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Court Justice considers Portuguese Tax Treatment of EU/EEA Pension Funds Incompatible with EU Law


On 6 October 2011, the Court Justice of the European Union issued its decision in the Commission vs Portugal case. The Court of Justice ruled that the tax exemption provided to Portuguese resident pension funds vis-?-vis the 20% tax rate (currently 21.5%) levied on pension funds resident in the EU/EEA constitutes an unjustified restriction to free movement of capital, foreseen in Articles 63 et seq of the Treaty on the Functioning of the European Union (prior Article 56 of the EC Treaty). Taxand Portugal looks at the background of the case and examines the ruling of the Court Justice.

Under Portuguese law, any income realised by pension funds is exempt from corporate income tax, provided that such funds are incorporated and organised according to Portuguese law. Note that Portuguese source dividends are nonetheless taxed at the level of a resident pension fund at a 20% rate when the shares are not held 1 year (which may be completed later). The Portuguese fund management companies are jointly and severally liable for any taxes due at the level of the fund, should the conditions of the exemption not be applicable.

Non-resident pension funds on the other hand do not benefit from the said tax exemption.

Opinion of the Advocate General
The Court Justice stated that the difference in treatment may constitute a prohibited restriction to the free movement of capital (Article 63 TFEU and Article 40 EEA) to the extent that the investments of EU/EEA pension funds in Portuguese companies becomes less attractive. The Court stated that difference in treatment however does not exist where the dividends paid by a resident company arise from shares held for less than 1 year.

The Court Justice rejected the Portuguese Government's arguments that the restriction could be justified by reasons relating to the coherence of the Portuguese tax system and need to guarantee the effectiveness of fiscal supervision.

Taxand Portugal provides a closer look at the case in the full article

Taxand's Take

Foreign based pension funds should consider filing refund claims taking into account local statutory time limits. The issues left open include the possible extension of this ruling to sovereign funds holding shares in Portugal and third country (non-EEA) pension funds - both covered by the free movement of capital. The third country debate remains unclear namely when double tax treaties provide "similar" exchange of information mechanisms. Finally, the issue of the comparability of foreign based funds also remains open and should be addressed on a case-by-case approach.

Your Taxand contacts for further queries are:

Fernando Castro Silva
T. + 351 21 382 12 32

Miguel C. Reis
T. + 351 226 158 860


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