One method for investment funds to seek withholding tax relief is through claims based on European Court of Justice (ECJ) legal precedent. When EU Member States impose different tax treatments on domestic and comparable foreign investment funds, it results in unjustified discriminatory tax practices that contravene the EU’s principle of free movement of capital, as outlined in Article 63 of the Treaty on the Functioning of the European Union.
As a result, investment funds have a significant opportunity to file withholding tax reclaims through the ECJ. While the reclaim process is complex, the potential benefits in terms of higher recovery yields and improved fund performance are substantial.
This timeline outlines the history and impact of ECJ claims related to Portuguese withholding tax on dividend and interest income.
Two arbitral decisions were issued analysing a potential tax discrimination against Collective Investment Undertakings (CIUs) incorporated in other EU Member States, in light of the free movement of capital.
In arbitral decision no. 90/2019-T, the focus was on the withholding tax applied to dividends distributed by a Portuguese company to a CIU based in Germany. In arbitral decision no. 194/2019-T, the issue pertained to the tax treatment of a Portuguese branch of a CIU incorporated in France.
In both decisions, the Arbitration Tax Court has concluded that the distinction between resident and non-resident CIUs goes against the free movement of capital and, therefore, CIUs incorporated in other Member States of the European Union should also benefit from the tax exemption under Portuguese Law.
On 17 July 2019, the Tribunal Arbitral Tributário in Portugal referred the case ALLIANZGI-FONDS AEVN v. Autoridade Tributária e Aduaneira (Case C-545/19) to the ECJ for a preliminary ruling.
On 6 May 2021, Advocate General (AG) to the ECJ, Juliane Kokott, delivered her opinion on the matter. The AG’s opinion is the final step before the court’s ruling and though it does not bind the ECJ, it often offers an indication of which way the court will lean.
The AG concluded that the national legislation that levies withholding tax on dividends distributed to non-resident CIUs does not conflict with the EU Law for the free movement of capital. At the time, this AG opinion casted doubt on the viability of ECJ claims based on this argument.
In contrast to the AG’s opinion, in a landmark ruling, the CJEU concluded on 17 March 2022 (C-545/19) that the withholding tax on dividends paid to foreign CIUs are, in fact, in breach of EU law and cannot be justified.
The Supreme Administrative Court ruled that imposing a WHT on dividends paid to a US investment fund, while exempting dividends paid to resident investment funds, constitutes a restriction on the free movement of capital and is therefore prohibited under EU law.
This ruling paves the way for non-EU investment funds to contest similar discriminatory tax practices in Portugal, establishing an important precedent that could entitle them to the same tax exemptions as EU-based investment funds.
The Portuguese tax authorities, backed by the Advocate General, argued that their tax regime was not discriminatory. However, the CJEU ruled otherwise, confirming that the free movement of capital opposes legislation where dividends to foreign CIUs are taxed while those to resident CIUs are exempt.
The recent rulings by the Portuguese Supreme Administrative Court and the CJEU underscore the evolving landscape of withholding tax in Portugal. Non-EU investment funds now have a strong basis to challenge discriminatory WHT practices.
At WTax, we specialise in the recovery of withholding taxes. Our expertise allows us to closely monitor legal developments, develop tailored strategies for each jurisdiction, and provide comprehensive support throughout the entire reclaim process.
Interested in maximising your reclaim opportunities? Speak to a specialist today.