Portugal: Withholding tax on interest payments to foreign financial institutions goes to court

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2026

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Portugal: Withholding tax on interest payments to foreign financial institutions goes to court

neves.jpg

Tiago Cassiano Neves

A new case entered the European Court of Justice (Brisal – C-18/15) dealing with the issue of compatibility of a withholding tax on gross interest paid to non-resident financial institutions, while in a domestic situation taxation is levied on a net basis without a withholding tax being levied. In general terms, Portuguese financial institutions or non-resident financial institutions with a permanent establishment in Portugal are not subject to withholding tax on interest derived from loans to Portuguese resident entities or individuals. As for outbound interest payments, Portugal continues to generally levy a 25% final withholding tax which may be reduced under a tax treaty between 10% and 15% (depending on the tax treaty). Only in very few instances may domestic exemptions apply, that is, interest payments for certain public and private debt securities and interest income paid between financial institutions.

The potential discriminatory tax treatment of outbound interest payments to EU/EEA based financial institutions had already given rise to an infringement procedure initiated by the EU Commission (Commission v Portugal – C-105/08), but on June 17 2010 the ECJ dismissed the action based on the Commission's failure to provide sufficient evidence that the levying of a gross withholding tax on interest results in higher taxation for non-resident financial institutions than the taxation of resident financial institutions.

The 2014 CIT Reform Commission's initial recommendation to remove interest withholding tax on loans paid to credit or financial institutions and shareholders resident in EU/EEA member states was not included in the CIT reform. Instead, parliament granted an authorisation for the Portuguese government to legislate on this point during 2014 but this was also not pursued further. As such, the tax landscape concerning interest payments has not been altered and the potential discrimination remains in place.

Brisal is therefore relevant primarily to EU/EEA financial institutions because it raises once again the issue of discriminatory treatment, now from the perspective of an actual financial institution (not an infringement procedure led by the EU Commission) that is claiming to be taxed on a net basis, on the grounds of the free movement of capital.

The claims against a discriminatory withholding tax rely on the EU Treaty's free movement of capital which covers payments between EU member states and also potentially may be extended to third countries, that is, non-EU member states (with effective exchange of information mechanisms).

When withholding taxes cannot fully or partially be credited against the recipient's tax liability, they become a final burden.

Recent ECJ cases in the field of withholding tax on dividends (not on interest income) have, for example, confirmed that the imposition of WHT by an EU state on dividends paid to a non-resident company while exempting domestic entities from such withholding tax results in discriminatory WHT contrary to the free movement of capital.

Nonetheless, in the field of interest withholding tax it is also worth noting that the ECJ already ruled in Truck Centre (C-282/07) that non-resident companies may be subject to withholding taxes even though resident companies are taxed by assessment, subject to an acceptable justification.

Foreign financial institutions that suffered Portuguese withholding tax on outbound interest payments should monitor this new case pending on the ECJ and reassess their tax position and possibly evaluate options for claiming back any uncreditable withholding tax suffered in open tax years.

Tiago Cassiano Neves (tiago.cassiano.neves@garrigues.com)

Garrigues – Taxand

Tel: + 351 231 821 200

Fax: +351 231 821 290

Website: www.garrigues.com

more across site & shared bottom lb ros

More from across our site

While the IBS incorporates taxable events previously covered by state and municipal taxes, its governance and operational logic represent a significant departure from the legacy model
The new office on the fourth floor of 4 More London will span 14,230 square feet, with the potential to expand to the first and second floors
MNEs now face a shift from modelling to execution as the side‑by‑side deal forces tax teams to upgrade systems, harmonise data, and prevent costly pillar two mismatches
As recent surveys suggest a disconnect between AI adoption and employee engagement, the big four risk digging themselves into a strategic hole
Almost three-quarters of surveyed tax professionals are concerned about inaccurate AI outputs; in other news, Dentons hired a partner from CMS to lead its Belgian tax team
Long-running, high-value and complex enquiries are a significant reason for HM Revenue and Customs’s increased TP yield, experts suggest
Landmark legal updates in India have led companies to prioritise specialised tax advisers over accountants, ITR has found
Brazil’s shift to a nationwide consumption tax is more than conceptual; it fundamentally transforms municipal revenue, enforcement, and administrative disputes
While some advisers praised the ruling’s definition of a ‘voucher’ for VAT purposes, a UK partner said the case left unanswered questions
While pillar two has been enacted on paper in Brazil, companies are encountering a range of practical compliance issues, ITR has heard
Gift this article