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Commission vs. Portugal


The infringement procedure against Portugal concerning potential discriminatory tax treatment of outbound interest payments to EU/EEA-based financial institutions was dismissed by the ECJ. Taxand Portugal discusses the case and final decision by the ECJ.

The case addressed the compatibility of Portuguese domestic withholding tax rules on interest payments with the freedom to provide services and the free movement of capital enshrined in the TFEU, namely when the recipient entities are non-resident financial institutions. While interest payments made to EU/EEA-based financial institutions are subject to a 20% withholding tax rate (reducible to 15% or 10% under the Portuguese treaty network) on gross proceeds, interest payments made to either a Portuguese resident financial institutions or a Portuguese-based permanent establishment of a foreign financial institution are taxed at the standard corporate income tax rate applicable on net income as determined by local GAAP.

The ECJ based its judgement on the Commission's failure to provide sufficient evidence that the said tax framework hinders the Treaty freedoms by imposing, in all instances, higher taxation on non-resident financial institutions when compared to resident financial institutions.

Indeed the Commission's reasoning was merely based on presumptive computations simulating different profit margins. No statistic data was provided to support the Commission's view. These presumptive computations, however, show that discrimination is potentially higher in scenarios where the banking margins are lower.

An unusual alternative reasoning provided by AG Kokott, which could not be used due to procedural reasons, indicates that the rules prevent price competition in the Portuguese money market between domestic and foreign financial institutions. The reasoning shows that, regardless of the margins in place, the rules impose stricter limitations on a foreign financial institution's ability to provide Portuguese consumers with competitive interest rates.

Taxand's Take

The dismissal of this case by the ECJ merely based on procedural grounds, in our opinion, does not close the door for private litigation challenging the same domestic rules in this infringement procedure.

Indeed, in the context of a preliminary ruling procedure, if EU/EEA-based financial institutions are able to provide specific data concerning actual profit margins, they would in principle be able to demonstrate a possible discriminatory effect when compared to domestic financial institutions. The additional argument provided by the AG could also be followed to substantiate a discrimination claim regardless of the market margins actually used.

Your Taxand contacts for further queries are:
Paulo N?ncio

Miguel Pimentel

Taxand's Take Author