Process: 156/2018-T

Date: May 10, 2019

Tax Type: Outros

Source: Original CAAD Decision

Summary

This CAAD arbitration case (156/2018-T) addresses the legality of Portugal's Banking Sector Contribution (Contribuição sobre o Setor Bancário - CSB) as applied to a Portuguese branch of a Luxembourg-based bank. The claimant challenged a €12,487.55 CSB assessment for 2016, following tacit rejection of their administrative appeal. The case raises three fundamental legal grounds: (1) violation of parliamentary law reserve, arguing that CSB, as a tax contribution, requires legislative authorization that was improperly delegated; (2) breach of the principle of tax equality, specifically questioning whether the branch causes or benefits from the presumed externalities that CSB aims to address; and (3) violation of EU law, particularly the freedom of establishment and non-discrimination principles. The core EU law argument centers on differential treatment: Portuguese branches of EU banks are taxed on gross liabilities without deductions for own capital, while resident banking institutions can deduct own capital when calculating their CSB base. This creates potentially discriminatory treatment favoring domestic institutions over EU branches. The claimant notably had not previously self-assessed or been assessed for CSB before 2016, raising questions about consistent application. The proceedings followed standard CAAD procedures, including witness examination with translation services, demonstrating the accessibility of Portuguese tax arbitration to foreign entities. This case has significant implications for EU banking institutions operating in Portugal and the compatibility of Portuguese banking sector taxation with EU fundamental freedoms.

Full Decision

ARBITRAL DECISION

1. Report

On 28-03-2018, the company A..., S.A. – BRANCH IN PORTUGAL, legal entity number ..., with registered office at ..., no. ..., ..., ...-... Lisbon, branch in Portugal of B..., S.A., hereinafter referred to as the Claimant, submitted to the Administrative Arbitration Centre (CAAD) a request for constitution of an arbitral tribunal with a view, immediately, to the declaration of illegality of the act of implicit dismissal of the administrative appeal lodged, and mediately, to the declaration of illegality of the act of assessment of the Contribution on the Banking Sector, relating to the year 2016, in the total amount of 12,487.55 €.

The request for constitution of the Arbitral Tribunal was accepted by the Honourable President of CAAD on 29-03-2018 and notified to the Respondent on the same date.

The Claimant did not proceed with the appointment of an arbitrator, whereupon, pursuant to article 6, paragraph 2, letter a) of RJAT, Dr. Suzana Fernandes da Costa was designated as arbitrator by the President of the Deontological Council of CAAD on 21-05-2018, with the appointment having been accepted within the legally prescribed timeframe and terms.

On the same date the parties were duly notified of this designation and did not express their wish to refuse the appointment of the arbitrator, in accordance with article 11, paragraph 1, letters a) and b) of RJAT, in conjunction with articles 6 and 7 of the Deontological Code.

Thus, in conformity with what is prescribed in letter c), paragraph 1, article 11 of RJAT, the Arbitral Tribunal was constituted on 12-06-2018.

On 13-06-2018, an order was issued requiring notification of the Respondent to submit a response within 30 days and, if it so wished, to request the production of additional evidence and to send the arbitral tribunal a copy of the administrative file within the timeframe for submission of the response.

On 03-09-2018, the Respondent submitted its response and attached the administrative file to the proceedings.

On 14-09-2018, the Claimant submitted a request to respond to the exceptions invoked by the Respondent.

On 20-09-2018, an order was issued designating 12-10-2018 at 14:30 hours for the holding of the meeting provided for in article 18 of RJAT, and for the examination of witnesses indicated by the Claimant.

On 03-10-2018, the Claimant submitted a request informing that the witnesses did not have availability on that date to appear at CAAD, and requesting the advancement of the meeting and the examination of witnesses to any date after 15-11-2018.

On 09-10-2018, a new order was issued cancelling the meeting scheduled for 12-10-2018, and designating 16-11-2018 at 14:30 hours.

On 13-11-2018, the Claimant sent a request designating Mrs. C... as translator, who would need to be present at the examination of witnesses, since witness D... would not be proficient in the Portuguese language.

On 16-11-2018, at 14:30 hours, the meeting of the arbitral tribunal took place. Present at the meeting were Dr. E..., as representative of the Claimant, and Dr. F... and Dr. G..., jurists representing the Director-General of the Tax and Customs Authority.

The Claimant's representative stated that he would dispense with the examination of witness H... . The remaining witnesses indicated by the Claimant were examined: D..., I... and J... .

At the meeting, statements of party by I... were also produced.

The representatives of the Claimant and the Respondent produced their respective oral submissions.

The tribunal requested the parties to send the documents produced in word format, designated 06-12-2018 for the rendering of the arbitral decision, and warned the Claimant to attach to the proceedings by that date the proof of payment of the subsequent arbitration fee.

On 23-11-2018, the Claimant attached to the proceedings the proof of payment of the subsequent arbitration fee.

On 06-12-2018, an order was issued extending to 14-01-2019 the deadline for the rendering of the arbitral decision, given the complexity of the matter and because the analysis of substantive issues and existing jurisprudence had not been concluded, pursuant to article 21, paragraph 2 of the Legal Regime of Tax Arbitration, approved by Decree-Law no. 10/2011 of 20 January.

On 08-01-2019, the Claimant attached to the proceedings the arbitral decision of case no. 142/2018-T of 28-12-2018, given its interest in the context of the present proceedings.

On 14-01-2019, an order was issued extending to 29-01-2019, taking into account the judicial recess period which occurred between 16-07-2018 and 31-08-2018 and between 22-12-2018 and 03-01-2019.

And on 29-01-2019, a new order was issued extending the deadline for the decision to 10-02-2019, taking into account that judicial recesses are 60 days and that the deadline referred to in paragraph 1 of article 21, paragraph 2 of RJAT ends on 10-02-2019.

On 12-04-2019, given the complexity of the matter and because the analysis of substantive issues and jurisprudence cited by both parties had not been concluded, an order was issued extending by one month the deadline for issuing the arbitral decision in the present proceedings, it being decided that it would be issued by 10-05-2019.

The parties have legal personality and capacity and are legitimate (articles 4 and 10, paragraphs 1 and 2 of RJAT and article 1 of Order no. 112-A/2011 of 22 March).

The arbitral request is timely, in accordance with article 10, paragraph 1, letter a) of Decree-Law no. 10/2011 of 20 January and article 102, paragraph 1, letter a) of the Tax Procedure and Process Code.

The proceedings are not affected by any nullities and no preliminary issues were raised.

2. Position of the Parties

The Claimant begins by alleging the illegality and unconstitutionality of the legal and tax regime of the Contribution on the Banking Sector applicable to branches of Banking Institutions resident in the European Union (EU). The Claimant refers to three grounds:

A) The legal regime of CSB is illegal due to violation of the parliamentary law reserve;

B) The legal regime of CSB is illegal due to violation of the principle of tax equality, in the aspect of the principle of equivalence, since it is manifest that there are no presumptions whatsoever, neither diffuse nor presumed ones, which are caused or even benefited by the Claimant;

C) This regime, applied specifically to the Claimant, as a branch of a Banking Institution resident in another EU Member State, also violates European Union Law.

