Dividends paid to Non-resident Undertakings for Collective Investments
Author: José Guerreiro
Case C- 545/19 of the Court of Justice of the European Union
The Portuguese taxation regime of Undertakings for Collective Investments (“UCIs”) establishes an exemption from taxation on dividends, interest, rents and capital gains obtained by Portuguese UICs. Taxation should occur at a later stage, at the level of participations units’ holders, at the time of income distribution, redemption of units, sale of units or liquidation of the UCIs.
This special regime is only applicable to UCIs that have been set up and that operate under the Portuguese law.
For the purposes of the court case in question, an UCI established under German law held shares in several Portuguese resident companies, from which it received dividends. In 2015 and 2016, that UCI was subject to withholding tax of 25%, over those dividends.
The German UCI submitted an administrative claim to the Portuguese Tax Authorities – which was rejected – sustaining that Portuguese UCIs are subject to a more favourable tax regime comparing with foreign UCIs regime, in relation to dividends received by Portuguese companies.
The allegation of a discriminatory treatment, against article 18 of the Treaty on the Functioning of the European Union and the free movement of capital established in article 63 of the same Treaty, were the reasons for the appeal to CAAD (Arbitration Court), which decided to suspend the proceedings and to request a preliminary ruling from the Court of Justice of the European Union (“CJEU”).
Basically, the CJEU was asked to assess whether the tax treatment in question could be justified by the fact that Portuguese UCIs may ve subject to a different taxation regime than the German UCI in question, and whether its justification should only be assessed at the level of the investment vehicle used in the transaction as well as the status of the participation units’ holders.
In the CJEU's opinion, the Portuguese legislation establishes a clear discriminatory treatment of non-resident entities, by not granting an exemption from withholding tax on dividends paid to foreign UCIs, a benefit granted to resident UCIs.
The Court mentions that the situation of a resident UCI is similar to the situation of non-resident UCI, since the profits obtained by both entities may be subject to economic double taxation.
In fact, the criteria used by Portuguese law to make the distinction in the internal tax regime is the residence of these entities, which does not allow the Court to conclude that there is a clear difference in factual situations between resident and non-resident UCIs.
In short, the CJEU's understanding is that the tax treatment granted by Portuguese law may result in non-resident UCIs being discouraged from investing in Portuguese companies, as well as Portuguese investors to acquire participation units in foreign UCIs.
Concerning the existence of a general interest reason, based on the safeguarding of a fair distribution of the power to tax between Member States, which may justify the breach of the free movement of capital (Article 63 TFEU), the Court clarifies that it is not sufficient to do so.
In this context, it is possible for foreign UCIs to recover any tax that may have been paid in Portugal over income obtained herein.
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