The increase in compensatory interest under GAAR: an unconstitutional penalty?

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

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

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

The increase in compensatory interest under GAAR: an unconstitutional penalty?

Sponsored by

sponsored-firm-mlgts.jpg
porto-1972450.jpg

Francisca Marabuto Tavares of Morais Leitão reviews Portugal’s controversial application of GAAR rules, and considers whether compensatory interest application could be unconstitutional.

The application of the general anti-abuse rule (GAAR) to transactions considered tax abusive, as provided for in article 38, no. 6, of the Portuguese General Tax Law, entails three tax consequences:

  • The evident payment of the omitted tax;

  • The consideration as a tax infraction for failure to assess and timely pay the tax due, the fine of which varies. In case of willful misconduct, it is between the value of the missing instalment and its double, and, in case of negligence, between 15% and half of the missing tax; and

  • The application of compensatory interest calculated at the rate of 19% per year (the current legal rate of 4% plus 15%), to run from the time of the tax default (failure by the taxpayer to pay the tax spontaneously) until the date on which the additional tax assessment is issued.

The final point raises several constitutional doubts, as well as doubts as to compliance with EU law.

Starting with the last of these angles: Council Directive 2016/1164 of July 12, 2016 (which inspired the 2019 reform of the GAAR) does not provide for any increase in interest or penalty in this context. And EU law, when referring to harmonised areas, should enshrine solutions that are similar, if not equal, in all member states, while complying with the principle of proportionality, which seems to be clearly undermined by this solution.

On the other hand, the idea that compensatory interest is intended to compensate the state for any delay in paying the tax for which the taxpayer is responsible is now firmly established by Portuguese doctrine and court decisions. But it is doubtful that this was the essence of the compensatory interest associated with the GAAR. The arithmetic speaks for itself: a rate of 19% per year goes beyond a merely compensatory function and can only intend to sanction and penalise the taxpayer, as if this were a normal criminal infraction.

Firstly, there is the general principle of ne bis in idem. By applying the compensatory interest, the taxpayer will be judged and penalised more than once for the same act. This manifests through tax infraction proceedings and a compensatory interest rate that takes on a sanctioning nature.

Secondly, this interest goes far beyond the taxpayers’ ability to pay, which contradicts the principle of equality provided for in article 13 of the Portuguese Constitution. An illegal improper penalty is applied when the interest rate and the consolidated amount to be paid no longer corresponds to that ability to pay.

Thirdly, as this is a true sanction, at no time could the guarantees that are legally associated with criminal proceedings be subtracted from this case. This refers to, for example:

  • The limits of the applicable fine or its waiver or reduction;

  • The possibility of suspending the tax infraction proceeding; or

  • The responsibility for the delay in assessment and payment of the tax required, in general, by the compensatory interest mechanism.

It remains to be seen whether the same sanction would be provided for the tax administration itself in cases where it must return the taxes paid by the taxpayers.

more across site & shared bottom lb ros

More from across our site

Using tax to enhance its standing as a funds location is behind Luxembourg’s measures aimed at clarifying ATAD 2 and making its carried interest regime more attractive
Encompassing everything from international scandals to seismic political events, it’s a privilege to cover the intriguing world of tax
In his newly created role, current SSA commissioner Bisignano will oversee all day-to-day IRS operations; in other news, Ryan has made its second acquisition in two weeks
In the age of borderless commerce, money flows faster than regulation. While digital platforms cross oceans in milliseconds, tax authorities often lag. Indonesia has decided it can wait no longer
The tariffs are disrupting global supply chains and creating a lot of uncertainty, tax expert Miguel Medeiros told ITR’s European Transfer Pricing Forum
Corporate counsel should combine deep technical knowledge with strategic dynamism, says Agarwal, winner of ITR’s EMEA In-house Indirect Tax Leader of the Year award
Luxembourg’s reform agenda continues at pace in 2025, with targeted measures for start-ups and alternative investment funds
Veteran Elizabeth Arrendale will lead the new advisory practice, which will support clients with M&A tax structuring, post-deal integration, and more
MAP cases keep increasing, and cases closed aren’t keeping pace with the number started, the OECD’s Sriram Govind also told an ITR summit
Nobody likes paperwork or paying money, but the assertion that legal accreditation doesn’t offer value to firms and clients alike is false
Gift this article