Concept
Profit is earned by the operating company at the bottom of the structure, and it rises to the ultimate beneficiary via a "ladder"—through one or more intermediate holdings in different countries. At each step of this ladder, the dividend may encounter withholding tax (WHT), and at the top—also tax at the recipient level. The purpose of a well-designed holding structure is to channel the dividend flow upward with minimal legal losses: through EU directives, tax treaties, and participation exemption—but only where each step is backed by a real company.
Where Tax Arises
The basic leakage is WHT, which the source country withholds when paying dividends, interest, and royalties abroad. Without relief, the rate often stands at 15–30%, and for certain payments reaches up to 35%. When profit is repatriated through several jurisdictions, WHT can theoretically apply at each floor, and on top of it comes tax on the incoming dividend at the recipient level. This creates economic multiple taxation of the same profit.
How Losses Are Reduced
Within the EU, the Parent-Subsidiary Directive (2011/96) operates: dividends between associated companies in EU countries are exempt from WHT at source when the participation threshold of around 10% and the holding period are met. The Interest & Royalties Directive (2003/49) eliminates WHT on interest and royalties between associated EU companies. Outside the EU, this role is taken by tax treaties (DTT), which reduce the WHT rate, and at the holding level itself, incoming dividends and capital gains are covered by participation exemption—a classic tool of jurisdictions like the Netherlands, Luxembourg, and Cyprus. Relief must be substantiated: withheld tax is often reclaimed through a refund procedure, and within the EU this will eventually be standardized by FASTER (see the section on evolution).
How It Works in Practice
Take an operating company in an EU country, above it—an intermediate holding in the Netherlands or Luxembourg, and higher still—a parent holding and ultimate beneficiary. Within the EU, the Parent-Subsidiary Directive eliminates WHT on the path from the operating company to the holding; at the holding level, participation exemption exempts the incoming dividend; if the next step is already outside the EU, the WHT rate is kept within reasonable bounds by a tax treaty—often 5% for substantial participation versus 15% by default. The same ladder without treaties and without substance would give away 15–30% at each junction, and roughly half of the original profit would reach the beneficiary.
The savings here rest on justifying each link: the holding must manage the participation, make decisions, and itself control the income—then it passes the beneficial owner test and retains the relief. Therefore, a paper trail always accompanies the structure: corporate minutes, agreements, and reporting on intra-group flows, confirming a business purpose beyond tax savings.
When the top step already sits outside the Union, the ladder loses its cheapest link: the Parent-Subsidiary Directive does not reach a payment into a third country, and everything rests on the specific treaty and on the beneficial-ownership test. What that looks like for a UAE holding above an EU operating company — the 0% and 9% rates, the participation exemption under Article 23 of Federal Decree-Law 47/2022, the GAAR review of the outbound flow and the amount of substance that satisfies both sides — is set out in a UAE holding over an EU business.
If the intermediate step sits in an Asian hub — Hong Kong or Singapore — outbound dividends leave without tax at source in both cases, and the centre of gravity shifts to the conditions for exempting incoming foreign income at the level of the company itself. The two hubs are compared in Hong Kong vs Singapore: corporate tax and Hong Kong FIHV vs Singapore 13O.
Anti-Abuse
The right to relief is conditional on passing tests for business reality. The 2015 amendment to the Parent-Subsidiary Directive (Directive 2015/121) introduced a general anti-abuse rule (GAAR): exemption is denied if one of the main purposes of the arrangement is a tax advantage that does not reflect economic reality. In tax treaties, the same function is performed by the principal purpose test (PPT), massively implemented through the MLI: treaty relief is removed if obtaining it was one of the principal purposes of the transaction.
The cross-cutting criterion is beneficial ownership: relief is due only to the genuine beneficial owner of the income, and a transit company without functions and without the right to dispose of the income does not receive it. This principle was enshrined in the "Danish cases" of the CJEU—two judgments of 26 February 2019 in six joined cases, which examined precisely Luxembourg and Cyprus holding conduits in investment chains. Even with formal compliance with the directive, relief is denied if the structure is artificial and the intermediate link serves merely as a "conduit" for the money of ultimate investors outside the EU.
What Makes the Ladder Sustainable
Sustainability is provided by economic substance at each step: office, personnel, real functions, and place of decision-making (CIGA). Added to this are a business purpose beyond tax savings, compliance with beneficial owner status, careful observance of participation thresholds and holding periods, and documentation of intra-group flows. A holding ladder without people and functions today withstands neither tax authority scrutiny nor bank compliance.
Where Regulation Is Heading
The main shift in recent years is the global minimum tax. Pillar Two (in the EU—Directive 2022/2523, effective from 2024) subjects large groups with turnover from €750 million to an effective rate of no less than 15%: if profit at the upper steps of the ladder is taxed too lightly, the difference is collected as a top-up tax in another jurisdiction of the group. For dividend structures, this means that zero tax at an intermediate holding no longer carries upward automatically—for large groups, the effective rate will be pulled up to 15% anyway.
In parallel, the procedure is being simplified. FASTER (Directive on faster and safer relief of excess withholding taxes, adopted by the EU Council in December 2024, applicable from 1 January 2030) introduces a single digital certificate of tax residence and accelerated mechanisms for relief-at-source and quick refund of excess WHT—money will be returned faster, but under stricter reporting on the chain of recipients. The separate Unshell Directive (ATAD 3), which since 2021 threatened to deprive companies without substance of tax benefits, was removed from the agenda by the EU Council in June 2025; its logic is promised to be embedded in a future reform of DAC6. The direction has not changed—requirements for substance and for a real beneficial owner are only tightening.
Q/A
A Luxembourg holding company with no employees. Will it pass the beneficial owner test?
Almost certainly not. In the Danish cases of 26 February 2019 — including C-116/16 and C-117/16 on dividends — the CJEU held that relief is denied where the intermediate link serves as a conduit: it does not control the income, performs no functions and simply passes the money on. Formal compliance with the directive does not cure this.
Dividends within the EU are exempt under the directive. Can a tax authority still refuse the relief?
Yes. Article 1(2) of the Parent-Subsidiary Directive, as amended by Directive 2015/121, requires denying the relief to an arrangement put in place to obtain a tax advantage that defeats the object of the directive and that is not genuine — that is, lacking valid commercial reasons which reflect economic reality. In tax treaties the same work is done by the PPT.
Is buying 10% of a subsidiary enough to avoid tax at source?
The threshold alone is not enough. Article 3(1)(a) of the directive does require a minimum holding of 10% in the capital, but Article 3(2)(b) lets a member state additionally require uninterrupted holding for up to two years. On top of that sit the GAAR and the beneficial owner test, so 10% only grants entry to the regime rather than the result.
Withholding tax was deducted at the full rate. Will the overpayment be refunded?
Usually yes, though not quickly: the refund follows the source country's reclaim procedure. Within the EU it is being standardised by FASTER — Directive (EU) 2025/50 of 10 December 2024: a single digital tax residence certificate, relief at source and quick refund. Member states must transpose it by 31 December 2028 and apply it from 1 January 2030.
Our group's turnover is below €750 million. Does that mean Pillar Two does not concern us?
As far as the top-up tax goes — it does not. The rules switch on when revenue in the consolidated financial statements of the ultimate parent reaches EUR 750,000,000 in at least two of the four preceding fiscal years; the minimum rate is 15%. But the requirements for substance and beneficial owner status do not depend on group size and apply to any ladder.
The intermediate holding sits in Hong Kong or Singapore. Does the ladder logic change?
The logic is the same: substance, beneficial ownership and business purpose are tested in the same way. Neither Hong Kong nor Singapore withholds tax at source on outbound dividends; the conditions concentrate on the company's own incoming income. In Hong Kong, foreign dividends of an MNE-group entity fall under the FSIE regime (ss. 15H–15Q IRO): exemption requires economic substance or a participation of at least 5% held for 12 months with a 15% subject-to-tax condition. In Singapore, foreign dividends of a resident are exempt under s. 13(8)–(9) ITA if the income was taxed abroad, the jurisdiction's headline rate is at least 15% and the Comptroller is satisfied the exemption benefits the recipient.