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.
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—six judgments of 26 February 2019, 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.
This material is for informational purposes and does not constitute individual legal or tax advice.