EU Tax Alert - Highlights Of 2025

In the course of 2025, there have been several important developments in the field of EU tax law. This annual edition of the EU Tax Alert provides an overview of those developments.

EU Tax Alert

In this publication, we look back at the most important tax law developments within the European Union during 2025. We discuss, amongst other things, relevant legislation adopted at the EU level, case law of the Court of Justice of the European Union (CJ) and Opinions of its Advocate Generals (AG). Furthermore, we set out important tax plans and developments of the European Commission, the Council of the European Union (Council) and the European Parliament. If you are interested in other tax law developments within the European Union during 2025, please see the by-monthly editions of the EU Tax Alert available in our website (see EUTA 209, 210, 211, 212, and 213).

Highlights in this edition

• France's Constitutional Court upholds French Digital Service Tax (DST) Read more >
• Belgian Constitutional Court refers case to the CJ on the compatibility of the UTPR with EU Law Read more >
• CJ judgment on the application of the GAAR under the PSD to national participation exemptions (Nordcurrent group, C-228/24) Read more >
• CJ judgment on the circumstances in which tax exemptions may be prohibited by EU law (Prezydent Miasta Mielca, C-453/23) Read more >
• CJ judgment on the compatibility of Polish tax exemption applicable only to externally managed collective investment funds with the free movement of capital (F S.A. v Dyrektor Krajowej Informacji, Case C18/23) Read more >
• Member States raise concerns about implementing Pillar 2 Side-by-Side System without amending the EU Directive Read more >
• EU Commission budget proposal and Corporate Contribution (CORE) as New Own Resource: Discussions in the Council show pushback from Member States Read more >
• EU Council adopts DAC9 to facilitate the filing and exchange of Pillar Two-related information in the EU Read more >
• CJ judgment regarding VAT treatment of transfer pricing adjustments for intra-group services (Arcomet, C-726/23) Read more >
• VAT in the Digital Age adopted Read more >
• Regulation simplifying CBAM adopted Read more >

1. Highlights in this edition

France's Constitutional Court upholds French Digital Service Tax (DST)

On 12 September 2025, the French Constitutional Council issued a landmark decision confirming the compatibility of France's Digital Service Tax (DST) with the French Constitution (Decision n° 2025-1157 QPC – September 12, 2025 Société Digital Classifieds France) .

The case was brought by the company, Digital Classifieds France, and supported by major digital players such as Airbnb Ireland and LBC France. The constitutionality of the French DST (i.e., a 3% levy on French-source turnover from certain online services, applying to both resident and non-resident companies with consolidated worldwide revenues over EUR 750 million and French revenues over EUR 25 million) was challenged through a Question Prioritaire de Constitutionnalité.

The applicant companies raised several arguments against the French DST, which were all rooted in the French Constitution and, in particular, on the principles of equality before the law and equality before public burdens under Articles 6 and 13 of the 1789 Declaration of the Rights of Man and of the Citizen. These arguments were that: (i) the DST excludes from its scope certain digital services that rely on users' free work and includes activities that are merely digital versions of traditional ones, making the scoping criteria neither objective nor consistent; (ii) the thresholds, to be assessed at the group level and covering two types of services, create an irrebuttable presumption of fraud and lack rationality; (iii) the DST's revenue allocation rules ignore the actual place of activity or origin of revenue, and are contrary to the traditional territoriality requirement; (iv) calculating the amount of French DST for 2019 based on the representative percentage of the share of the services connected with France during five months (instead of the whole year) is inconsistent and prevents objective assessment of ability to pay; (v) the DST leads to double taxation, is confiscatory, introduces unjustified inequality between French and foreign companies, as the tax applies in addition to the corporate income tax a flat rate of 3% without progressivity.