As to the last point, the Claimant states that the regime violates European Union Law because it violates the prohibition of discrimination and the freedom of establishment, since the rules determining the tax base of CSB provide, broadly, for the taxation of EU branches on the basis of CSB on their "gross" liabilities, without any deduction, in particular related to own capital, while the same rules determining the tax base of CSB for resident entities provide broadly for the taxation of resident entities on the basis of CSB on their "net" liabilities, allowing the deduction, in particular related to their own capital.

The Claimant also refers to the fact that before 2016, since the Claimant began to operate in Portugal as a branch of a credit institution with registered office in Luxembourg, it did not proceed with the self-assessment of the Contribution on the Banking Sector, nor was it collected from it by the tax administration.

Regarding the defect of violation of the parliamentary law reserve, the Claimant refers to the principle of the law reserve and the entire remaining Fiscal Constitution, in particular articles 103 and 104 of the CRP, which apply to contributions proprio sensu, alluding to Constitutional Court rulings no. 313/92 and 616/2003. For the Claimant, contributions are taxes which should be treated for those purposes as taxes, even if with some special features.

In the Claimant's view, the principle of legality within the tax scope, in the aspects of material and formal law reserve, provided for in article 103, paragraph 2, and in letter i) of paragraph 1 of article 165 of the CRP, requires that the essential elements of taxes (and, as the doctrine and jurisprudence aforementioned state, of contributions) must be contained in Law of the Assembly of the Republic, allowing the Government to legislate (not to exercise regulatory power, which does not exist here) only by means of legislative authorization. In accordance therewith, the Claimant states that those norms require, from the outset, that it be the Law — in material sense — that defines the normative discipline of a tax in its entirety, which necessarily includes the determination of the respective tax rate and taxable base. And it states that the rates of the Contribution on the Banking Sector and its tax base, two essential aspects of taxes, were fixed by an order and not by law of the Assembly of the Republic or by Decree-Law authorized by law of the Assembly of the Republic.

Additionally, the Claimant understands that articles 3 and 4 of the Contribution on the Banking Sector regime, not being sufficiently developed as to the definition of the objective scope and the tax rate of that contribution, are unconstitutional due to violation of the principle of material law reserve, contained in paragraph 2 of article 103 of the CRP, which equally tarnishes the self-assessment effected by the Claimant with the vice of violation of law.

The Claimant concluded that the self-assessment act effected under the aforementioned norms must be annulled for illegality and material unconstitutionality, for violation of what is provided in article 8 of the General Tax Law and what is provided in paragraph 2 of article 103 of the Constitution of the Portuguese Republic.

As to the violation of the principle of equivalence, the Claimant argues that the fact that the Contribution on the Banking Sector is a true contribution would always lead to the annulment of the self-assessment in question, for violation of the principle of equivalence as a criterion of adequacy of the principle of tax equality.

In conclusion, the Claimant argues that the subjection of the Claimant to the Contribution on the Banking Sector does not meet the paracommutative ground of contributions, since it violates the principle of equivalence, as a manifestation of the broader principle of tax equality enshrined in article 13 of the Constitution of the Portuguese Republic.

Thus, in the Claimant's view, the self-assessment act effected under the aforementioned norms must be annulled for the vice of violation of law and material unconstitutionality.

As to the violation of European Union Law, a vice which taints the assessment in question, according to the Claimant's position, this begins by referring to the fact that Member States retain the freedom to define the organization and conception of their tax system (Bachmann Judgment, Proc. C-204/90) and to determine the need to share the power of taxation among themselves (Saint-Gobain ZN Judgment, C-307/97 and, more recently, Nordea Bank Denmark, C 48/13).

In the Claimant's position, the rules specially applicable to EU branches in defining their tax base of the Contribution on the Banking Sector imply a clear discrimination of the Claimant as against credit institutions resident in Portuguese territory, by determining the application of an increased tax burden and a higher effective tax rate, which is not permitted by European Union Law.

The Claimant concluded that, in the event of incompatibility of the application of the Contribution on the Banking Sector regime with EU law, the respective assessment should be declared illegal and the regime disapplied.

But as to the violations of European Union Law, the Claimant further states that there is a violation of Directive 2014/59/EU, which establishes a harmonized framework at European level for the recovery and resolution of credit institutions and investment firms.

The Claimant further refers to the fact that the imposition of this contribution on the Claimant creates a genuine situation of international double taxation, in itself and by its circumstances also in breach of the Directive, since in 2016 the A... paid in Luxembourg a periodic contribution in the amount of € 1,903,995.35, part of which contribution corresponds to the liabilities of the Claimant in Portugal. In these terms, for the Claimant, it will always be doubly taxed, once in Portugal through the Contribution on the Banking Sector and again in Luxembourg through the contributions provided for in the Directive.

Finally, the Claimant requests, under the mechanism of the preliminary ruling provided for in article 267 of the Treaty on the Functioning of the European Union, that the Court of Justice of the European Union be asked to pronounce on whether:

• Article 56 of the TFEU precludes national legislation, such as that at issue in the domestic Portuguese regime of the Contribution on the Banking Sector, which taxes branches in Portugal of financial institutions resident in other Member States of the European Union on the totality of their liabilities, without giving them the possibility of deducting own capital, whereas this possibility is expressly recognized to resident financial institutions, placing the former in a disadvantageous situation as against the latter?

• Directive 2014/59/EU precludes the application of the domestic Portuguese regime of the Contribution on the Banking Sector to financial institutions (resident or non-resident) operating in Portugal through a branch, this regime having should have been eliminated and replaced, when transposing the aforementioned Directive into the Portuguese legal order, by the contributions provided for in that Directive?

• Directive 2014/59/EU precludes specifically the application of the domestic Portuguese regime of the Contribution on the Banking Sector to branches in Portugal of financial institutions resident in another Member State of the European Union?

The Claimant further requests the condemnation of the AT to payment of compensatory interest, in accordance with article 43 of the LGT, for a reason exclusively attributable to the AT.

And it indicates three witnesses and requests statements of party in the person of the Claimant's manager.

The Tax and Customs Authority presented a response alleging the legal conformity of the tax act that is the subject of the arbitral request.

The Respondent begins by presenting a defence by exception, alleging the material incompetence of the arbitral tribunal on the grounds that it is attacking the legality of the norm and not the self-assessment, and the material incompetence of the tribunal on the grounds that this is a contribution and not a tax.

As to the first exception, the AT states that what the Claimant intends is to attack the legality of the norm providing for the Contribution on the Banking Sector and not the respective self-assessment, since the Claimant does not ascribe any vice to the assessment, but rather to the normative itself that institutes the Contribution on the Banking Sector.

For the AT, the examination of the constitutionality of the norm is forbidden both to the AT and to the Arbitral Tribunal itself, which prevents the continuation of the instance, due to the occurrence of an exception that precludes knowledge of the merits.

