The Sofina case law refers to a landmark judgment by the Court of Justice of the European Union (CJEU), confirmed in decisions from 2022 and 2024, with additional cases pending. Taken together, these judgments indicate that, under the EU’s free movement of capital, withholding tax (WHT) should not apply to payments made to foreign loss-making companies where a domestic company in comparable circumstances would ultimately not be liable to tax. The authors submit that, although under a ‘matching principle rationale’ the doctrine’s scope may be narrower than initially assumed, Portuguese law should be considered discriminatory in specific situations, entitling affected taxpayers to a WHT reimbursement.
Sofina case law
In Sofina (November 22 2018), Belgian companies in a loss-making position received dividends from a French source and were subject to a final 15% WHT (a reduced treaty rate).
By contrast, French-resident companies receiving comparable dividends would initially be subject to 25% WHT as a payment on account of final corporate income tax (CIT) liability; however, if they were in a loss-making position at year-end, they would be entitled to a refund of that WHT.
The CJEU held that this difference in treatment restricted the free movement of capital under Article 63 of the Treaty on the Functioning of the European Union (TFEU). Specifically, it found the entities to be in an objectively comparable situation and rejected the justifications put forward under Article 65 of the TFEU, including the balanced allocation of taxing powers, the effectiveness of tax collection, and the prevention of revenue loss.
Importantly, the court held that the discriminatory effect arose from the regime’s material outcome, not merely from the imposition of WHT on non-residents, in a reasoning consistent with the court’s earlier judgment in Truck Center (December 22 2008).
The CJEU further noted that the discrimination could not be neutralised by applying the France–Belgium double tax treaty. Indeed, this is typically the case for foreign loss-making companies, or those whose state of residency applies the exemption method, as they lack the taxable income against which to credit the foreign WHT.
This reasoning was confirmed in Credit Suisse Securities (Europe) (December 19 2024), where a UK-resident loss-making company received dividends from a company established in Biscay, Spain, and was subject to WHT at source at a reduced treaty rate of 10%.
Under the applicable Spanish law, WHT on dividends paid to non-resident companies was generally final, with no domestic mechanism for reimbursement where the recipient company incurred losses. By contrast, where dividends were paid to a resident company subject to CIT in Biscay, the WHT operated merely as a payment on account for final CIT liability. At year-end, that dividend income formed part of the overall tax assessment and, where the resident company was in a global loss-making position, no tax was due, and the WHT was reimbursed in full.
Against that background, the CJEU again identified a restriction on the free movement of capital under Article 63 of the TFEU. The court stressed that once a source state taxes dividends paid to both resident and non-resident companies, their situations become objectively comparable as regards the tax burden attached to that income. Consequently, the differing tax treatment conferred a substantive advantage to resident loss-making companies.
The court again rejected justifications presented under Article 65 of the TFEU, including the need to ensure effective tax collection, preserve the balanced allocation of taxing rights, or prevent the double use of losses. It held that extending reimbursement or deferral mechanisms to non-resident loss-making companies would not undermine the source state’s right to tax the dividends once the company returns to profitability, nor would it exceed what is necessary to safeguard tax collection, given the availability of evidentiary requirements and administrative cooperation between member states. Therefore, the court concluded that Article 63 of the TFEU precludes regimes that impose definitive WHT on non-resident loss-making companies while granting reimbursements or deferrals to resident companies in comparable economic positions.
Other pertinent cases include ACC Silicones (June 16 2022), where the court found German law discriminatory due to the additional and stricter conditions it imposes on non-resident loss-making companies to be able to claim a WHT reimbursement. The authors also note the pending Société Générale/OPmobility case (cases C-287 through C-289/25), where the Sofina doctrine is being tested in the context of tax-consolidated groups.
Taken together, these cases appear to expand the concept of comparability as traditionally applied under CJEU case law, requiring source states to consider a taxpayer’s global loss position (with respect to both EU and third-country entities), seemingly departing from earlier case law on tax losses and cost deductibility; e.g., Futura (May 15 1997) and Centro Equestre (February 15 2007).
