A ruling by the Portuguese Southern Central Administrative Court on April 4 2024 concluded that a Portuguese branch has a tax personality for the purposes of stamp tax and in the context of credit operations carried out with its parent company. This strengthened the position that had already been addressed by Portuguese courts, for corporate tax purposes, and the Portuguese Tax Authority, thus rejecting the view that a branch has no tax personality and is a mere extension of its parent company.
This article will point out that this stance raises several questions; namely, for the purposes of the (non) application of stamp tax exemptions and in terms of its compatibility with EU law and jurisprudence.
The Portuguese court’s ruling
In the aforementioned case, No. 202/21.6BEALM (in Portuguese), the discussion centred on whether the loans granted in the context of agreements entered into between an entity resident in Spain and its Portuguese branch constituted a ‘credit operation’ subject to stamp tax or if such loans were deemed to be internal allocations of funds within the same legal entity and, therefore, of no relevance in terms of taxation.
The court highlighted that the possibility of being subject to stamp tax does not depend on the existence of a legal personality, but rather a tax personality, while a Portuguese branch is considered an autonomous taxable person under a number of arguments; namely, as a permanent establishment for transfer pricing purposes, since, in this context, the branch and the parent company are treated as if they are completely independent entities.
Such treatment is also based on the ‘theory of absolute independence’ of a permanent establishment, which was followed by the court to sustain its position.
On that note, the court concluded that a Portuguese branch is, in fact, subject to stamp tax, challenging a set of strong arguments presented towards the non-taxation of the loans granted from a parent company to a Portuguese branch.
Furthermore, the court also understood that while having a tax personality, a branch may not be considered as held – directly or indirectly, in any percentage – by its parent company for the purposes of a shareholder loan (stamp tax) exemption, which inevitably raises concerns about the potential discrimination faced by a Portuguese branch.
Thus, from a deeper look, it may be important to question if EU non-discrimination principles have been unlawfully transgressed.
A branch v subsidiary discrimination under EU principles?
In parallel with the aforementioned, it should be noted that the European Court of Justice (ECJ) has been taking a strong position against restrictions on the free movement of capital.
This stance is well noted in the case C-420/23, of June 20 2024, which focused on short-term treasury operations for the purposes of stamp tax and the resident versus non-resident discriminating treatment under Portuguese legislation.
Although the ruling does not directly address the issue of branches or their tax personality, in the authors’ opinion it is highly relevant as it stresses the importance of not restricting the free movement of capital in loans, and the need for domestic legislation to grant the same tax treatment in objectively comparable situations.
As is well known, under EU principles, potential restrictions to the free movement of capital must have strong underlying conditions, particularly when distinctions are made between taxpayers who are in an unequal situation, residence-wise or based on where the capital is invested, and for anti-avoidance purposes.
That said, the Portuguese court’s ruling lacks evidence of uniform treatment being given to a Portuguese branch, instead displaying clearly unfavourable treatment in comparison with other legal entities.
A glance at the future: what to expect
In the authors’ view, provided that a Portuguese branch has a tax personality, like a subsidiary, and is subject to stamp tax on credit operations, such as short-term treasury loans, then it should also benefit from the same exemptions as the subsidiary – or, at least, from comparable ones.
Shedding light on a Portuguese branch compared with other legal entities in the same circumstances, one can only point to a slight difference in the legal form adopted, which, therefore, cannot be held sufficient for a restriction in the free movement of capital from its foreign parent company.
That said, if such a difference were held as highly significant against these other entities, such as subsidiaries, this would lead us to the conclusion that a Portuguese branch is a mere extension of its parent company, incomparable to these subsidiaries for stamp tax purposes.
In fact, as stated in the above-mentioned ECJ ruling, domestic restrictions on the movement of capital between EU member states are prohibited, so a different treatment between entities based solely on the legal form they adopt, such as in the present case, will always represent a restrictive measure that also discourages investment in another member state.
When applying the ECJ’s interpretation to the case at hand, it may be affirmed that the Portuguese court’s ruling discriminates against branches, in so far as they are treated as companies with a tax personality for stamp tax purposes on shareholder loans but end up being excluded from the scope of any exemption potentially applicable, as they cannot possibly form part of a control or participation relationship with their parent company in a strict sense.
In this context, it will be interesting to see if Portuguese domestic law will reduce the gap that has now been established between a Portuguese branch and subsidiary for stamp tax purposes.
From the point of view of companies that have expanded their business to Portugal through a Portuguese branch (rather than, hypothetically, a subsidiary), they are faced with legal uncertainty and, potentially, a new set of conditions.
In the authors’ opinion, this recent development paves the way for tax disputes with the Portuguese Tax Authority and, ultimately, may result in a need to call upon the ECJ to settle any controversies, leading to a closing question: what further developments might arise on the topic?