According to the Respondent, by virtue of the terms of what is provided in article 2, letter a) of Order no. 112/2011 of 22 March, the AT bound itself to the jurisdiction of the arbitral tribunals operating in CAAD which have as their object the examination of claims relating to taxes whose administration is entrusted to them as referred to in paragraph 1 of article 2 of Decree-Law no. 10/2011 of 20 January (RJAT), with the exception of claims relating to the declaration of illegality of acts of self-assessment, which have not been preceded by recourse to the administrative route, in accordance with article 131 of CPPT.

For the AT, the arbitral pronouncement process constitutes a contentious matter of legality of tax assessment, whereupon arbitrability must be referring to the assessment act and not to the (il)legality of the norm that permits the assessment act, as the Claimant seeks.

In the Respondent's position, the Claimant's claim seeks not the examination of the legality of the self-assessment act, but the examination of the legality (and unconstitutionality) of the norm underlying the self-assessment act (not of the act itself), whereby it must be concluded that it is impossible for the present arbitral tribunal to decide the dispute, with the Respondent being absolved of the instance.

The Respondent alleges that, if this is not so understood, such interpretation would be not only illegal but manifestly unconstitutional, due to violation of the constitutional principles of the rule of law and separation of powers (cf. articles 2 and 111, both of the CRP), as well as of legality (cf. articles 3, paragraph 2, and 266, paragraph 2, both of the CRP), as a corollary of the principle of indisposability of tax claims inherent to article 30, paragraph 2 of the LGT, which bind the legislator and all activities of the AT.

As to the second exception invoked, the Respondent states that the tribunal is materially incompetent because we are dealing with a contribution and not a tax. And as to this question, the Respondent alludes to the arbitral ruling in case no. 347/2017–T which decided on the incompetence of the tribunal.

To substantiate its position, the AT refers to articles 3, paragraph 2, and 4, both of the LGT.

The Respondent argues that doctrine and jurisprudence have understood that the distinctive criterion between taxes and fees is their unilaterality or bilaterality, that is, the existence or non-existence of specific consideration consisting of administrative performance (in this sense, and among others, Constitutional Court ruling no. 365/03 of 14/07/2003). And that contributions, as a tertium genus of tax, situated in an intermediate category between the fee and the tax, constitute pecuniary and coercive payments required by a public entity in consideration for administrative performance only presumptively caused or benefited by the taxpayer.

The Respondent states that contributions are not unilateral taxes as is the case with taxes since, as written in Constitutional Court Ruling no. 313/92, the tax "constitutes, in itself, a state revenue — or even of the public entity legally empowered to collect it — which is not directly intended to satisfy the utilities of the taxpayer as a counterweight to the enjoyment of that satisfaction".

For the AT, the Contribution on the Banking Sector constitutes a contribution, not only in a formal sense but also materially, insofar as it is possible to identify consideration presumptively caused or benefited by the taxpayer.

Thus, for the Respondent, the Contribution on the Banking Sector formally and materially constitutes a financial contribution.

The Respondent concludes that, in the combined terms of articles 4, paragraph 1 of RJAT and article 2 of the PV, the tribunal will be materially incompetent to examine the merits of the present case, whereby the Respondent should be absolved of the instance.

The Respondent also presented a defence by challenge, alleging that there is no violation of the parliamentary law reserve.

To substantiate this position, the AT refers to Law no. 55-A/2010 (State Budget 2011), which created the regime of the Contribution on the Banking Sector, which was based on an exceptional economic and financial situation expressly motivated by the need to reduce the budgetary deficit, provided for in the "PEC" (stability and growth plan).

The AT alludes to the fact that this law determined the essential elements of this Contribution, in particular its scope (subjective and objective) and the applicable rates, which could vary between certain percentages depending on the values determined.

The AT also refers to Order no. 121/2011, which had as its object the regulation of the contribution established by Law no. 55-A/2010, its conditions of application, as well as the approval of the declaration of official form no. 26, for purposes of (self)assessment of the same.

The AT alludes to the fact that article 103 of the Constitution of the Portuguese Republic (CRP), taxes are created by law which should determine the scope, the rate, tax benefits and guarantees of taxpayers (article 8 of the LGT is a corollary of this constitutional precept). Thus, for the Respondent, there was no unconstitutionality due to violation of the principle of the law reserve, and article 141 of Law no. 55-A/2010 of 31 December (State Budget Law for 2011), enunciated the essential elements of the tax, defining both the scope (objective and subjective) and the "parameters" to be applied as to tax rates, leaving to Order 121/2011 of 30 March, and as stated in such legal instrument, the development "of the concepts relevant to the determination of the tax base established by Law no. 55-A/2010 (…)"

Thus, the Respondent concludes that there is no vice of organic unconstitutionality invoked by the Claimant, with no violation of the Fundamental Law.

As to the alleged violation of the principle of equivalence as a criterion of the principle of tax equality, the AT states that the same does not occur.

As to the principle of equivalence invoked by the Claimant, the AT argues that such principle emerges as a corollary of the principle of equality, equality that determines that the rates (of taxes and contributions) be distributed according to the cost caused by the taxpayer or according to the benefit provided to it. For the AT, what such principle aims to prevent is that the value of taxes constitutes an (inadequate) sacrifice for the taxpayers to the benefit of the community, which, as already said above, is not at all what happens in the situation sub judice. According to the Respondent, what is intended with the creation of the Contribution on the Banking Sector is exactly the opposite, that is, to prevent taxpayers from bearing the losses and burdens generated by the banking sector.

Thus, it is the opinion of the AT that the norms which introduced and regulated the Contribution on the Banking Sector are not unconstitutional due to violation of the principle of equivalence as a criterion of the principle of tax equality and the Claimant's request should also be rejected on this point of the disputed matter.

As to the alleged violation of European Union Law, the AT states that the same does not occur.

As to the Claimant's request for preliminary ruling provided for in article 267 of the Treaty on the Functioning of the European Union, the AT argues that such request should be dismissed, the present Arbitral Tribunal being completely competent and qualified to interpret the national law set out in the regime of the Contribution on the Banking Sector, which is sufficient to resolve the issue sub judice. Regarding the request for payment of compensatory interest filed by the Claimant, the AT argues that there is no error attributable to the services in the assessment of the tax, and therefore no indemnification should be recognized to the Claimant, in accordance with article 53 of the...

As to the witness evidence, the Respondent states that, given the nature of the disputed matter, it does not foresee the need for its examination.

3. Factual Matters

4.1. Facts Proved:

Having analyzed the documentary evidence, statements of party and witness evidence produced, as well as the position of the parties stated in the procedural documents, the following facts are considered proved and of relevance for the decision of the case:

  1. The Claimant is a branch in Portugal of B... (…), S.A., a credit institution under Luxembourg law, with registered office and effective management in Luxembourg.

  2. On 22-06-2017, the Claimant proceeded with the self-assessment of the Contribution on the Banking Sector for the year 2017, in the amount of 12,487.55 €, by submitting form 22, as a copy of the same attached to the arbitral request as document 2.

  3. The Claimant proceeded with the payment of the stated Contribution on the Banking Sector in the amount of 12,487.55 €, in accordance with document 5 attached to the arbitral request.

