On March 17, 2016 on the website of the Court of Justice of the European Union the opinion of Advocate General Kokott in Case C‑18/15 Brisal — Auto Estradas do Litoral SA and KBC Finance Ireland versus Fazenda Pública was published (ECLI:EU:C:2016:182).
For the second time, the question as to whether a Portuguese provision concerning deduction of tax on interest at source is compatible with the fundamental freedoms has reached the Court. Where the interest recipient is non-resident, not only does a withholding tax apply for the interest payer, but, in comparison with resident interest recipients, tax is also calculated differently.
The first time, in Case C‑105/08, the Court dismissed an action raised by the Commission against this provision, because the Commission had not sufficiently clarified the extent to which the specific provision actually disadvantaged non-residents. In the reference for preliminary ruling that has now come to the Court, the Portuguese provision is once again the subject of scrutiny. This time the Court must decide the substance, unburdened by procedural issues of the onus of pleading and proof.
In this connection, the question is which aspects of the withholding tax scheme may lawfully depart from the normal tax regime for residents. This is likely to be of great importance in particular for competition between credit institutions in the internal market.
The dispute in the main proceedings and the question referred to the Court
· The subject of the main dispute is the charging of Portuguese corporation tax on interest arising in Portugal and paid to a financial institution resident in Ireland.
· The Portuguese company Brisal — Auto Estradas do Litoral S.A. (‘Brisal’) and the Irish bank KBC Finance Ireland (‘KBC’) were contract partners under a finance contract (‘loans’). Within that framework, in certain months in the years 2005 to 2007 Brisal was obliged to pay interest to KBC totalling EUR 350 806. From the payments, Brisal withheld EUR 59 386 in total, and on the basis of deduction of tax at source paid it to the Portuguese tax authority on behalf of KBC.
· Both Brisal and KBC challenge this obligation to withhold part of the interest in order to pay Portuguese corporation tax, because, they claim, it discriminates against non-resident financial institutions by comparison with resident ones in a manner which is unlawful under EU law. In particular, KBC asks for its re-financing costs for the loan to be taken into account for tax purposes.
· The Supremo Tribunal Administrativo (Supreme Administrative Court, Portugal), before which the case is pending, referred the following questions to the Court on 19 January 2015 pursuant to Article 267 TFEU:
1. Does Article 56 TFEU preclude national tax legislation under which financial institutions not resident in Portuguese territory are subject to tax on interest income received in that territory, withheld at source at the definitive rate of 20% (or at a lower rate if there is an agreement to avoid double taxation), a tax applied to gross income with no possibility of deducting business expenses directly related to the financial activity carried out, whereas the interest received by resident financial institutions is incorporated in the total taxable income, with deduction of any expenses related to the activity pursued when determining the profit for the purposes of corporation tax, so that the basic rate of 25% is applied to the net interest income?
2. Does Article 56 TFEU preclude this provision even if the tax base of resident financial institutions, after deduction of the financing costs related to the interest income, or of expenses directly related, economically, to such income, is or may be subject to a higher tax than is deducted at source from the gross income of non-resident institutions?
3. For this purpose, can the financing costs associated with the loans granted, or the expenses directly related, economically, to the interest income received, be proved by the data provided by the EURIBOR (‘Euro Interbank Offered Rate’) and by the LIBOR (‘London Interbank Offered Rate’) — which represent the average interest rates charged on interbank financing used by banks to carry out their activity?
· Before the Court, the applicants in the main dispute, the Belgian Government, the Danish Government, the Portuguese Government and the Commission submitted written observations. At the oral hearing on 13 January 2016, only the Belgian Government, the Portuguese Government and the Commission participated.
Conclusion
According to the Advocate General, the questions referred by the Supremo Tribunal Administrativo (Supreme Administrative Court, Portugal) are to be answered as follows:
1. Article 49(1) EC precludes a national provision of tax law such as the one in the present case, according to which non-resident financial institutions are subject to tax on interest arising within the territory and, unlike resident financial institutions, have no possibility of deducting operating costs directly linked to carrying on the financial activity.
2. The costs which have a direct link to carrying on an activity include a share of the taxpayer’s overheads, to the extent that those costs are necessary for carrying out the taxed activity. The costs are to be taken into account in the amount of the costs actually incurred.
For further information click here to be forwarded to the text of the opinion as published on the website of the CJEU, which will open in a new window.
Did you know that in our section CJEU Rulings we have made a selection of rulings of the CJEU? We have organized these rulings based on the subject they relate to (e.g. Freedom of establishment, Free movement of capital, Indirect taxes on the raising of capital, etc).
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