In its judgment, the Constitutional Court rejected all the arguments put forward by the applicants and confirmed the constitutionality of the French DST. First, it found that the distinction between taxable and non-taxable services made by the French DST (i.e., taxing services where value depends heavily on user activity such as targeted advertising and digital intermediation and, excluding payments, streaming, financial services) is justified by the purpose of the tax, which targets online services whose value essentially derives from user activity. Second, the Court found that the criteria for taxation thresholds (i.e., worldwide revenues over EUR 750 million and French revenues over EUR 25 million) are objective and consistent with the aim of taxing online businesses with a significant digital presence in France and worldwide. Third, the Court assessed the DST tax base, which is determined on the basis of a representative percentage of users located in France in relation to the total number of users, and concluded that such aspect is aligned with the DST's purpose, even if part of the service's value is created outside France. Fourth, the Court confirmed that by allowing - for the year 2019 – to calculate the percentage of French users over a five-month period (instead of over the whole year) following the introduction of the DST the legislature relied on objective and rational criteria, which did not infringe the principles of equality before the law and before public charges. Fifth, the Court found that the amount of the DST rate (3%) is not confiscatory because it is based on turnover from taxable services supplied in France, not on profits, and does not impose an excessive burden on taxpayers. The Court noted that it is irrelevant whether the online services are also subject to corporate income tax. Furthermore, the Court found that the DST does not create unequal treatment because the rate applies uniformly to all companies operating taxable digital services, regardless of where they are established. Finally, the Court found that DSTs' flat tax rate (and lack of a progressive rate or smoothing mechanism) does not violate constitutional principles. Based on all the above, the Constitutional Court rejected the applicants' complaints and confirmed that the DST provisions are constitutional, as they do not violate the freedom to conduct a business or any other constitutional right.

Although this is not a case on EU law per se, the judgment of the French Constitutional Court on France's DST is relevant in this area. This is mainly because it deals with important questions about non-discrimination, proportionality, and the allocation of taxing rights (which are also core principles of EU law) and, therefore, the French Court's reasoning may influence EU-wide debates, future legislation, and a potential judicial review of the DSTs under EU law.

Belgian Constitutional Court refers case to the CJ on the compatibility of the UTPR with EU Law

On 17 July 2025, the Belgian Constitutional Court referred questions to the Court of Justice of the European Union (CJ) regarding the compatibility of the Undertaxed Profits Rule (UTPR), as implemented under the EU Minimum Tax Directive (2022/2523), with fundamental principles of EU law. The case was brought by the American Free Chamber of Commerce (AmFree), which was represented jointly by Loyens & Loeff and Jones Day.

The Court's referral seeks clarification on whether the UTPR violates: (i) the right to property; (ii) the freedom to conduct a business; (iii) the principle of equal treatment; and/or (iv) the principle of fiscal territoriality. At the core of these grounds for challenge lies a common question: is it compatible with fundamental rights for an entity to be taxed under the UTPR on profits earned by entities in other jurisdictions, without consideration of its own financial capacity?

The outcome of the CJ's ruling may have significant implications for the application of the UTPR across the EU and the implementation of the Pillar Two rules by Member States. Since proceedings before the CJ take on average 1,5 year, a decision can be expected by the end of 2026. Despite the ongoing legal challenge, businesses are advised to continue preparing for UTPR compliance as the rules remain in effect pending a final decision, although taxpayers may want to consider taking proactive steps to safeguard their rights. Further developments on this case will be reported in future editions of the EU Tax Alert.

For more information on this development, please read our dedicated web post or reach out to one of our specialists.

CJ judgment on the application of the GAAR under the PSD to national participation exemptions (Nordcurrent group, C-228/24)

On 3 April 2025, the CJ delivered its judgment in the case Nordcurrent Group (C-228/24), which deals with the question of whether national participation exemptions can be denied under the General Anti-Avoidance Rule of Article 1(2) and (3) of the Parent- Subsidiary Directive (GAAR PSD), in the case of abuse.