  4. The self-assessment was made on the basis of gross liabilities, without deduction of any amount as own capital, as it is a branch, an entity without legal personality.

  5. The Claimant, not agreeing with the self-assessment in question, lodged an administrative appeal against it on 16-10-2017, in accordance with document 1 attached to the arbitral request.

  6. Until the date of lodging of the arbitral request, the Claimant had not been notified of any decision on the administrative appeal.

  7. The Claimant lodged the present request for arbitral pronouncement on 28-03-2018.

No other facts with relevance for the decision of the case were proved.

4.2. Facts Not Proved

No facts that were not proved were found.

4.3. Reasoning of the Proved Factual Matter:

The arbitrator's conviction was based on the documents attached to the proceedings by the Claimant and on the position of the parties demonstrated in the procedural documents produced.

5. Matters of Law:

5.1. Object and Scope of the Present Proceedings

The essential legal questions posed in this case are the following:

a) to determine whether the Claimant, as a branch in Portugal of a non-resident credit institution with registered office in an EU country, is or is not subject to the scope of the Contribution on the Banking Sector;

b) to determine whether the following defects exist:

• violation of the parliamentary law reserve;

• violation of the principle of equivalence;

• violation of European Union Law, in the aspects of the prohibition of discrimination and violation of the freedom of establishment and violation of Directive 2014/59/EU.

However, it is necessary to first examine the matter of exception of incompetence of the arbitral tribunal, the examination of which, being ex officio, precedes that of any other question, as provided by articles 13 of the Code of Procedure in Administrative Courts (CPTA) and 278, paragraph 1, letter a) of the Code of Civil Procedure (CPC), applicable by virtue of article 29, paragraph 1, letters d) and e) of RJAT.

Preliminary Issue

5.2. Competence of the Arbitral Tribunal

As to the incompetence of the Arbitral Tribunal, the AT presented two autonomous grounds:

i) Incompetence to rule on the unconstitutionality of norms;

ii) Incompetence to rule on illegalities of the assessment of the Contribution on the Banking Sector on the grounds that it is a financial contribution and not a tax.

Competence in terms of subject matter is necessarily determined according to the material relationship in dispute, taking into account the terms in which the claimant's claim is formulated in the initial petition, including its grounds.

5.2.1. Competence of the Arbitral Tribunal as to Knowledge of the Unconstitutionality of Norms

As to this exception invoked, the AT states that what the Claimant intends is to attack the legality of the norm providing for the Contribution on the Banking Sector and not the respective self-assessment, since the Claimant does not ascribe any vice to the assessment, but rather to the normative itself that institutes the Contribution on the Banking Sector.

For the AT, the examination of the constitutionality of the norm is forbidden both to the AT and to the Arbitral Tribunal itself, which prevents the continuation of the instance due to the occurrence of an exception that precludes knowledge of the merits.

According to the Respondent, by virtue of the terms of what is provided in article 2, letter a) of Order no. 112/2011 of 22 March, the AT bound itself to the jurisdiction of the arbitral tribunals operating in CAAD which have as their object the examination of claims relating to taxes whose administration is entrusted to them as referred to in paragraph 1 of article 2 of Decree-Law no. 10/2011 of 20 January (RJAT), with the exception of claims relating to the declaration of illegality of acts of self-assessment, which have not been preceded by recourse to the administrative route, in accordance with article 131 of CPPT.

Notified to state its position on this question, the Claimant stated that the claim filed is for the declaration of illegality of the tax act of assessment of the Contribution on the Banking Sector, and not for the declaration of invalidity of any norm abstractly applicable.

Now, paragraph 1 of article 2 of RJAT, with the heading "Competence of arbitral tribunals and applicable law", states that:

"1 - The competence of arbitral tribunals comprises the examination of the following claims:

a) The declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and payment on account;

b) The declaration of illegality of acts of fixation of taxable matter when this does not give rise to the assessment of any tax, of acts of determination of collective taxable matter and of acts of fixation of property values; (Revised by Law no. 64-B/2011 of 30 December)

c) (Revoked) (Revised by Law no. 64-B/2002 of 30 December)";

For its part, paragraph 1 of article 4 of RJAT provides that:

"1 — The binding of the tax administration to the jurisdiction of the tribunals constituted under the terms of the present law depends on an order of the members of Government responsible for the areas of finance and justice, which establishes, in particular, the type and maximum value of the disputes covered. (Revised by Law no. 64-B/2011 of 30 December)".

And article 2 of Order no. 112-A/2011 of 22 March provides the following:

"The services and bodies referred to in the preceding article are bound to the jurisdiction of the arbitral tribunals operating in CAAD which have as their object the examination of claims relating to taxes whose administration is entrusted to them as referred to in paragraph 1 of article 2 of Decree-Law no. 10/2011 of 20 January (…)".

Thus, Arbitral Tribunals have the power to examine the legality of assessment acts.

In this regard, see what is referred to in the arbitral decision in case no. 115/2012-T: "the scope of tax arbitral jurisdiction was (…) delimited, in the first place, by what is provided in article 2 of RJAT which enunciates, in its paragraph 1, the criteria of material distribution, encompassing the examination of claims directed to the declaration of illegality of acts of assessment of taxes (letter a))."; "Through the Binding Order (Order no. 112-A/2011 of 20 April), the Government, through the Ministers of State and Finance and Justice, bound the services of the Tax Administration Directorate-General and the Customs and Special Consumption Tax Directorate-General to the jurisdiction of the arbitral tribunals operating in CAAD, with such services now corresponding to the Tax and Customs Authority, in accordance with Decree-Law no. 118/2011 of 15 December, which approves the organic structure of this Authority, resulting from the merger of various bodies. In this Order, additional conditions and limits of binding are established taking into account the specificity of the matters and the value involved".

The arbitral ruling in case no. 48/2012-T also states that: "The competence of arbitral tribunals operating in CAAD is, first, limited to the matters indicated in art. 2, paragraph 1, of DL no. 10/2011 of 20 January (RJAT). In a second line, the competence of arbitral tribunals operating in CAAD is also limited by the terms in which the Tax Administration bound itself to that jurisdiction, specified in Order no. 112-A/2011 of 22 March, since article 4 of RJAT provides that «the binding of the tax administration to the jurisdiction of the tribunals constituted under the terms of the present law depends on an order of the members of Government responsible for the areas of finance and justice, which establishes, in particular, the type and maximum value of the disputes covered. Given this second limitation of the competence of arbitral tribunals operating in CAAD, the resolution of the question of competence depends essentially on the terms of this binding, for, even if one is dealing with a situation that can be framed in that article 2 of RJAT, if it is not covered by the binding the possibility of the dispute being jurisdictionally decided by this Arbitral Tribunal will be precluded".

Thus, the examination of the legality of the assessment may have as its basis questions of unconstitutionality.

As provided in articles 204, 209, paragraph 2 and 280 of the CRP, the competence to examine the constitutionality of norms, raised in connection with concrete cases, is recognized by all courts, which necessarily include arbitral tribunals constituted in CAAD.

