On March 17, 2022, on the website of the Court of Justice of the European Union (CJEU) the Judgment of the CJEU in Case C-545/19 AllianzGI-Fonds AEVN versus Autoridade Tributária e Aduaneira (ECLI:EU:C:2022:193), was published.
Introduction
Does the free movement of capital require a Member State to tax non-resident and resident investment vehicles according to the same tax system? That is the question which the Court must answer in this case. The question arises because Portugal, in exercise of its fiscal autonomy, has chosen to adhere, in the case of non-resident investment vehicles, to the conventional taxation of capital income by means of corporation tax withheld at source in cases where the corporations concerned are not subject to corporation tax or are subject to a low rate of corporation tax in their State of residence.
In contrast, resident investment vehicles are taxed according to a different tax system approach (referred to by Portugal as a form of exit taxation). Such vehicles are taxed quarterly by means of a ‘stamp duty’, which is charged on the entire net assets (and thus also retained dividend income) of the investment vehicle. To that end, the dividend income concerned is not subject to corporation tax (not even by way of a withholding tax deduction). It is then only when dividends are distributed to the investor that the latter becomes subject to Portuguese revenue tax.
Although Portugal therefore taxes non-resident and also resident investment vehicles, but it does so in a different manner. This surely also entails differences in the tax burden in one direction or the other. If no dividends are distributed to the investment vehicle, the tax burden of the domestic investment vehicle is significantly higher. If dividends are distributed to the investment vehicle, the picture can be quite different. However, this is only the case if the non-resident taxpayer is not taxed or is taxed at a low rate in his or her State of residence.
Since the fundamental freedoms in tax law prohibit discriminatory treatment of cross-border situations ‘only’, it is necessary in the present case to compare the taxation of resident and non-resident investment vehicles. Harmonisation of income tax would be helpful in this respect, but such harmonisation is currently still lacking. This gives rise to the follow-up question as to whether the free movement of capital can remedy this situation or whether, due to the lack of comparability of the situations, different taxation systems are also possible depending on residence and on the Member State, and a certain imbalance in the tax burden must therefore be tolerated under EU law.
The dispute in the main proceedings
Allianzgi-Fonds Aevn (‘the applicant’) is a collective investment undertaking (UCITS) which has its seat in Germany and receives investment income in the form of dividends paid by undertakings resident in Portugal. A UCITS is an investment fund the legal framework of which is determined by Directive 2009/65/EC. The purpose of such a UCITS is to facilitate the participation of private investors in the securities market.
In principle, Portugal treats dividends distributed to a UCITS formed under Portuguese law as exempt from corporate income tax. It therefore makes no difference to the private investor whether he or she acquires shares directly or invests indirectly in another undertaking via a UCITS. In that respect, dividends distributed by undertakings to a resident UCITS which the latter in turn distributes to its investors are not taxed by Portugal at the level of the UCITS. Instead, a UCITS formed under Portuguese law is subject to stamp duty, which is charged quarterly as a tax under tax law on both the retained dividend income and the remaining total net book value.
However, the exemption from corporation tax in respect of capital income of the UCITS does not apply to the applicant, as it is not an undertaking formed and operating under Portuguese law. This would be possible only if it were to have its seat or a permanent establishment in Portugal and fulfil certain other requirements of Portuguese law. The applicant is therefore subject to the general provisions of the Corporation Tax Code. Accordingly, dividends distributed by Portuguese undertakings to the applicant in 2015 and 2016 were subject to Portuguese corporation tax at a rate of 25%, which the distributing undertakings withheld at source and paid over to the Portuguese treasury.
However, due to the double taxation convention between Portugal and Germany, Portugal may only tax the investment income of a UCITS resident in Germany at a maximum rate of 15%. Portugal therefore refunded part of the tax withheld for 2015 at the request of the applicant. The applicant did not submit such a request for 2016.
The tax treatment of a UCITS in Germany constitutes an obstacle to the corporation tax exemption in respect of dividend payments to corporations located abroad which is provided for in Portuguese law under Article 14(3) of the Corporation Tax Code. According to the referring court, a UCITS which has its seat in Germany is also exempt from corporation tax in that country.
Germany – unlike Portugal – considers a UCITS to be a transparent ‘taxable entity’, that is to say, it is not the UCITS that is taxed but the investor directly. However, that taxation is not levied only on the amount of the income distributed to the investors, but on the amount of the income of the UCITS proportionally attributed to them (referred to as transparent taxation). The purpose of this is likewise to achieve equal treatment with a direct investment.
Since a UCITS does not owe any corporation tax in Germany, Portuguese corporation tax also cannot be offset at the level of the UCITS. Instead, the Portuguese tax can be proportionally offset only against the corresponding tax levied on the investors in accordance with Paragraph 4(2) of the German Investmentsteuergesetz (Law on investment income tax) as applicable at the time. The Court is unaware of whether the applicant’s investors availed themselves of this facility, however.
The applicant lodged an appeal against the Portuguese tax assessments on the basis of which corporation tax had been deducted at source for the tax years 2015 and 2016, by which it sought the annulment of those assessments and a refund of the tax withheld at source. The competent tax authority did not grant those requests. The application for arbitration submitted to the Centro de Arbitragem Administrativa (Centre for Administrative Arbitration, Portugal) is directed against the decision of that authority.
Request for a preliminary ruling and proceedings before the Court
By decision of July 9, 2019, the referring court referred the following questions to the Court for a preliminary ruling:
‘(1) Does Article 63 TFEU on the free movement of capital or Article 56 TFEU on the freedom to provide services preclude tax rules such as those at issue in the main proceedings, contained in Article 22 of the Statute of Tax Benefits, which provide for a withholding to be made, in full discharge of liability, from dividends distributed by Portuguese companies and received by collective investment undertakings not resident in Portugal and established in other EU [Member States], whereas collective investment undertakings formed under Portuguese tax law and resident for tax purposes in Portugal can benefit from an exemption from the withholding at source made on the said income?
(2) In providing for a withholding to be made at source in respect of dividends paid to non-resident collective investment undertakings and in making the possibility of obtaining an exemption from such a withholding at source available only to resident collective investment undertakings, does the national legislation at issue in the main proceedings treat dividends paid to non-resident collective investment undertakings less favourably, in that such undertakings are wholly unable to take advantage of the aforesaid exemption?
(3) For the purposes of assessing whether the Portuguese legislation that establishes specific and different tax treatment for
(i) (resident) collective investment undertakings and for
(ii) the shareholders or unitholders in collective investment undertakings is discriminatory, are the tax rules that apply to the shareholders or unitholders in the collective investment undertaking relevant? Or, bearing in mind that the tax rules for resident collective investment undertakings are not affected or altered in any way by whether or not their shareholders or unitholders are resident in Portugal, in order to determine whether situations are comparable for the purposes of assessing whether the said legislation is discriminatory, should regard be had only to tax treatment at the level of the investment vehicle?
(4) Is the difference in treatment between collective investment undertakings resident in Portugal and not resident in Portugal permissible, having regard to the fact that natural or legal persons resident in Portugal who hold shares or units in collective investment undertakings (whether resident or non-resident) are, in both cases, subject in the same way to tax on income distributed by collective investment undertakings (and are generally not exempt), even if non-resident shareholders or unitholders are liable to a higher level of tax?
(5) Having regard to the fact that the discrimination at issue in these proceedings concerns a difference in the taxation of dividend income distributed by resident collective investment undertakings to their shareholders or unitholders, when it comes to assessing whether the taxation of the income is comparable, is it lawful to take account of other taxes, levies or charges payable in respect of the investments made by collective investment undertakings? In particular, in order to analyse whether the situations are comparable, is it lawful and permissible to take account of the impact of taxes on assets or costs, or of other types of tax, rather than limiting the examination strictly to the tax on the income of collective investment undertakings, including any specific taxes?’
In response to a request for information from the Court of Justice, the referring court provided additional details in order to clarify the tax situation of resident and non-resident UCITS and their investors.
In the proceedings before the Court, the applicant, the Portuguese Republic and the European Commission submitted written observations on the request for a preliminary ruling and subsequently on the questions asked by the Court.
Legal framework
A. EU law
The relevant provisions of EU law arise from the TFEU. In that context, particular importance is attached to the free movement of capital under Article 63 and Article 65 TFEU.