Conceptual and legal background
Conceptual understanding of costs and losses
Costs and losses represent the same economic reality, viewed at different points in time. A company typically incurs costs that, if deductible for income tax purposes and exceeding profits, generate a net operating loss for the tax year. Those losses may generally be carried forward or, in some cases, carried back. Accordingly, tax losses arise only from costs that are deductible for tax purposes.
Treatment of costs and losses under Portuguese law: the matching principle
General regime
Under Portuguese law, as in most CIT systems, costs are considered for tax purposes only if they are incurred with a view to generating taxable profits (Article 23.1 of the Portuguese Corporate Income Tax Code, or the CIT Code).
Under this matching principle, several categories of costs are disregarded for tax purposes. These include:
Capital losses on equity, up to the amount of certain profits or gains exempt under the participation exemption regime (Article 23-A.2 of the CIT Code);
Losses of foreign permanent establishments where the taxpayer opts for the ‘exemption method’ (Article 54-A of the CIT Code); and
Costs incurred by alternative investment funds (AIFs) linked to profits exempt under the AIF tax regime (Article 22.3 of the Portuguese Tax Benefits Code).
Tax losses may generally be carried forward indefinitely; however, they may be offset only against up to 65% of taxable profits assessed in a given year. Carrybacks are not permitted (Article 52 of the CIT Code).
Non-resident corporate entities
Dividends paid to non-resident corporate entities are generally subject to a final 25% WHT, which may be reduced under applicable tax treaties.
Under Article 94.8 of the CIT Code and Article 71.11 of the Portuguese Income Tax Code, EU or EEA (where qualified exchange-of-information mechanisms are in place) taxpayers may apply for reimbursement of WHT levied on capital income (including dividends) where the WHT exceeds the CIT liability that would have arisen under generally applicable CIT rates. This assessment is made “considering all of the taxpayer’s income, including income generated outside Portugal, under the same conditions applicable to resident taxpayers”, and allows for the deduction of “evidenced costs that are directly and exclusively related to Portuguese-source income”. The application must be filed within two years following the end of the tax year in question.
Portuguese tax authority guidance (Ruling 23637, Procedure P 4266/22) and published court decisions offer precedents for applying this regime (Arbitration Court decisions in Procedure 1240/2024-T, of August 1 2025, or in Procedure 1239/2024-T, of June 12 2025), albeit in cases involving royalties or services rather than dividends.
Where both the payer and recipient are corporate entities subject to and not exempt from CIT (or a comparable tax), articles 95.2 and 95.3 of the CIT Code may apply, providing for a specific dividend WHT reimbursement procedure. Those provisions allow EU or EEA taxpayers subject to WHT on domestic dividends to seek reimbursement for any excess tax paid. The reimbursement equals the difference between the tax withheld and the tax due under the general applicable rates under articles 87.1 and 87-A.1 of the CIT Code, and the calculation should consider all the taxpayer’s income, including income obtained in Portugal. This reimbursement request should likewise be filed within two years following the end of the tax year in question.
Given the close similarity between the two regimes, the reimbursement mechanism under Article 95.2 should operate in essentially the same manner as the mechanism set out in Article 94.8.
For cases not covered by the special procedures described above, taxpayers may pursue a residual WHT reimbursement procedure under Article 132 of the Portuguese Tax Procedure and Process Code, which is again subject to the same two-year limitation period.
Discrimination assessment: Sofina case law and Portuguese law
Based on the regime described above, non-resident companies incurring losses arising from costs related to activities not subject to Portuguese tax should not be able to deduct or offset those losses against Portuguese tax. Consequently, they should not be able to obtain a refund of WHT levied on Portuguese-source dividends.
As shown, this does not differ from a Portuguese company in an objectively comparable situation – for example, receiving dividends from the same company – that has incurred costs or losses for a purpose other than generating profits subject to Portuguese tax.