In this following, article 25, paragraph 1 of RJAT states that "the arbitral decision on the merits of the claim filed which terminates the arbitral proceedings is susceptible of appeal to the Constitutional Court on the part in which it refuses to apply any norm on the grounds of its unconstitutionality or which applies a norm whose unconstitutionality has been raised".

On this question, the rulings of CAAD in cases no. 347/2017-T, 139/2017-T and 142/2018-T have already pronounced themselves in favour of the competence of the tribunal.

In effect, it is verified that this Tribunal is competent to analyze the eventual annulment of the contested assessment act on the grounds of the inapplication of the norm that authorizes it, based on its unconstitutionality.

Terms in which the invoked exception of material incompetence of the Arbitral Tribunal is judged unfounded, as to this ground, regarding knowledge of the unconstitutionality of norms.

5.2.2. Competence of the Arbitral Tribunal to Rule on the Legality of Assessment of the Banking Sector Contribution Having Regard to its Tax Nature

The Respondent states that the tribunal is materially incompetent because we are dealing with a contribution and not a tax. To substantiate its position, the AT refers to articles 3, paragraph 2, and 4 of the LGT.

The Respondent argues that doctrine and jurisprudence have understood that the distinctive criterion between taxes and fees is their unilaterality or bilaterality, that is, the existence or non-existence of specific consideration consisting of administrative performance (in this sense, and among others, Constitutional Court ruling no. 365/03 of 14/07/2003). And that contributions, as a tertium genus of tax, situated in an intermediate category between the fee and the tax, constitute pecuniary and coercive payments required by a public entity in consideration for administrative performance only presumptively caused or benefited by the taxpayer.

The Respondent states that contributions are not unilateral taxes as is the case with taxes since, as written in Constitutional Court Ruling no. 313/92, the tax "constitutes, in itself, a state revenue — or even of the public entity legally empowered to collect it — which is not directly intended to satisfy the utilities of the taxpayer as a counterweight to the enjoyment of that satisfaction".

The Claimant argues that this tax is administered by the AT and there is no substantiation or reason why the AT should not be subject to tax arbitration.

Article 3, paragraph 2 of the LGT provides that "taxes comprise taxes, including customs and special taxes, and other tax species created by law, in particular fees and other financial contributions in favor of public entities".

And article 4 of the LGT states that:

"1 - Taxes are based essentially on contributory capacity, revealed, in accordance with law, through income or its use and property.

2 - Fees are based on the provision of a concrete public service, on the use of a good in the public domain or on the removal of a legal obstacle to the conduct of individuals.

3 - Special contributions which are based on the obtainment by the taxpayer of benefits or increases in value of its goods resulting from public works or the creation or expansion of public services or on special wear of public goods occasioned by the exercise of an activity are considered taxes".

Now, the present arbitral request concerns the Contribution on the Banking Sector, with the object being constituted by the self-assessment of the Contribution on the Banking Sector effected by the Claimant, through the submission of form 26, following the formation of the implicit dismissal of the administrative appeal presented, as stated in the facts proved.

The Contribution on the Banking Sector is a tax created under the regime enshrined in article 141 of Law no. 55-A/2010 of 31-12, later amended, with the regulation resulting from Order no. 121/2011 of 30-03, later amended.

Article 2 of Order no. 112-A/2011 of 22-03 states that "the services and bodies referred to in the preceding article are bound to the jurisdiction of the arbitral tribunals operating in CAAD which have as their object the examination of claims relating to taxes whose administration is entrusted to them as referred to in paragraph 1 of article 2 of Decree-Law no. 10/2011 of 20 January (…)".

This provision arises following what is established in paragraph 1 of article 4 of RJAT which provides that "the binding of the tax administration to the jurisdiction of the tribunals constituted under the terms of the present law depends on an order of the members of Government responsible for the areas of finance and justice, which establishes, in particular, the type and maximum value of the disputes covered".

We understand that the only meaning that can be attributed to the literal-systematic interpretation of the precepts is that the reference to taxes instead of taxes in article 2 of Order no. 112-A/2011, followed by the express referral to a set of exceptions, indicates that the legislator of the Order did not have the restrictive intent to include only taxes, for if so it would have made express reference to that restriction in the list of letters that contain the exceptions, as stated in the decisions in cases no. 312/2015-T, 139/2017-T and 142/2018-T.

Thus, we agree with the decision in case no. 139/2017-T when it states that "even convening the theological and rational elements of legal interpretation do not point in the direction of such a restriction but only to the 'limitation of the scope of binding of the AT through the holding of powers to administer taxes'", with that being, moreover, the logical limit of the binding — the restriction not thus covering those related with "contributions" also administered by it".

The same decision, with which we agree, further states that the procedure of assessment and collection of the Contribution on the Banking Sector, even if we consider it inserted in the legal category of contributions, in no way differs from that of taxes, in its nature and structure. Firstly because the AT acts as if it were taxes, and to the unilateral character of this contribution, in all similar to what characterizes the tax.

In the wake of our understanding, the authors Sérgio Vasques and Carla Castelo Trindade, in "The material scope of tax arbitration", Tax Justice Notebooks no. 00 (April/June 2013), page 24, state that "the services and bodies referred to in the preceding article [now, the AT] bound themselves to the jurisdiction of the arbitral tribunals operating in CAAD which have as their object the examination of claims relating to taxes whose administration is entrusted to them as referred to in article 2, paragraph 1 of Decree-Law no. 10/2011 of 20 January. Pursuant to article 2 of DL no. 118/2011 of 15/12, which approved the Organic Law of the Tax and Customs Authority, this entity thus has under its aegis the administration of customs duties, income taxes, wealth taxes and consumption taxes and also other taxes that are legally assigned to it such as, for example, special contributions".

We also agree with the understanding of Prof. Dr. Rui Morais, set forth in the CAAD ruling in case no. 347/2017-T, which transcribes part of the arbitral decision no. 312/2015-T:

"First, the literal tenor and systematic articulation of the precepts do not permit a direct and evident clarification of the sense of the norms. And if any sense can be attributed in a manner closer and more faithful to the literal-systematic interpretation of the precepts it is that the reference to "taxes" instead of "taxes" in article 2 of Order no. 112-A/2011, followed by the express referral to paragraph 1 of article 2 of RJAT and the express enumeration of a set of exceptions, indicates that the 'legislator' of the Order did not have the clear restrictive intent that the AT invokes, for if so it would have made express reference to that restriction in the range of letters that contemplate the exceptions.

Second, the convening of the teleological and rational elements of legal interpretation also do not point to the reasonableness of such a restriction, but only to the 'limitation of the scope of binding of the AT through the holding of powers to administer taxes'", with that being, moreover, the logical limit of the binding — the restriction not thus covering those related with "contributions" also administered by it".

The fact is that the procedure of assessment and collection of such "contributions" in no way differs, in its nature and structure, from that of "taxes" (the AT acts there as if it were taxes), whereupon there is no valid reason to exclude the binding of the AT, in such cases, to arbitrability.

The absence of an express reference in the text of article 2 of the aforementioned Order no. 112-A/2011 to such type of taxes must be due, after all, only to the fact that, at the date thereof, any tax with such characteristics was still not found to be assigned to the administration of the AT. Moreover, the doctrine on which the AT relies does not permit sustaining a different position, quite the contrary.

