This content is from: Portugal

Portugal's bank levy on branches breaches EU law

Paulo Núncio and António Queiroz Martins from Morais Leitão analyse the landmark decision by a Portuguese arbitral court which ruled that the PT bank levy, applicable to Portuguese branches of EU banks, breaches EU law.


The 2016 Portuguese state budget law extended the PT bank levy to Portuguese branches of banks domiciled in other EU member states. The PT bank levy refers to the charge that was created unilaterally by Portugal in December 2010 in respect to the banking sector. In 2019, a Portuguese arbitral court issued a landmark decision judging that the PT bank levy on such Portuguese branches was imposed in violation of EU law.

At stake in this decision is a unilateral bank levy that the Portuguese government decided to keep and extend in 2016 to EU banks operating in Portugal through branches, even after the EU Bank Recovery and Resolution Directive was implemented and entered into force in Portugal. Under this EU directive, which established a harmonised framework for the recovery and resolution of credit institutions and investment firms within the EU, branches of EU credit institutions are expressly excluded from any bank levy.

By extending the PT bank levy to branches of non-resident banks, this Portuguese regime generates a situation of double taxation affecting banks from other EU member states. In fact, the annual amount of liabilities imputed to their branches operating in Portugal is simultaneously subject to the PT bank levy as well as to the EU bank levy charged in the head office state (i.e. ex ante contributions under the directive), through the allocation of the branch liabilities into the EU bank balance sheet.

In this decision, the Portuguese court started by stating that in accordance with the case law of the European Court of Justice (ECJ), it is for the national courts, in application of the principle of cooperation laid down in the European treaties, to ensure the legal protection deriving from the direct effect of provisions of European law. In addition, the court added that it is for the national court within the limits of its discretion under national law, when interpreting and applying domestic law, to give to it, where possible, an interpretation which accords with the requirements of the applicable European law and, to the extent that this is not possible, to hold such domestic law inapplicable.

After analysing the facts under discussion, the court sharply ruled that PT bank levy regime, as established in the state budget for 2016, violates EU law by creating discrimination between resident and non-resident credit institutions operating in Portugal through branches. This was considered as a specific type of discrimination that was already considered as an unjustified restriction to the EU fundamental freedom of establishment (among others, Commission v Italy C-212/99, No. 24 and Commission v. Italy C-224/00, No. 15).

In fact, in the case of resident entities, the PT bank levy is charged on the bank’s liabilities deducted, namely, from their own funds, whilst in the case of branches this levy is assessed on the liabilities of the branch with no such deduction, since the branch does not have its own funds. 

Thus, this decision was grounded on the fact that branches of non-resident banks are subject to the PT bank levy on their gross liabilities, while resident banks pay the PT bank levy on their net liabilities. This results in an increased tax burden and a higher effective tax rate applicable to non-resident banks vis-a-vis resident banks, which is not allowed under EU law.

The Portuguese arbitral court further decided that these different rules to compute the taxable base of resident and non-resident banks result in a discriminatory tax treatment, which is treated as a restriction of the freedom of establishment in line with the most relevant ECJ jurisprudence on the matter (i.e. Schumacker, No. 30, Royal Bank of Scotland, No. 26, and Hervis-Sport, C-385/12, No. 39).

Actually, the Portuguese court followed the ECJ jurisprudence closely on its doctrine, sustaining that non-residents must be treated in the same way as residents and must be able to deduct the same expenses as those which residents are allowed to deduct (Brisal C-18/15, No. 45 following Gerritse, C-234/01; Scorpio Konzertproduktionem, C-290/04; Centro Equestre da Lezíria Grande, C-345/04).

By failing to treat resident and non-resident banks in the same way, the court concluded that the PT bank levy is in breach of EU primary law, namely in violation of the freedom of establishment (Article 49º of the EU Treaty) and of the non-discrimination principle (Article 18º of the EU Treaty), since non-residents banks operating in Portugal through a branch are unfairly discriminated over banks domiciled in Portugal.

In this landmark decision, which may eventually constitute a relevant judicial precedent, the court also ordered the Portuguese tax authorities to reimburse the PT bank levy paid by the branch operating in Portugal, plus interest calculated from the moment the levy was paid in order to fully compensate the costs incurred with this illegal bank levy assessment. 


Paulo Núncio 
T: +351213817465

António Queiroz Martins 
T: +351 213 817 489


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