Indirect taxation on the raising of capital has been a matter of harmonisation in the EU since 1969, when Council Directive 69/335/EEC, of July 17 1969, sought to govern indirect tax levies on the raising of capital (the 1969 directive).
When Portugal acceded to the European Communities in 1986, among the special provisions established in the 1969 directive (as amended by Directive 85/303/ECC, of June 10 1985) was Article 7(1), which established that ”member states shall exempt from capital duty [as defined in the article] transactions […] which were, as at July 1 1984, exempted or taxed at a rate of 0.50% or less [being such exemption] subject to the conditions which were applicable, on that date, for the grant of the exemption, or, as the case may be, for imposition at a rate of 0.50% or less.”
The precise consequences and accurate interpretation of this aptly named “standstill clause” was the subject of several rulings by the Court of Justice of the European Union. One such ruling was in Case No. C-366/05 – Optimus, where the court was referred the following questions under a preliminary ruling issued by a Portuguese court in a dispute between the telecommunications company Optimus – Telecomunicações, S.A. and the Portuguese tax authorities:
Whether the 1969 Directive imposed a “…a clear and unconditional obligation, on the part of member states, to exempt from capital duty [in the case at hand, Portuguese stamp duty] transactions which, on July 1 1984, were exempted or taxed at a rate of 0.50% or less.”
Whether, from its date of accession to the European Communities (January 1 1986) onwards, Portugal was prohibited from introducing a stamp duty levy on a share capital increase falling within the scope of the 1969 directive, considering that, on July 1 1984, such a taxable event was exempt from stamp duty under national law.
In answering the first question, and because no reservations to the 1969 directive were made by Portugal when it acceded to the European Communities, the European Court of Justice ruled that a clear, unconditional and unambiguous obligation was imposed on Portugal to exempt from stamp duty transactions that, on July 1 1984, were either exempt or were taxed at a rate of 0.50% or less.
In response to the second question, the court ruled similarly, stating, “it would therefore be contrary to the wording of article 7(1) of Directive 69/335, and to the objectives of that directive, to reintroduce into the Portuguese legal system, after January 1 1986, a stamp duty on increases in the share capital of capital companies […] paid in cash, when such a duty was not imposed on such transactions on July 1 1984.”
The 1969 directive would ultimately be repealed and replaced by Council Directive 2008/7/EC of February 12 2008, concerning indirect taxes on the raising of capital (the 2008 directive).
Among the provisions introduced by the 2008 directive, there is an improved iteration of the referred standstill clause, under which member states that, as of January 1 2006, charged a duty (e.g., stamp duty) on contributions of capital to capital companies (as defined in the 2008 directive, which includes financing via shareholders’ loans), may continue to do so, in strict compliance with the remaining articles of the 2008 directive.
However, regarding member states that, after January 1 2006, discontinued the levying of duties over transactions included in the 2008 directive, those member states effectively forfeited the right to reintroduce these levies over the same taxable events.
Some of the rules governing the taxation of intra-group financing relating to Portuguese stamp duty may be questioned in light of the latest iteration of the standstill clause.
Since 1999, Portuguese stamp duty legislation has included an exemption applicable to loans (and underlying interest) granted by shareholders to their subsidiaries (i.e., shareholder loans).
Until 2011, this exemption depended on the nature of the loans themselves and applied to shareholder loans with a maturity date of at least one year. These requirements were eased in the state budget for 2011 so that all shareholder loans were in principle exempt, irrespective of the corresponding effective duration.
However, from 2016 onwards, the exemption was once again amended, this time to introduce stricter requirements for the exemption. Under the regime in force, for the stamp duty exemption to apply to shareholder loans, two requirements must be met: (i) a minimum shareholding of 10% between lender and borrower; and (ii) this minimum shareholding must have been continuously kept for at least one year before the granting of credit or since the incorporation of the borrower if the incorporation occurred less than one year before the credit was granted (in which case, the one-year holding period must be completed prospectively).
In our view, the amendments introduced in 2016 represent a back and forth movement that is neither desirable nor allowed by the 2008 directive, against which these amendments run unjustifiably afoul. In the matter of indirect taxation on the raising of capital, the member states must either stand or walk in the same direction, not being allowed to turn back.
Pedro Vidal Matos
T: +351 21 355 38 00
E: pedro.matos@cuatrecasas.com
João Pedro Russo
T: +351 21 355 38 00
