By Moritz Richter
The case concerns the lawfulness of a Portuguese withholding tax (‘WHT’) regime on certain interest payments. Non-resident financial institutions are subject to a 20% WHT on interest income. The WHT is applied to the gross amount, without allowing deductions for business expenses directly related to the financial activity carried out. In contrast, the interest income of resident financial institutions is taxed as part of the total taxable income at a rate of 25% after deduction of business expenses.
KBC (resident for tax purposes in Ireland) granted a loan to Brisal. 20% WHT was applied to the gross interest paid by Brisal to KBC. The claimants argued that the Portuguese WHT scheme infringed the freedom to provide services contrary to Article 49 EC (now Article 56 TFEU) and that it should be allowed, like resident financial institutions, to deduct from its taxable base its business expenses and financial costs relating to the loan. The Supreme Administrative Court of Portugal referred the dispute to the CJEU.
On 13 July 2016, the CJEU held that Article 49 does not preclude national legislation under which a WHT is applied to the interest income of non-resident financial institutions received within the member state, while resident financial institutions are not subject to that WHT. Such a WHT scheme is lawful as long as it is justified by an overriding reason in the general interest. The court held that Article 49 does however preclude national legislation which taxes non-resident financial institutions without giving them the opportunity to deduct business expenses directly related to the activity in question, when such an opportunity is given to resident institutions.
This article appears in the JHA July 2016 Tax Newsletter, which also features:
