Portugal: Withholding tax on interest payments, CJEU judgment

Portugal: Withholding tax on interest payments

The Court of Justice of the European Union (CJEU) issued a judgment concluding that Portugal’s withholding tax on interest paid to non-resident financial institutions was contrary to EU law because the tax was imposed on the gross amount of the interest paid—whereas resident financial institutions were taxed on their net income.

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The CJEU concluded that the Portuguese tax provision constituted a restriction of the freedom to provide services that was not justified, and that financing costs would need to be deductible by non-residents, under the same conditions as for residents. The case is: Brisal (C-18/15, 13 July 2016). 


Portugal imposed a 20% withholding tax on interest paid to non-residents, but in this instance, was reduced to 15% under the applicable income tax treaty. The tax is withheld from the gross amount, without any deduction for the costs of business expenses (e.g., costs of financing the underlying loans). Portuguese residents, on the other hand, were subject to a 25% corporate income tax on their net income, i.e., after deduction of such expenses.

In a separate proceeding, the European Commission challenged this tax treatment in 2010, arguing that it resulted in non-resident financial institutions being more heavily taxed than resident financial institutions and therefore was contrary to certain principles (the free movement of capital and the freedom to provide services). The CJEU then rejected the EC’s case without addressing the substantive issues, arguing that no concrete evidence had been put forward to support the calculations used as basis for the arguments.

In the case at hand, two companies challenge the Portuguese tax provisions, and the Portuguese Supreme Administrative Court referred questions to the CJEU as to: 

  • Whether the freedom to provide services precludes the Portuguese law that taxes non-resident financial institutions by means of withholding tax on interest with no possibility of deducting business expenses, whereas resident financial institutions are not subject to such withholding tax and may deduct business expenses related to the financial activity pursued
  • How those expenses would be determined

The CJEU concluded that Portugal’s withholding tax on interest paid to non-resident financial institutions was contrary to EU law, given that it was imposed on the gross amount of the interest paid, and resident financial institutions were taxed on their net income. 


Read a July 2016 report prepared by KPMG’s EU Tax Centre

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