Thus, for example, SÉRGIO VASQUES and CARLA CASTELO TRINDADE in «The Principle of Equivalence as a Criterion of Tax Equality», Tax Justice Notebooks no. 00 (April/June 2013), p. 24, make clear that "the services and bodies referred to in the preceding article [now, the AT] bound themselves to the jurisdiction of the arbitral tribunals operating in CAAD which have as their object the examination of claims relating to taxes whose administration is entrusted to them as referred to in article 2, paragraph 1 of Decree-Law no. 10/2011 of 20 January. Pursuant to article 2 of DL no. 118/2011 of 15/12, which approved the Organic Law of the Tax and Customs Authority, this entity thus has under its aegis the administration of customs duties, income taxes, wealth taxes and consumption taxes and also other taxes that are legally assigned to it such as, for example, special contributions".

We thus consider that the scope of arbitral tribunals encompasses, as derives from the combined interpretation of articles 2 of RJAT and Order no. 112-A/2011, the examination of claims relating to taxes whose administration is entrusted to the AT, with the exception of the cases enumerated in the letters of article 2 of Order no. 112-A/2011- thus encompassing also the claims relating to "contributions" administered by it.

Being the Contribution on the Banking Sector a tax administered by the AT whose procedure of assessment and collection is structurally identical to that of taxes, the arbitral tribunal is competent to resolve the present dispute, independently of whether this tax is to be qualified as a contribution or as a tax, thus making the exception invoked by the Respondent unfounded.

5.3. On the (Il)legality of Assessment of the Contribution on the Banking Sector

Having analyzed the questions related to the matter of exception of incompetence of the Arbitral Tribunal, it is now necessary to analyze the (il)legality of the assessment of the Contribution on the Banking Sector at issue here.

Let us examine each of the defects pointed out by the Claimant in the assessment in question:

5.3.1. On the (Alleged) Violation of the Parliamentary Law Reserve

The Claimant argues that the legal regime of CSB is illegal due to violation of the parliamentary law reserve, invoking that the principle of tax legality requires that it be a law or a Decree-Law issued by the Government under legislative authorization that creates taxes and defines their essential elements, in particular their scope and rates, in accordance with article 103, paragraph 2 of the CRP and article 8 of the LGT.

Now, Law no. 55-A/2010 (State Budget Law for 2011) created the regime of the Contribution on the Banking Sector. This law was created in terms identical to those that already existed in other Member States of the European Union and had its origins in various aspects discussed at the Pittsburgh Summit of September 2009 and the ECOFIN Council of May 2010, where it was affirmed that the financial sector should bear the burdens it generates, through the creation of a tax on banks.

The said law was based on an exceptional economic and financial situation motivated by the need to reduce the budgetary deficit provided for in the stability and growth plan (PEC).

Law no. 55-A/2010 established the essential elements of the Contribution on the Banking Sector, namely its objective and subjective scope and the applicable rates.

The law established that the passive subjects of this contribution are credit institutions with principal registered office and effective management located in Portuguese territory; branches in Portugal of credit institutions which do not have their principal registered office and effective management in Portuguese territory; branches in Portugal of credit institutions with principal registered office and effective management outside the European Union (i.e. third countries).

The law also established that the Contribution applies to the liabilities determined and approved by the passive subjects deducted from base capital (Tier1) and supplementary (Tier2) funds and deposits covered by the Deposit Guarantee Fund, and the notional value of derivative financial instruments outside the balance sheet determined by the passive subjects.

As to the tax base, the law determined that it could vary between certain percentages depending on the values determined.

Let us note the following:

• The fundamental elements of the tax in question were defined by Law of the Assembly of the Republic, notwithstanding some development in an Order, as the regime itself provided;

• The formal law reserve, given the most recent jurisprudence of the Constitutional Court, does not cover the creation of financial contributions such as those in question;

• Even if the creation of the financial contribution were covered by the formal law reserve, the fact that its essential characters are provided for in Law of the Assembly of the Republic implies that there is no violation of article 165, paragraph 1, letter i) of the CRP;

• The fact that Order no. 121/2011 of 30 March develops some aspects relating to the tax, in the terms in which the regime itself provided, does not likewise taint it with the mentioned vice;

• The regime set out in the State Budget/2011 goes beyond the mere creation of the tax, with its essential elements being set forth therein, which were only subject to some development by order;

• The rate itself was fixed within an interval provided for in the State Budget/2011 and in accordance with the terms set forth therein, an interval that is of circumscribed scope (between 0.01% and 0.05%, in cases framed within paragraph 1 of article 4, and between 0.00010% and 0.00020%, in cases covered by paragraph 2 of the same article of the banking sector contribution regime), and it is not considered, given such circumscription, that the power given to the Government, in article 8 of the regime, offends, in the terms already explained, the fundamental law, conferring on it flexibility within a specifically defined margin and not with total discretion (indeed, the technique of defining a range of rates is not innovative of this tax, as is verified, for example, from the analysis of the IMI regime - cf. article 112 of CIMI).

Order no. 121/2011 of 30-03 established the regulation of the contribution established by Law no. 55-A/2010, its conditions of application and the approval of form 22 declaration, for purposes of self-assessment of the stated Contribution on the Banking Sector.

The CRP determines, in article 103, paragraph 2 of the CRP, that taxes are created by law, law that must regulate the scope, the rate, tax benefits and guarantees of taxpayers.

Now, in the case at hand, there was no unconstitutionality due to violation of the principle of the law reserve, since article 141 of Law no. 55-A/2010 determined the essential elements of the tax, governing the objective and subjective scope and the interval of rates to be applied.

Thus, we must understand that the essential elements of the Contribution on the Banking Sector, which are the rules of scope and the rates) are determined by Law no. 55-A/2010 of 31-12. And the Order published merely served to determine the forms of determination of the taxable value.

In conclusion, the alleged violation of the parliamentary law reserve invoked by the Claimant is unfounded.

5.3.2. On the (Alleged) Violation of the Principle of Equivalence as a Criterion of the Principle of Tax Equality

The Claimant argues that the norms which introduced and regulated the Contribution on the Banking Sector are unconstitutional due to violation of the principle of equivalence as a criterion of the principle of equality.

Let us see that from the Pittsburgh Summit (September 2009) and the Ecofin Council (18 May 2010) two orientations emerged:

a) that taxpayers could not continue to "pay" for the coverage of losses in the banking sector, and

b) that the sector itself should bear the burdens it generates – through the creation of a tax on the sector.

The spirit that presided over the creation of the CSB was thus to create a tax "(…) with the dual purpose of reinforcing the tax effort made by the financial sector and of mitigating in a more effective manner the systemic risks associated therewith". (as per the preamble to Order no. 121/2011).

The State Budget Report (Point III 2.2.3.2) states that the reason for the creation of the Contribution on the Banking Sector was to "approximate the tax burden borne by the banking sector to that which burdens the rest of the economy and to have it contribute more intensely to the effort of consolidation of public accounts and prevention of systemic risks (…).

This mitigation of systemic risks is present in several norms, in particular:

i. In paragraph 1 of article 4 of the Order when it proceeds to the definition of what is meant by liabilities (for purposes of the objective scope provided for in article 3), as such qualifying all elements recognized in the balance sheet that represent debt to third parties (regardless of their form or manner) excluding only a very small set of realities:

ii. In articles 3 and 4 of Order no. 121/2011, when it proceeds to the disregard, for purposes of taxable base, of deposits covered by the Deposit Guarantee Fund in the portion of such value that is subject to coverage by that same fund;

iii. In article 3 letter b) and article 4, paragraph 3 of the order, when it determines that financial instruments for risk hedging and those whose risk positions offset each other mutually are not part of the taxable base;

The principle of equivalence emerges as a corollary of the principle of equality, equality that determines that the rates (of taxes and contributions) be distributed according to the cost caused by the taxpayer or according to the benefit provided to it.

Such principle aims to prevent that the value of taxes constitutes an (inadequate) sacrifice for the taxpayers to the benefit of the community.

However, we understand that there is no violation of such principle in the present case.

Sérgio Vasques (in "The Principle of Equivalence as a Criterion of Tax Equality" Publ. Almedina) alludes to the fact that the essential sense of the principle of equivalence is to prohibit the introduction in commutative taxes of differentiations unrelated to the cost or benefit, as well as to prohibit that the value of such taxes exceeds such cost or benefit, sacrificing the respective taxpayers to the benefit of the community.

Let us see what is stated in the Financial Stability Report issued by the Bank of Portugal and published in November 2013, being the same extremely clear as to the situation of Portuguese banking:

"In this context, it should be noted that the liquidity position of Portuguese banks (and more broadly, banks in the euro area) has benefited from the action of the ECB, at the level of conventional and unconventional monetary policy measures. At the level of conventional measures, the reduction of official interest rates stands out, with the narrowing of the corridor defined by the interest rates of the standing facilities contributing to the reduction in volatility of money market interest rates. As regards unconventional measures, the fixed-rate regime and full satisfaction of demand adopted for financing operations with the Eurosystem are noted, the conduct of refinancing operations for long periods (with emphasis on the two three-year operations), as well as measures that impacted the rules on collateral eligibility, allowing the expansion of available collateral. Portuguese banks were thus able to significantly increase their collateral pools with the Eurosystem, that is, the set of assets eligible as security for credit operations with the Eurosystem. It was thus possible to increase the degree of over-collateralization of refinancing operations, a fact that gives institutions increased capacity to, in the short term, accommodate adverse shocks at the level of their liquidity needs."

(…)

"Given this framework, it should be noted that in general terms, and when assessed by liquidity gaps, the liquidity situation of Portuguese banks remained relatively comfortable during the first half of 2013. (…)

The recourse to Eurosystem financing under stable conditions and at reduced cost has minimized these impacts, although, as mentioned, this financing source remained relatively stable throughout 2013. (…)

As regards southern Europe, fixed-income securities continue to offer generally higher yield rates, supported by the guarantees offered. In Portugal, it is of interest to note that a significant part of the portfolios of financial institutions is composed of national assets, in particular sovereign debt, which continue to provide relatively high levels of profitability."

In conclusion, we understand that the alleged violation of the principle of equivalence as a criterion of the principle of tax equality must be rejected.

5.3.3. On the (Alleged) Violation of European Union Law

The Claimant argues that the assessment in question would in any case have to be annulled for violation of European Union Law.

Pursuant to the jurisprudence of the CJEU, articles 52 and 65 of the TFEU produce direct effect, whereby the national judge, as a common judge of Union law, has the duty to disapply in the concrete case the national norm incompatible with those fundamental freedoms and/or to interpret national law in a manner to harmonize it with Union law, in light of the principles of primacy and interpretation in conformity with Union law and article 8, paragraph 4 of the Constitution of the Portuguese Republic.

It also follows from established jurisprudence that «any national judge has, within its competence as an organ of a Member State, the obligation, by virtue of the principle of cooperation enshrined in article 4, paragraph 3 of the Treaty on European Union, to fully apply directly applicable Union law and to protect the rights which it confers on individuals, not applying any provision possibly contrary to national law, whether prior or subsequent to the Union law norm» (cf. judgment Philips Electronics UK, proc. C-18/11, no. 38, Simmenthal, proc. 106/77, nos. 16 and 21, and Factortame and others, proc. C 213/89, no. 19 e)

It is also important to note that, pursuant to the principle of interpretation in conformity with Union law, «it is for the national court to give the internal law, insofar as a margin of appreciation is allowed to it by its own internal law, an interpretation and an application in conformity with the requirements of Community law and, insofar as such interpretation is not possible, to leave inapplied any provision of internal law of contrary meaning» (See among others the judgment Murphy, proc. 157/86, no. 11).

As stated in the arbitral request "Member States retain the freedom to define the organization and conception of their tax system (Bachmann Judgment, Proc. C-204/90) and to determine the need to share the power of taxation among themselves (Saint-Gobain ZN Judgment, C-307/97 and, more recently, Nordea Bank Denmark, C 48/13)".

Powers that must be compatible with respect for the principles and freedoms arising from the Treaties and with the jurisprudence of the CJEU.

Let us see the principles which are allegedly being violated by the CSB.

On the Prohibition of Discrimination and Violation of the Freedom of Establishment

Pursuant to article 49 of the TFEU, which enshrines the right of establishment, restrictions on the freedom of establishment of nationals of a Member State of the Union in the territory of another Member State are prohibited.

For the purposes of the right of establishment, article 54 TFEU equates nationals of Member States who are natural persons with companies incorporated in accordance with the legislation of a Member State and which have their registered office, central administration or principal establishment therein. The principle of non-discrimination prohibits not only direct or overt discrimination based on nationality, but also any form of dissimulated discrimination which, by application of other distinguishing criteria, leads, in fact, to the same result (judgments Commission/Italy, proc. C 212/99, no. 24, and Commission/Italy, proc. C 224/00, no. 15).

This is what occurs with discrimination based on residence — or indirect discrimination — since as a rule and in the majority of cases, non-residents in a given Member State are also non-nationals of that Member State, whereby in accordance with established jurisprudence of the Court of Justice this dissimulated discrimination is also prohibited as it leads, effectively, to the same result of discriminating non-nationals as against nationals.

Article 49 prevents, from the outset, Member States from taking measures that favor resident companies to the detriment of non-resident companies (eg judgments Schumacker, no. 30, and Royal Bank of Scotland, no. 26).

Thus, the right of free establishment, which in the words of the CJEU is one of the fundamental provisions of Union law, prohibits all national measures capable of making difficult or rendering less attractive the establishment and management of companies, as well as the creation of agencies, branches or subsidiaries in a Member State, by companies based or established in another Member State (judgments Commission/France, proc. 270/83, no. 13, Royal Bank of Scotland, proc. C-311/97, no. 22, and Gebhard, C-55/94, no. 37).

