When a legitimate structure becomes a non-genuine arrangement

Can a tax structure that was valid when it was set up later become abusive?

According to the European Court of Justice, the answer is yes.

In its recent Nordcurrent Group UAB decision (C-228/24), the ECJ clarified the scope of the concept of “non-genuine arrangement” under the EU Parent-Subsidiary Directive. The ruling sends a clear message to international groups: tax compliance is not static.

What matters is not only how a structure was built — but how it operates over time.

The legal framework: abuse under the Parent-Subsidiary Directive

The Parent-Subsidiary Directive grants dividend withholding tax exemptions within qualifying EU groups. However, this benefit is denied where the arrangement is considered “non-genuine”.

A non-genuine arrangement is one that:

• is not put in place for valid commercial reasons reflecting economic reality,
• and has as its main purpose, or one of its main purposes, the obtaining of a tax advantage contrary to the object or purpose of the directive.

The Nordcurrent decision clarifies how this test must be applied in practice.

Substance is not limited to intermediary holding companies

One of the most important clarifications in the ruling is that the abuse test does not apply only to conduit or relay companies.

The ECJ confirmed that:

• even direct corporate structures,
• without any intermediary holding entity,
• can be reviewed under the “non-genuine arrangement” standard.

What matters is not the number of layers in the structure, but whether the entities involved reflect genuine economic activity and decision-making.

This significantly broadens the scope of scrutiny.

A structure can become abusive over time

Perhaps the most consequential aspect of the decision lies here.

The Court explicitly recognised that:

• a structure may be legitimate when it is created,
• but may later lose its economic justification,
• while continuing to generate tax benefits.

When circumstances evolve and the original commercial rationale fades, maintaining the structure unchanged can transform it into a non-genuine arrangement.

In other words, abuse is not assessed once and for all. It is assessed continuously, in light of current facts.

Tax benefits alone do not prove abuse

The ruling also contains an important safeguard.

The ECJ reaffirmed that:

• the mere existence of a tax benefit,
• even a significant one,
• does not automatically constitute abuse.

The burden of proof remains on the tax authorities. They must demonstrate that the arrangement’s primary purpose is to obtain a tax advantage in a way that defeats the purpose of the directive.

This preserves a crucial balance: tax planning remains legitimate — but only when it is supported by economic reality.

Why this matters now more than ever

This decision arrives in a context where:

• tax authorities increasingly rely on data analytics and AI,
• historical structures are revisited with fresh scrutiny,
• and enforcement focuses less on formal compliance and more on operational reality.

Structures set up years ago are particularly exposed. They often remain legally in place, while their economic role has quietly eroded.

What once made sense may no longer do so.

Practical implications for international groups

For entrepreneurs and holding groups, the message is clear:

• It is no longer sufficient to prove that a structure was legitimate at inception.
• It must remain justified, operated and substantiated today.
• Substance must be maintained, not assumed.

Groups that treat structure as static and operations as incidental face increasing requalification risk.

Conclusion: substance must be reassessed, not presumed

The Nordcurrent ruling confirms a fundamental shift.

Substance is not a checkbox.
It is a living requirement.

Structures that are not regularly reviewed in light of their current functions, activities and decision-making risk drifting into non-genuine territory — even if they were once beyond reproach.

How we can help

At Altara Tax, we assist international entrepreneurs and groups in:

• auditing existing structures against current operational reality,
• identifying arrangements that may have become fragile over time,
• and realigning substance, governance and tax positioning before requalification occurs.

In today’s environment, the most dangerous structures are not the aggressive ones.

They are the outdated ones.