatory disclosure rules require intermediaries to report arrangements that meet hallmarks associated with aggressive tax planning, including the use of opaque ownership chains. This means that structures challenged under the Danish framework may already have been reported by another party in the transaction chain, giving revenue authorities a significant informational head start in any audit.
Strategic Recommendations for International Groups
Given the matured state of the doctrine and the continued evolution of case law, groups should consider the following approaches in their tax structuring and compliance processes:
- Substance audit across holding layers: Map every entity in the dividend and interest chain, assess its functional profile against the objective limb of the abuse test, and identify where gaps exist. This is not a one-time exercise; substance must be maintained continuously and documented contemporaneously.
- Purpose documentation: For each holding or financing layer, prepare a narrative analysis of the non-tax rationale – regulatory requirements, governance frameworks, investor demands, operational needs. This documentation should pre-date the payment concerned, not be assembled in response to an audit notice.
- Treaty and directive coordination: Where a group relies on both a bilateral treaty and a directive for the same payment, the applicable legal analysis should address both frameworks simultaneously. Advisers should not treat them as independent shields.
- Proactive engagement with transfer pricing: The beneficial ownership analysis overlaps with transfer pricing in the sense that an entity receiving income must bear economic risk commensurate with its return. Groups should ensure that intercompany pricing is consistent with their substance positions.
- Scenario planning for audit: Revenue authorities in EU Member States have shown increased willingness to open enquiries into holding structures. Groups should rehearse their substantive defence before an audit begins, not during it.
- Monitor legislative and jurisprudential developments: The CJEU pipeline continues to develop the beneficial ownership framework. The Nordcurrent Group ruling is unlikely to be the last significant development; national courts continue to refer questions that will further define the boundaries of the doctrine.
Corporate law considerations – including governance structures that demonstrate genuine decision-making authority at the holding level – are closely integrated with the tax analysis. Our corporate law practice works alongside the tax team on exactly these cross-disciplinary reviews.
Outlook: Where the Doctrine Moves Next
The trajectory of EU beneficial ownership doctrine points toward more, not less, scrutiny of intermediary entities. Three developments are worth monitoring. First, the EU's continued legislative activity in the anti-avoidance field – including the UNSHELL directive proposal aimed at entities with minimal substance – would, if enacted, create a codified layer of presumptions that interact with the existing case-law framework. Second, the European Commission's increasing use of state aid investigations as a parallel tool to challenge selective tax advantages means that some structures targeted under the Danish framework may face dual exposure. Third, the integration of global minimum tax (Pillar Two) rules into EU law via the Minimum Tax Directive adds a further layer of complexity for multinational groups, as top-up taxes can alter the economics of holding structures in ways that affect both the subjective and objective elements of the abuse test.
The post-2019 landscape is one in which legal risk management requires ongoing attention rather than periodic review. Groups that treat their holding structures as static, legally settled arrangements are likely to find themselves on the wrong side of an audit finding that applies principles which have been settled at EU level for several years.
The Ferraz & Whitmore tax and corporate teams are available to assist with structure reviews, audit defence preparation and forward-looking tax risk management across EU jurisdictions. To discuss your situation in confidence, please contact us at info@ferrazwhitmore.com or visit our contacts page.
Sources
- CJEU Grand Chamber, 26 February 2019, joined cases C-116/16 and C-117/16 (Danish beneficial ownership – dividends)
- Parent-Subsidiary Directive 2011/96/EU (EUR-Lex)
- Interest and Royalties Directive 2003/49/EC (EUR-Lex)
- CJEU, 3 April 2025, C-228/24 Nordcurrent Group
- Loyens & Loeff, "CJEU rules on the application of the GAAR under the PSD to national participation exemptions" – loyensloeff.com
Disclaimer: This publication is provided for informational purposes only and does not constitute legal advice. The information herein should not be relied upon as a substitute for professional legal counsel tailored to your specific circumstances. Ferraz & Whitmore assumes no liability for actions taken or not taken based on the contents of this material. For advice regarding your particular situation, please contact info@ferrazwhitmore.com.