To that extent, the regime does not create a differential treatment between resident and non-resident companies that could be considered discriminatory (making it unnecessary to determine whether such discrimination would be justified and proportional, under the CJEU’s traditional approach).
In the authors’ view, this conclusion does not go against the Sofina case law. Specifically, it may be argued that, in the analysed cases, the court was not presented with these specific arguments. Instead, the defendants focused on the absence of comparability and on potential justifications. Consequently, it remains to be seen how the court would rule if it were shown – assuming this to be the case – that:
Resident entities also cannot use losses arising from non-taxable activities, which are generally not recognised as tax losses; and
Apart from any time-value-of-money effects, the available reimbursement mechanisms are proportionate and essentially place resident and non-resident entities on equal footing.
This reasoning aligns with CJEU case law on costs, including Brisal (July 13 2016) and Centro Equestre. Under that case law, only costs linked to taxable profits are considered, while costs related to non-taxable activities are generally disregarded.
Conversely, where losses relate to profits potentially taxable in Portugal (in line with Futura (May 15 1997)), a foreign entity would face discriminatory treatment if, unlike a Portuguese entity, it could not offset those losses against future taxable profits and, where applicable, obtain a WHT reimbursement. To avoid such discrimination, those losses should generally be carried forward under the same terms applicable to resident entities. Notwithstanding this, consideration should be given to whether this potential discrimination falls within the scope of the EU free movement of capital or the freedom of establishment.
It so happens that the existing WHT reimbursement procedures seem to apply only to – and have been tested in practice only with respect to – the deduction of costs incurred in the same tax year in which the WHT was levied, and not to the carryforward of losses.
Furthermore, even if those procedures could allow loss carryforwards – a debatable proposition – the time limit for filing a reimbursement claim of at most three years contrasts with the unlimited loss-carryforward benefit granted to resident companies. That disparity should, in itself, be considered discriminatory.
For clarity, that is not to say that a non-resident company should not be required to substantiate incurred costs within a defined period for losses to be recognised and subsequently carried forward without time limitation, such as by filing an annual tax return. Rather, the point is that no such mechanism currently exists.
Summary
While Portuguese law allows non-resident companies to deduct qualifying costs incurred in a given tax year (consistent with the case law described above; e.g., Centro Equestre or Brisal), it does not permit the carryforward of losses in the same manner available to resident companies.
Additional discrimination arises where a foreign taxpayer is considered profitable because it must consider its worldwide income, including income not taxable in Portugal, whereas a Portuguese company’s exempt or non-taxable income is disregarded for that purpose.
Lastly, the WHT reimbursement procedures described above apply only to EU and EEA entities. Consequently, the Portuguese regime discriminates against third-country entities, which should also benefit from the EU’s free movement of capital principle, subject to certain limitations (e.g., the existence of adequate exchange-of-information mechanisms).
Takeaways
The Portuguese regime is not discriminatory towards non-resident EU and EEA companies in a loss-making position that are subject to WHT on Portuguese-source dividends where the losses arise from activities not taxable in Portugal. In the authors’ view, this preliminary conclusion is consistent with CJEU case law, including Sofina.
However, the Portuguese regime should be considered discriminatory where a non-resident entity:
Incurs losses arising from taxable activities in Portugal but, unlike a resident entity, cannot carry those losses forward without a time limitation;
Must consider non-taxable income when determining whether it is in a qualifying loss position, whereas resident companies disregard exempt or non-taxable income for that purpose; or
Is resident in a third country with adequate exchange-of-information mechanisms but, unlike EU or EEA residents, cannot apply for reimbursement.
Taxpayers in these situations should be entitled to a reimbursement of WHT and would generally have a four-year period to initiate the pertinent proceedings. Typically, the taxpayer first files an administrative review request (revisão oficiosa) with the Portuguese tax authorities. If they do not respond within four months, or reject the request, the taxpayer may bring the case before a court, including an arbitration court, which generally must issue a ruling within six months.
The authors thank their colleague Pedro Vidal Matos for his helpful input for this article. However, any errors or omissions are the sole responsibility of the authors.
