The Court of Justice of the European Union (CJEU) ruled in a recent landmark decision in AllianzGI-Fonds AEVN v Autoridade Tributária e Aduaneira (case C-545/19) that Portugal’s tax treatment subjecting dividends paid by resident companies to nonresident collective investment undertakings (CIUs) to withholding tax is contrary to EU law.
Portuguese Legal Framework
Dividends distributed to CIUs, and therefore to undertakings for collective investment in transferable securities (UCITS), formed under Portuguese law are exempt from corporate income tax when the shares in respect of which such dividends were received have been held for a continuous period of one year before payment became available, or were held long enough to complete that period, unless distributed by companies domiciled in a blacklisted jurisdiction. Instead, CIUs formed under Portuguese law are subject to a stamp duty, which is charged quarterly as a tax on their total net book value, thus including any retained dividends.
On the other hand, dividends distributed by Portuguese companies to nonresident CIUs may be subject to Portuguese corporate income tax at a rate of 25%, which the distributing company should withhold at source and deliver to the Portuguese tax authorities. However, provided that the relevant conditions are met, a reduction in the withholding tax rate may supersede this rate in accordance with double tax treaties entered into between Portugal and the country of tax residence of the CIU.
Portuguese law also foresees a withholding tax exemption which generally does not apply to CIUs, as one of the necessary conditions is that the beneficiary—which needs to be an entity resident in the EU, in the European Economic Area, or in a country with which Portugal has entered into a double tax treaty with exchange of tax information—is subject to, and not exempt from, a tax mentioned in article 2 of Council Directive 2011/96/EU, of Nov. 30, 2011, or to a tax identical or of a similar nature to the Portuguese corporate income tax, provided that the applicable legal rate is not less than 60% of the Portuguese corporate income tax rate—that is, provided that the applicable rate is equal to or higher than 12.6%, considering that the Portuguese corporate income tax standard rate is currently 21%.
Main Proceedings in Case C‑545/19
The plaintiff was a German UCITS which was treated in Germany as tax transparent, i.e., it is not the CIU that is taxed but the investors directly, and therefore dividends received by the plaintiff from Portuguese companies were subject to withholding tax in Portugal under Portuguese tax law.
Since a CIU is not subject to corporate income tax in Germany, Portuguese corporate income tax cannot be offset at the level of the CIU and may only be proportionally offset against the corresponding tax levied on the investors.
The plaintiff unsuccessfully challenged the Portuguese withholding tax assessments before the Portuguese tax authorities, and subsequently filed a claim before a tax arbitration court that decided to submit a request to the CJEU for a preliminary ruling concerning the compatibility of Portuguese tax law with the fundamental EU freedoms.
With regard to the questions referred to the CJEU, the arbitration court ultimately sought to ascertain whether the taxation of a CIU formed under foreign law and having its seat in another EU member state —whereas CIUs formed under Portuguese law and resident in Portugal are exempt from corporate income tax but are subject to a different tax, stamp duty—is compatible with the free movement of capital and the freedom to provide services.
On the other hand, the referring arbitration court asked if the different tax treatment could be justified by the fact that resident CIUs are subject to a different type of taxation, and also whether the comparison between resident and nonresident CIUs should be made only at the level of the CIU, or also at the level of the investors.
Opinion of the Advocate General
The Advocate General (AG) began her assessment by clarifying that the Portuguese legislation at issue in the main proceedings concerned the taxation of dividends under tax law and not the taxation of services, and therefore the domestic provisions should be assessed in relation to the free movement of capital and not the freedom of establishment.
For these purposes, the AG clarified that the measures prohibited by EU law as restrictions on the movement of capital include those which are likely to discourage nonresidents from making investments in a member state or to discourage that member state’s residents from doing so in other states; and therefore there can be a restriction on the movement of capital in tax law only if a member state treats dividends paid to nonresident corporations less favorably than dividends paid to resident corporations, as such treatment is liable to deter companies resident abroad from pursuing investments in that first member state.
The AG further stated that, at first glance, it could be argued that the Portuguese provisions are liable to discourage the nonresident CIU from investing in Portuguese undertakings, since the tax withheld in Portugal cannot be offset against the tax payable in Germany by the nonresident CIU because it is likewise not subject to corporate income tax there, due to the “transparent taxation” technique, which reduces the amount of the return on capital and thus the profitability of the plaintiff’s investment in Portuguese undertakings.
However, the AG upheld that, as follows from the case law of the CJEU in the Pensioenfonds Metaal en Techniek case, the question of whether there is a restriction on the free movement of capital is not to be based on a purely formal assessment of the exemption from a type of tax, but rather on a comprehensive material examination in order to ascertain comparable situations.
Within this context, the AG concluded that, although dividends received by resident CIUs may be exempt from corporate income tax, they are subject to another tax—stamp duty—on a quarterly basis, which also taxes dividends that are not redistributed (retained dividends); and also that the question of whether a much larger capital stock is burdened with a much lower tax (stamp duty) or a much lower distribution based on the capital stock is burdened with a higher tax (withholding tax on dividends) is purely a question of taxation technique.