Article 65(1)(a) and Article 65(3) TFEU read as follows:
‘1. The provisions of Article 63 shall be without prejudice to the right of Member States:
(a) to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in the same situation with regard to their place of residence or with regard to the place where their capital is invested;
…
3. The measures and procedures referred to in paragraphs 1 and 2 shall not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments as defined in Article 63.’
B. International treaty law
Article 10 of the double taxation convention (‘the DTC’) between the Portuguese Republic and the Federal Republic of Germany governs which State is entitled to tax the recipient of dividends:
‘(1) Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.
(2) However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient of the dividends is the beneficial owner, the tax so charged shall not exceed 15 per cent of the gross amount of the dividends. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of that limitation. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid.’
C. Portuguese law
According to the referring court, the legal situation under Portuguese law in the years at issue was as follows.
In principle, Portugal taxes dividends paid by a corporation resident in Portugal to another corporation in Portugal or abroad as capital income at a corporation tax rate of 25% in accordance with the Corporation Tax Code. This corporation tax is paid to the Portuguese State by way of withholding tax deducted by the corporation distributing the dividends.
In accordance with Article 14(3) of the Corporation Tax Code, however, dividend payments to foreign investors taking the legal form of a corporation are, in principle, exempt from corporation tax in the source State (Portugal). An exception to this exists only if they are taxed in the State of residence at a rate less than 60% of the corporation tax rate applicable in Portugal.
Decree-Law No 7/2015 of 13 January 2015 revised the tax regime for collective investment vehicles. Since then, Article 22 of the Statute of Tax Benefits has provided for exemption from corporation tax for certain undertakings for collective investment in transferable securities (‘UCITS’) in respect of capital income. That provision reads as follows:
‘(1) The following shall be liable for corporation tax in accordance with the terms of this article: funds investing in transferable securities, property investment funds, transferable securities investment companies and property investment companies that are formed and operate under national law.
…
(3) For the purposes of determining taxable profits, the following shall be disregarded: the income referred to in Articles 5 [capital income], 8 [letting and leasing] and 10 [capital gains] of the Revenue Tax Code…
…
(8) The specific tax rates established in Article 88 of the Corporation Tax Code shall apply, mutatis mutandis, to these arrangements.
…’
Article 22(10) of the Statute of Tax Benefits supplements the corporation tax exemption from capital income with an exemption from the requirement of the distributing corporation to withhold tax at source. That provision reads as follows:
‘There shall be no requirement to withhold corporation tax at source in respect of income obtained by the taxable persons referred to in paragraph 1.’
However, in accordance with Article 88(11) of the Corporation Tax Code, income of a UCITS formed and operating under Portuguese law is not treated as tax-exempt in the first year following the acquisition of shares, contrary to Article 22(3) of the Statute of Tax Benefits. This is because the former provision provides that:
‘A specific tax rate of 23% shall apply to income distributed by undertakings liable for corporation tax that is received by taxable persons who benefit from a total or partial exemption; in this case, this includes income from capital where the shares in respect of which the income was received have not been held by the same taxable person for a continuous period of one year before payment became available and are not retained long enough to complete that period.’
Decree-Law No 7/2015 of 13 January 2015 also brought about amendments to the Código do Imposto do Selo (Stamp Duty Code) and the Schedule of Stamp Duties annexed thereto, which sets out the rules on the taxable amount. By virtue of the addition of Part 29 of the General Annex to the Stamp Duty Code, the taxation of the total net assets of collective investment undertakings falling within the scope of Article 22 of the Statute of Tax Benefits is effected at the rates provided for therein.
A UCITS formed and operating under Portuguese law is therefore subject – since the introduction of Article 22 of the Corporation Tax Code – to an extended tax on documented legal transactions (‘stamp duty’). This is a quarterly tax levied at 0.0125% of the total net book value of the UCITS. In that respect, dividends received which have not yet been distributed to the investors of the UCITS are included in the taxable amount.
Judgment
The Court (Second Chamber) ruled as follows:
The answer to the questions referred is that Article 63 TFEU must be interpreted as precluding legislation of a Member State under which dividends paid by resident companies to a non-resident collective investment undertaking (UCITS), are subject to withholding tax, while dividends paid to a resident UCITS are exempt from such tax.
The full text of the judgment, including the considerations of the Court, is available in several European languages (unfortunately not (yet) in the English language at the time of writing this artcile) on the website of the CJEU and can be found here. (You can change the language of the judgment on the left top of the page)
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