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Tax Treatment Of EE/EEA Pension Funds Are Deemed Incompatible With EC Law


The Advocate General (AG) of Portugal has asked the Court of Justice (CJ) to consider the tax treatment of general tax exemption provided to Portuguese based pension funds vis-?-vis the 20% final withholding tax rate (currently 21.5%) levied on Portuguese sourced dividends derived by EU/EEA based pension funds, since it is felt it unfairly restricts the free movement of capital. Taxand Portugal discusses this issue in further detail.

Under the Portuguese law, any income realised by pension funds is exempt from corporate income tax, provided that such funds are incorporated and organised according to the Portuguese law. Non-resident pension funds on the other hand do not benefit from the said tax exemption. Therefore, Portuguese-sourced dividends are subject to a 21.5% tax rate (20% before 1 January 2011), notwithstanding the treaty reduced rates (if applicable).

The AG stated that the difference in treatment may constitute a prohibited restriction to the free movement of capital to the extent that the investments of EU/EEA pension funds in Portuguese companies will become less attractive.

Taxand's Take

Although the AG opinion is not binding to the Court, it usually bears significant influence on the final decision. Regardless of the final outcome, the AG clearly indicated that the difference in treatment applicable to EU/EEA based pension funds is incompatible with EU law.

It is believed that EU/EEA based funds that are subject to withholding tax in Portugal should consider reassessing their tax position in order to evaluate options to ensure exemption of future profits and for claiming back the previously paid tax.

Read the full article on the Advocate General's stance on the issue from Taxand Portugal here

Your Taxand contact for further queries is:
Fernando Castro Silva
T. +351 213 821 200

Taxand's Take Author