Portuguese Banking Sector Surcharge – the end of an era?
Maria do Carmo Leitmann of Morais Leitão discusses the controversial and discriminatory implications of Portugal’s Banking Sector Surcharge on foreign credit institutions’ branches.
Since the implementation of the Portuguese Banking Sector Surcharge (ASSB) back in 2020, concerns were raised regarding its unconstitutionality and incompatibility with EU principles. Now, almost three years later, the Advocate General (AG) of the Court of Justice of the European Union (CJEU) has confirmed what many Portuguese branches of foreign credit institutions have been arguing and discussing before the Portuguese Courts: the ASSB is against the EU principle of freedom of establishment.
Since its implementation, the ASSB has been a hot topic for foreign credit institutions’ branches, who have made their way to Portuguese courts to discuss its illegality (similarly to what they still do regarding the bank levy). One of the grounds raised by the many complaints is that the ASSB violates the freedom of establishment by discriminating against Portuguese branches of non-resident credit institutions.
One of these complaints derived from a Portuguese branch of a French-based credit institution who pleaded that the ASSB is against EU law and, therefore, brought the case to a Portuguese arbitration court. Given the nature of the arguments, the court requested a preliminary ruling from the CJEU. Even though it is not binding, the AG Priit Pikamäe issued his conclusions on July 13 2023 which may provide a sense of a victory for the Portuguese branches of EU credit institutions.
In a nutshell, the ASSB was introduced by the 2020 Supplementary Budget in response to the COVID-19 crisis. The main aim of the ASSB was to strengthen the financing mechanisms of the social security system, by fully earmarking its revenue for the Social Security Financial Stabilisation Fund. Thus, according to the Portuguese legislator, the ASSB was drafted to compensate for the VAT exemption applied to the banking sector during the pandemic regarding most financial services and operations, with the purposes of aligning the tax burden borne by this sector with the one borne by other economic sectors.
Nevertheless, when drafting the regime underlying the ASSB, the Portuguese legislator has disregarded some of the fundamental principles of EU law, namely, the freedom of establishment and of nondiscrimination. As pointed out by the AG, the ASSB is applicable not only to credit institutions with head offices in Portugal and subsidiaries of credit institutions with foreign head offices but also to foreign credit institutions’ branches operating in Portugal, which may put the latter in a disadvantageous position. The reason for this is because the ASSB applies to the liabilities calculated and approved by the taxable person deducted from, inter alia, the elements of liabilities comprising its own funds.
Due to foreign credit institutions’ branches not being recognised as legal personalities in Portugal, they cannot deduct their own funds from their liabilities and, therefore, their taxable amount subject to ASSB is higher in comparison to the one estimated by resident credit institutions. This landmark AG opinion is of the utmost importance for the purposes of strengthening the EU market in times where indirect discrimination and other types of additional burdens are hindering the economic activities of non-residents in other EU member states.
Thus, the preliminary ruling aimed to analyse whether the application of the ASSB to Portuguese branches of EU credit institutions violates the freedom of establishment set out in Article 49 of the Treaty on the Functioning of the European Union.
As per the AG, the fact that entities without legal personality cannot record equity capital in their balance sheet and, as a result, deduct it from their ASSB tax base, means that Portuguese branches of foreign credit institutions are at a disadvantageous position. This is particularly true in comparison to resident credit institutions and subsidiaries of non-resident credit institutions, which are allowed to make such deductions, due to their legal nature and applicable accounting standards.
Thus, in the words of the AG, the Portuguese legislation that established the ASSB gives rise to indirect discrimination to the detriment of non-resident credit institutions wishing to set up in Portugal through a branch, violating the principle of freedom of establishment.
The conclusions of the AG constitute a threat to the application of the ASSB to Portuguese branches of foreign credit institutions. Even though the CJEU is not bound by these opinions, it may give a sense of victory to the Portuguese branches that are, since its implementation, fighting against the discriminatory application of the ASSB.
Nevertheless, the final decision of the ECJ is awaited to understand whether the battle against the ASSB has come to an end. Notwithstanding, the conclusions of the AG are already providing a sense of relief for these entities, giving these entities some hope that this unfair and discriminatory tax treatment is coming to an end.