Landmark case on the tax regime of UCI in Portugal

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Landmark case on the tax regime of UCI in Portugal

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The court has called for the elimination of any discrepancies with EU law

Bruno Santiago and Miguel Teles of Morais Leitão analyse the findings of the recent significant ruling on the applicability of the tax regime of UCI incorporated under Portuguese law to UCI incorporated under a foreign law

A decision of a Portuguese arbitral court was recently made available online in a case where a branch in Portugal of a société civile de placement immobilier (SPCI) incorporated under French law argued that it was being discriminated under Portuguese tax law (case number 194/2019-T, dated September 19 2019). 



According to the findings of the arbitration court, this company should be considered equivalent to the variable capital real estate investment companies (SIICAV) that are undertakings for collective investment (UCI) incorporated under Portuguese law. 



The branch of the French company claimed that it was being discriminated against UCI incorporated under Portuguese law, infringing the freedom of establishment and the free movement of capital.



Non-resident foreign UCI (operating through a branch in Portugal) are taxed according to the general framework foreseen in the Portuguese Corporate Income Tax Code, whilst UCI incorporated and operating according to Portuguese law are taxed according to a special tax regime foreseen in Article 22 of the Tax Incentives Statute.



Generically, Article 22 of this statute establishes a considerably more favourable regime than the Portuguese Corporate Income Tax, namely because for the purposes of determining the taxable profit of the UCI, investment income, real estate income and capital gains are not considered in the formation of the tax base. This regime does not apply, however, to UCI incorporated under a foreign law.



The court upheld the branch’s claim, concluding that the difference in treatment represents an inadmissible discrimination as it is a restriction of the fundamental freedom of movement of capital between the Member States of the EU, foreseen in Article 63 of the Treaty on the Functioning of the European Union (TFEU). The mentioned tax regime did not apply to the branch of the French UCI, exclusively because it was not incorporated under Portuguese legislation.



The tax authorities argued that the different tax treatment present in Article 22 of the Portuguese Tax Incentives Statute that distinguished UCI incorporated under Portuguese law and UCI incorporated under foreign law is not discriminatory if they are in objectively different situations. 



It is true that according to Article 65, n.1 (a) of the TFEU, regarding tax law, Member States are allowed to “distinguish between taxpayers who are not in the same situation with regard to their place of residence or with regard to the place where their capital is invested”. However, since the branch located in Portugal of the French UCI was developing its activities and acting in accordance with Portuguese legislation, and for that matter, in the same situation as any other UCI incorporated under Portuguese law, the court decided that there was a restriction on the movement of capital. According to the judgement of the court, there were also no overriding reasons in the general interest that, considering the jurisprudence of the Court of Justice, might justify the restriction made by national legislation to the fundamental freedom of movement of capitals foreseen in the TFEU.



The Portuguese arbitral court also quoted the case law of the Court of Justice, reaffirming the decision taken in the Emerging Markets Series of DFA Investment Trust Company case (C-190/12). As the interpretation of European law had already been expressed, the arbitral court had no need to ask for a preliminary ruling to the Court of Justice (acte eclairé doctrine – C-283/81 CILFIT).



The court acknowledged that if the Portuguese law applies a more onerous tax regime to foreign UCI it is a deterrent to their entry in Portugal, primarily because they face competition from Portuguese UCI with more favourable tax conditions. This creates an undesirable distortion in the European internal market. The court declared illegal Article 22 of the Portuguese Tax Incentives Statute insofar as it limits the regime therein to UCI in corporate form incorporated under Portuguese law, excluding its application to UCI in corporate form incorporated under the laws of other Member States of the European Union.



The Portuguese tax system has not, however, eliminated this discrimination that violates European law. It will require a legislative amendment. However, until that happens, this arbitration jurisprudence will be an example of a good decision, to be followed in future cases.



Bruno Santiago

T: +351 213 817 435

E: brunosantiago@mlgts.pt



Miguel Teles

T: +351 213 817 400

E: mteles@mlgts.pt



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