On July 13, 2016 the Court of Justice of the European Union (CJEU) judged in Case C-18/15 Brisal – Auto Estradas do Litoral SA and KBC Finance Ireland versus Fazenda Pública (ECLI:EU:C:2016:549).
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 [IRC], so that the basic rate of 25% is applied to the net interest income?
The facts in the main proceedings and the questions referred for a preliminary ruling
· On 30 September 2004, Brisal entered into an external financing agreement, known as Loan, Bond and Guarantee Facilities, in the amount of EUR 262 726 055, designed to guarantee the performance of all the activities covered by a concession contract previously concluded with the Portuguese State. That external financing agreement was concluded with a syndicate of banks, some of which were resident solely in Portuguese territory.
· On 29 March 2005, that syndicate was extended to other financial institutions, including KBC, by means of a transfer of contract.
· As regards the part of the contract relating to KBC, Brisal withheld at source, and paid to the Portuguese State, the sum of EUR 59 386 by way of IRC. That amount was calculated on the basis of interest accrued in favour of KBC between September 2005 and September 2007 and totalling EUR 350 806.07.
· On 28 September 2007, Brisal and KBC brought an administrative appeal before the relevant tax authority in which they sought a review of that taxation on the ground that it contravened Article 56 TFEU.
· Following the dismissal of that administrative appeal, Brisal and KBC brought an application before the Tribunal Administrativo e Fiscal de Sintra (Sintra Administrative and Tax Court, Portugal), which was also unsuccessful. That court took the view that it was clear from the judgment of 22 December 2008 in Truck Center (C‑282/07, EU:C:2008:762) that the fact that national legislation makes provision for treating resident companies and non-resident companies differently with regard to the obligation to withhold income tax at source does not, in itself, constitute an infringement of the principle of freedom to provide services, since those two categories of companies are not in an objectively comparable situation. That court also added that the Court of Justice had already dismissed an action for failure to fulfil obligations brought by the European Commission against the Portuguese Republic, an action which was based on the same grounds as those relied on by Brisal and KBC in the dispute in the main proceedings.
· In support of the appeal brought before the Supremo Tribunal Administrativo (Supreme Administrative Court, Portugal), Brisal and KBC claim that the interest received in Portugal by non-resident financial institutions is subject to a withholding tax at a definitive rate of 20%, or at a lower rate if there is an agreement to avoid double taxation — a rate that is applied to gross income — whereas interest received by resident financial institutions, which is not subject to withholding tax, is taxed on its net value at the rate of 25%. Non-resident financial institutions are therefore subject to a heavier tax burden than are resident financial institutions, something which, they submit, is contrary to the freedom to provide services and to the free movement of capital, provided for, respectively, in Articles 56 and 63 TFEU.
· The Supremo Tribunal Administrativo (Supreme Administrative Court) states that the dispute in the main proceedings concerns the freedom to provide services and that the restrictive effects on the free movement of capital and the freedom of payments are merely the direct and natural consequence of possible restrictions on the freedom to provide services. It is therefore, in its view, appropriate only to examine whether Article 80(2)(c) of the CIRC is compatible with Article 56 TFEU, as interpreted by the Court, in particular in its judgments of 12 June 2003 in Gerritse (C‑234/01, EU:C:2003:340), 3 October 2006 in FKP Scorpio Konzertproduktionen (C‑290/04, EU:C:2006:630), and 15 February 2007 in Centro Equestre da Lezíria Grande (C‑345/04, EU:C:2007:96).
· In the opinion of that court, it is necessary to refer, not to the judgment of 22 December 2008 in Truck Center (C‑282/07, EU:C:2008:762), in order to resolve the present case, but rather to the judgment of 12 June 2003 in Gerritse (C‑234/01, EU:C:2003:340). However, although the rationale of that latter judgment may be regarded as having similarities with the rationale at issue in the case in the main proceedings here, the Court has not, in the view of the referring court, given an express ruling on the taxation of cross-border interest payments involving financial institutions.
· The question therefore remains open, in the view of the referring court, as to whether resident financial institutions and non-resident financial institutions are in a comparable situation, and whether the taxation in question must take into account, for both, the costs of financing loans granted or the expenses directly related to the economic activity carried out, and, if so, as to what is the difference which can lead to the conclusion that non-resident institutions are actually in a less favourable situation compared with resident institutions. That issue, in its opinion, was also not dealt with in the judgment of 17 June 2010 in Commission v Portugal (C‑105/08, EU:C:2010:345).
· In those circumstances, the Supremo Tribunal Administrativo (Supreme Administrative Court) decided to stay the proceedings and to refer the following questions to the Court of Justice for a preliminary ruling:
‘(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 [IRC], so that the basic rate of 25% is applied to the net interest income?
(2) Does the same hold good 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?’
The CJEU judged as follows:
Article 49 EC does not preclude national legislation under which a procedure for withholding tax at source is applied to the income of financial institutions that are not resident in the Member State in which the services are provided, whereas the income received by financial institutions that are resident in that Member State is not subject to such withholding tax, provided that the application of the withholding tax to the non-resident financial institutions is justified by an overriding reason in the general interest and does not go beyond what is necessary to attain the objective pursued.
Article 49 EC precludes national legislation, such as that at issue in the main proceedings, which, as a general rule, taxes non-resident financial institutions on the interest income received within the Member State concerned without giving them the opportunity to deduct business expenses directly related to the activity in question, whereas such an opportunity is given to resident financial institutions.
It is for the national court to assess, on the basis of its national law, which business expenses may be regarded as being directly related to the activity in question.
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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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