The case involves a Lithuanian taxpayer (Nordcurrent), which develops and publishes video games. In 2009, Nordcurrent established a subsidiary in the United Kingdom (UK Subsidiary) for the sale and distribution of games, because of restrictions to sell video games via app stores directly from Lithuania. The UK Subsidiary realized profits in the UK which were regularly subject to UK corporate income tax. In 2017-2018, Nordcurrent relocated the functions and risks from the UK Subsidiary to the parent company in Lithuania, and the UK Subsidiary was liquidated a few years later. Nordcurrent applied the national participation exemption to dividends received from the UK Subsidiary in 2018 and 2019. Following an audit for the years 2018 and 2019, the Lithuanian tax authorities found that the UK Subsidiary had no 'substance' in these years. They deemed the UK Subsidiary to be a 'non-genuine arrangement' created to obtain a tax advantage, refusing the application of the participation exemption to dividends received from the UK Subsidiary. Nordcurrent contested this before the Lithuanian Tax Dispute Commission, leading to a referral to the CJ. The referring court asked the CJ: (i) whether the GAAR PSD must be interpreted as precluding the denial of a national participation exemption on the basis of a non-conduit subsidiary being qualified a 'non-genuine arrangement'?; (ii) whether the qualification of an arrangement as 'non-genuine' requires taking into account all the facts and circumstances of the case, or only those that existed at the time of the dividend distribution?; and (iii) whether the qualification of an arrangement as 'non-genuine' under the GAAR PSD alone is sufficient to conclude that, by benefiting from a participation exemption, a parent company obtained a 'tax advantage' that defeats the object and purpose of the PSD?

With respect to the first question the CJ held that the GAAR PSD must be interpreted as not only being applicable to specific situations or types of arrangements (e.g., arrangements involving conduit companies). Moreover, the scheme and objective of the PSD entail that the GAAR PSD is cross-cutting in nature, which militates in favour of an interpretation that permits its application irrespective of the circumstances in which abuse occurs. Consequently, the CJ held that the GAAR PSD does not preclude a national practice pursuant to which a parent company is denied an exemption from corporate income tax in its Member State of residence in respect of dividend received from a subsidiary established in another Member State on the basis that such subsidiary is a non-genuine arrangement, while that subsidiary is not an intermediate company and the profits that were distributed by way of dividend distributions were generated in the course of activities carried out in name of the subsidiary.

With respect to the second question, the CJ held that although the application of the GAAR PSD appears to be limited to the putting into place of an arrangement due to the wording of the provision, it is important to take into account that an arrangement may comprise more than one step or part. As a result, it cannot be ruled out that an arrangement, initially considered as genuine, has to be regarded as not genuine from a certain point onwards due to the fact that it has been maintained despite a change in circumstances. The possibility of applying the GAAR PSD to non-genuine steps of an arrangement should be understood as meaning that circumstances subsequent to the formation of the arrangement may be considered for purposes of assessing whether or not a step is genuine. Accordingly, the Court noted that when an arrangement consists of more than one step, all relevant facts and circumstances must be taken into account. Consequently, it held that the GAAR PSD must be interpreted as precluding a national practice pursuant to which merely the situation existing as per the dates the dividends were paid are to be taken into account in order to classify a subsidiary established and residing in a Member State as a non-genuine arrangement, while that subsidiary was established for valid commercial reasons and the genuine nature prior to the dividend payment dates were not questioned.

With respect to the third question, the CJ held that in light of the wording of the GAAR PSD, two conditions must be met in order for the benefits of the PSD to be denied. First, a 'non-genuine arrangement' within the meaning of Article 1 (3) of the PSD must be present. Second, the non-genuine arrangement must have been put in place with the main purpose or one of its main purposes being that of obtaining a 'tax advantage' that defeats the object and purpose of the PSD. Hence, the CJ held that the classification of a subsidiary as a 'non-genuine arrangement' in itself is not sufficient to conclude that, by enjoying an exemption from corporate income tax in respect of those dividends, the parent company obtained a 'tax advantage' that defeats the object of the PSD. In addition, the CJ noted that the existence of a 'tax advantage' must not be assessed in isolation and demands considering the overall tax position of the arrangement.

For further information about this judgment and its impact, please see our dedicated web post.

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