The AG also took the view that the situations are not comparable, because nonresident CIUs cannot be subjected to stamp duty on their entire assets, as opposed to resident CIUs.
The AG also argued that the comparability of a cross-border situation with an internal one must be examined having regard to the aim pursued by the national provisions at issue, as well as their purpose and content. The AG concluded that the taxation affecting resident CIUs has a different purpose from that applied to nonresident CIUs, i.e. the aim pursued by the national legislation of implementing an exit taxation for investors of CIUs and to carry out only asset-based taxation of the CIUs up until the point at which dividends are distributed, cannot be attained in respect of nonresident CIUs, nor can that object be achieved through the taxation of dividends received by nonresident CIUs in accordance with the stamp duty method. Consequently, in light of the aim pursued by the national legislation, a nonresident CIU is not in a situation comparable to that of a resident CIU.
Finally, the AG concluded that, if the Court proceeds on the assumption that the situations are comparable, the different taxation of resident and nonresident CIUs is justified, since (1) a different tax burden when it is not possible to tax resident and nonresident CIUs in the same way is a justifying circumstance, (2) it is in line with the objective of ensuring a minimum level of taxation of a nonresident CIU, and (3) it is necessary to maintain the coherence of the Portuguese tax system because there is a direct link between the exemption from withholding tax as regards dividends paid to resident CIUs and the quarterly taxation in accordance with the stamp duty.
Court’s Decision
On March 17, 2022, the CJEU ruled that the issue in the main proceedings should be assessed considering the free movement of capital and not the freedom of establishment, thus agreeing with the AG’s opinion.
However, contrary to the AG’s opinion, the Court ruled that nonresident CIUs are in a situation comparable to that of resident CIUs, mainly because:
- The Portuguese tax legislation not only foresees a different type of taxation according to the residency of the CIU but also a taxation only on dividends distributed to nonresident CIUs, as the stamp duty is a wealth tax that cannot be equated to an income tax.
- Stamp duty does not tax distributed dividends and, therefore, even if stamp duty was compared to a tax on dividends, a resident CIU could avoid the taxation by immediately distributing the dividends, whereas this possibility is not available to nonresident CIUs. As such, the fact that resident CIUs are subject to stamp duty does not place them in a different situation of nonresident CIUs regarding the taxation on dividends distributed by Portuguese companies since only nonresident CIUS are taxed on dividends received.
- From the moment Portugal decided to tax income obtained by nonresident CIUs, these are in a comparable situation with resident CIUs regarding the risk of double taxation on dividends distributed by Portuguese companies, as a nonresident CIU may have investors domiciled in Portugal whose income may be taxed there.
On the other hand, the Court ruled, again against the AG’s opinion, that the different taxation of resident and nonresident CIUs is not justified.
In fact, as to the purported need to maintain the coherence of the Portuguese tax system, the Court stated that the corporate income tax exemption applicable to resident CIUs is not conditioned on the dividends received being redistributed, nor to the taxation at the level of the investors compensating the withholding tax exemption. As such, there is no direct link between the withholding tax exemption on dividends distributed by Portuguese companies to resident CIUs and the taxation of such dividends at the level of the investors.
Moreover, the Court stated that Portugal having decided not to tax resident CIUs on dividends received from Portuguese companies precludes the possibility to uphold that the taxation of nonresident CIUs on those dividends is needed to ensure a balanced allocation of the taxation rights between the member states.
Considering the above, the Court concluded that EU law must be interpreted as precluding national legislation that subjects dividends paid by resident companies to nonresident CIUs to withholding tax, whereas dividends paid to resident CIUs are exempt from such withholding tax.
Planning Points
This case affects not only a large number of nonresident CIUs receiving dividends—and potentially also interest—from Portuguese companies, but also CIUs receiving dividends in multiple jurisdictions in the EU where there may be a discriminatory tax treatment between resident and nonresident CIUs.
CIUs should therefore review their tax treatment in the EU in order to ascertain the possibility of challenging past and future withholding taxes regarding dividends and potentially also interest.
The CJEU judgment allows not only CIUs resident in the EU but also CIUs resident in third countries to claim Portuguese withholding tax refunds, because the discriminatory tax treatment is based on the free movement of capital.
In Portugal, for the purposes of claiming withholding tax refunds on the grounds discussed in this case, CIUs should file an administrative claim—mandatory in order to allow further court litigation if the tax authorities refuse such claim—within two years after the end of the year during which tax was withheld.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Diogo Bernardo Monteiro has been a Partner with Eversheds Sutherland FCB since 2009 and coordinates the tax department. He is an experienced tax lawyer and specialises in tax consultancy and litigation and international and domestic tax planning, in the Portuguese, Angolan and Mozambican jurisdictions. In 2014, he was appointed to the Corporate Income Tax Reform Monitoring Committee by the Secretary of State for Tax Affairs.
Bruno Arez Martins became a Partner with Eversheds Sutherland FCB in 2019. He has extensive experience in tax litigation proceedings, and on domestic and international taxation. He also has wide experience in Angolan and Mozambican Tax Law, and he coordinates the tax area of the Mozambique Desk.
The authors may be contacted at: [email protected]; [email protected]