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

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

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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

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