Holding Company Tax Status: What Changes It?

Recently, many questions have arisen regarding the taxation of so-called "holding" companies, which own shares in other companies and receive only passive income, such as dividends, interest, etc. Let us review the most relevant case law of the Court of Justice of the European Union (hereinafter referred to as the CJEU) and the Supreme Administrative Court of Lithuania (hereinafter referred to as the SAC). 

The Non-Permanent Nature of a Holding Company's Tax Status

The courts (both the ECJ and the SAC) have noted in tax disputes that the tax status of a passive holding company that owns company shares (as determined by the tax administrator, for example, during a tax audit) is not fixed and does not apply permanently. Depending on the future "behaviour" of the passive holding company, its tax status may change from "completely artificial" to "passive holding company in line with economic logic". 

Criteria for Determining an Intermediary Company

The courts explain that, for example, the assessment of the group of companies in dispute as a sham entity during the period relevant to the case does not in itself determine the same assessment of the status of this group in subsequent periods. When deciding on transactions and actions taken in other periods, the subsequent activities of the company in question and/or other circumstances may lead to a different assessment, i.e., the operation of this company as a parent company in relation to the applicant may be recognised as important commercial reasons corresponding to economic reality as understood by EU law. 

This interpretation by the courts means that, for example, circumstances established in a specific year, 2022, that the managers or governing bodies of the entity do not have the appropriate qualifications to perform such duties; the entity has no employees or too few to carry out the declared activities; the employees of the entity do not have the appropriate powers to perform the contracted functions; the experience, competence and time allocated to the performance of work functions by the employees of the entity do not correspond to the nature of the entity's activities and/or the minimum requirements; the meetings of the members of the entity's board are not held in the country of establishment (registration) and the entity does not carry out any real active activities (e.g. there is no production); the most important decisions of the entity are not taken by the managers or management bodies of that entity. In these circumstances, it can be argued that such a company is an intermediary, because, for example, it was established for a short period of time to pay dividends between companies without taxing them (for example, this entity is a company established as an intermediary). 

Therefore, according to the law, dividends paid by a Lithuanian company to such a foreign holding company in 2024 may be subject to income tax.

How a Change in Circumstances Can Alter Tax Treatment

However, let us assume that circumstances change in 2024: the managers and management bodies of the entity have the appropriate qualifications to perform such duties; the entity has sufficient employees to carry out the declared activities; the entity's employees have the appropriate powers to perform their contracted functions; the experience, competence and time allocated to the performance of work functions by the entity's employees correspond to the nature of the entity's activities and/or minimum requirements; meetings of the entity's board members are usually held in the country of establishment (registration) and the entity carries out real active activities; and the most important decisions of the entity are not always, but usually, taken by the entity's managers or management bodies. In this case, it could be argued that such a company is no longer considered an intermediary company. 

Therefore, dividends paid by a Lithuanian company to such a foreign holding company in 2026 could already be exempt from income tax under the conditions of the relief.

Tax Status as a Dynamic Assessment

This example is intended to show that the determination that a passive holding company does not carry out any activities changes over time and that, in subsequent periods, it may continue to be considered only an intermediary for tax avoidance purposes or, if circumstances change, it may already be considered an economically substantive company. Thus, depending on the future "behaviour" of the company in question, its tax status may change from "completely artificial" – when the relevant tax relief is not available – to "an enterprise with economic logic" – when all tax relief is available if the conditions for the application of relief provided for in tax legislation are met. 

Burden of Proof: Obligations of the Taxpayer and Tax Authority

The ECJ reveals that, for example, companies requesting exemption from withholding tax on dividends under EU law must prove that they meet the objective conditions set for them. In fact, nothing prevents the relevant tax authorities from requiring the taxpayer to provide evidence which, in their opinion, is necessary for the correct assessment of the relevant duties and taxes and, where appropriate, to refuse to grant the requested exemption if such evidence is not provided. 

However, in the Court's view, where the tax authority of the Member State of source intends to refuse to grant the exemption provided for in EU law to a company which has paid dividends to a company established in another Member State on the ground of abuse, it must prove such abuse, taking into account all relevant circumstances, including the fact that the company to which the dividends were transferred is not the real owner of those dividends. 

Consequently, in that regard, the authority must establish not only the beneficial owners of those dividends, but also that the alleged beneficial owner is merely an intermediary company through which the abuse of rights was committed with the assistance of the company referred to in Article 12(1). In fact, such a determination may be impossible because the actual owners are unknown. 

Given the complexity of certain financial arrangements and the fact that intermediary companies involved in artificial arrangements may be established outside the EU, the national tax authority does not necessarily have the information that would enable it to identify those owners. It should therefore not be required to provide evidence that it cannot provide.

The Tax Administrator's Duty to Justify Calculated Amounts

It should be noted that the tax administrator must justify the tax and related amounts calculated for the taxpayer. This means that, in a tax dispute case, the tax administrator must first collect and submit relevant evidence regarding the calculation of taxes for the taxpayer. In order to refute the calculated amounts and challenge the tax administrator's decision, it is not sufficient for the taxpayer to merely provide explanations and counterarguments without substantiating them with specific evidence. Meanwhile, a taxpayer who disagrees with the specific tax and related amounts calculated by the tax administrator must justify why they are incorrect. The taxpayer should provide evidence that would suggest a conclusion opposite to that of the tax administrator. In cases where there is insufficient evidence to confirm either the applicant's or the defendant's claims, the decision shall be made to the detriment of the party that bears the burden of proving the unproven circumstances.

The Relationship Between Tax Law and Civil Law

Furthermore, disputes over whether a particular company is an intermediary used for tax avoidance purposes are often based on various civil contracts that form the basis of the company's actual activities. Here, the Supreme Administrative Court of Lithuania consistently takes the position that tax law and civil law are equal, parallel areas of law that assess the same factual circumstances from a different perspective and in terms of different values. 

Even if a tax law provision derives taxation from civil legal relations, it does not have to be interpreted strictly in line with the civil law assessment of the established legal relations. The plenary session of the Supreme Administrative Court of Lithuania has stated that in a situation where public law relations are directly regulated by the relevant public law provisions and where such a situation is not expressly specified in the Civil Code of the Republic of Lithuania (hereinafter referred to as the CC), the relevant public law norms must be applied. In such cases, the norms of the CC are not applicable. 

Accordingly, transactions, their conclusion, and validity are subject to civil law rather than public law, i.e., the civil law consequences of transactions and their impact on the taxation of economic entities are subject to different branches of law and cannot be equated. In the court's opinion, neither tax laws, nor the Civil Code, nor other legal acts give the tax administrator the right to interfere in the private relations of the parties to a transaction and to dispute the transactions they have concluded on grounds unrelated to the taxpayer's failure to fulfil or improper fulfilment of their tax obligations. 

Thus, as explained by the courts, neither the tax administrator nor the administrative courts hearing the case decides on the validity of transactions and the resulting civil legal consequences (e.g., performance or non-performance of transactions) but assesses the civil legal relations that have arisen from a tax law perspective. Therefore, certain formal civil contracts may be negated by the actual content of tax law relations.