According to unanimous jurisprudence, article 49 of the TFEU is intended to implement, in the field of non-salaried activities, the principle of equality of treatment, a general principle of Union law, enshrined in article 18 of the TFEU, considering any discrimination on grounds of nationality resulting from national legislation to be a violation of the freedom of establishment. For this reason, any national measure that is incompatible with article 49 is also incompatible with article 18 of the TFEU (judgments Commission/Greece, proc. 270/83, no. 14, Commission/Greece, proc. 305/87, nos. 12 and 13, and Royal Bank of Scotland, proc. C-311/97, nos. 21 and 22).

In this regard, it is important to recall that the principle of non-discrimination prohibits not only direct or overt discrimination based on nationality, but also any form of dissimulated discrimination which, by application of other distinguishing criteria, leads, in fact, to the same result (judgments Commission/Italy, proc. C 212/99, no. 24, and Commission/Italy, proc. C 224/00, no. 15).

This is what occurs with discrimination based on residence — also called indirect discrimination — since as a rule and in the majority of cases, non-residents in a given Member State are also non-nationals of that Member State, whereby in accordance with established jurisprudence of the Court of Justice this dissimulated discrimination is also prohibited as it leads, effectively, to the same result of discriminating non-nationals as against nationals.

Article 49 prevents, from the outset, Member States from taking measures that favor resident companies to the detriment of non-resident companies (eg judgments Schumacker, no. 30, and Royal Bank of Scotland, no. 26) – what seems, moreover, evident and why must be analyzed with great care in this case.

As it was proved the Claimant is an EU branch that operates in Portugal, under the freedom of establishment. And hence follows that the rules determining the tax base of the CSB are different from those which apply to resident financial institutions.

For purposes of objective scope, the CSB applies to liabilities deducted from the elements that make up the own capital of the taxpayers — cf. article 3, letter a), of the CSB regime.

For its part, Order no. 121/2011 of 30 March provides that for purposes of defining liabilities, it is understood as «…the set of elements recognized in the balance sheet which, regardless of their form or manner, represent a debt to third parties, with exception […] of elements which, according to applicable accounting rules, are recognized as own capital […]» — cf. article 4, paragraph 1, letter a) of the said Order (cit.)

Now, as is known, EU branches do not have legal personality, carrying out directly, wholly or in part, operations inherent to the activity of the non-resident credit institution they integrate — cf. article 2-A, letter ll) of RGICSF.

The absence of legal personality determines, a priori, the absence of share capital and, from this point on, the absence of own capital as these are considered and recorded for the purpose of credit institutions with registered office and effective management in Portugal.

What implies the impossibility of applying to EU branches the deduction that is conferred to resident institutions as set forth in article 4, paragraph 1, letter a) of Order no. 121/2011 of 30 March.

This means that, in the case of resident credit institutions the CSB applies to their "net" liabilities, after deducting own capital, whereas as far as EU branches are concerned the CSB applies to their "gross" liabilities, without any deduction related to own capital, placing the latter in a disadvantageous position as against the former.

In these terms, this discriminatory treatment is based solely on the nationality of the institutions in question, whereby the same is shown to be contrary to European Union Law in general, violating the freedom of establishment associated with the exercise of an activity by a credit institution resident in a Member State of the EU, by way of the establishment of a branch located in Portugal.

Well, article 18 of the Treaty on the Functioning of the European Union provides that:

«any discrimination on grounds of nationality is prohibited» (cit.).

On the other hand, on the freedom of establishment, one of the fundamental corollaries of the prohibition of discrimination, the Treaty on the Functioning of the European Union is clear in the sense that:

«restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State are prohibited. This prohibition shall also apply to restrictions on the establishment of agencies, branches or subsidiaries by nationals of a Member State established in the territory of another Member State. The freedom of establishment includes the right to pursue non-salaried activities and to set up and manage undertakings, and in particular undertakings referred to in the second paragraph of article 54, on the conditions laid down for its own nationals by the law of the country where establishment is effected, subject to the provisions of the chapter relating to capital» — cf. article 49 of the Treaty on the Functioning of the European Union (cit., underlined).

Freedom of establishment is one of the essential pillars of the functioning of the internal market, with article 26 of the said Treaty establishing that:

«[the] Union shall adopt measures with the aim of establishing or ensuring the functioning of the internal market, in accordance with the relevant provisions of the Treaties» and that «the internal market shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaties» (cit.).

In these terms, the provision of a national contribution which in fixing its respective tax base discriminates against and prejudices EU branches as against resident credit institutions and resident in Portuguese territory is clearly incompatible with European Union Law and expressly violates the freedom of establishment, and cannot continue.

Pursuant to the jurisprudence of the Court of Justice of the European Union, for a difference in tax treatment to be discriminatory it is necessary that the entities in question be in objectively comparable situations, with the objective comparability of situations being analyzed having regard to the objective pursued by the national regime in question (judgments Commission/Hungary, proc. C-253/09, no. 50, and X Holding, proc. C-337/08, no. 17).

In this regard, note that the CJEU has already pronounced itself on the criterion of comparability between resident and non-resident entities in relation to the deduction of professional expenses (cf. judgments Gerritse, proc. C-234/01, no. 27; Conijn, proc. C-346/04, no. 20; Centro Equestre da Lezíria Grande, proc. C-345/04, no. 23, and Scorpio C-290/04, no. 42).

Furthermore, although branches do not have, as already mentioned, own capital strictly speaking, the tax administration could have adopted guidelines for the scope of the CSB on the basis of assumptions similar to those that founded the guidelines it adopted for the purposes of CIT, regarding the so-called free capital of branches.

On the contrary, Order no. 165-A/2016 of 14 June, which approved the new official form no. 26 of the Contribution on the Banking Sector, also approved its respective filling instructions, pursuant to which it is determined "that in the case of branches in Portugal of credit institutions with principal registered office and effective management outside national territory, in accordance with accounting rules, the respective liabilities include debts to the head office (principal and effective outside national territory) and/or other branches thereof, which are, thus, considered debts to third parties", being thus denied any relevance to the free capital (cf. Point 5 – Tax base - of the filling instructions of official form no. 26, approved by Order no. 165-A/2016 of 14 June) (our highlighting).

Before what has just been set forth, there are no doubts that the rules specially applicable to EU branches, in defining their tax base of the CSB, imply a clear discrimination of the Claimant, as against credit institutions resident in Portuguese territory, by determining the application of an increased tax burden and a higher effective tax rate, which is not permitted by European Union Law.

Indeed, there is consolidated jurisprudence of the Court of Justice of the European Union on the violation of the right of establishment, freedom of provision of services and free movement of capital, especially regarding the financial sector.

In that vast jurisprudence the judgments are constant in judging incompatible with the fundamental freedoms and with the prohibition of discrimination among entities of different Member States the situations of differentiated treatment of resident financial institutions and non-resident financial institutions.

See as an example what is provided by the recent

Frequently Asked Questions

Automatically Created

What is the Banking Sector Contribution (Contribuição sobre o Setor Bancário) in Portugal and who is subject to it?
The Banking Sector Contribution (Contribuição sobre o Setor Bancário - CSB) is a Portuguese tax levy imposed on banking institutions operating in Portugal. It applies to credit institutions, including both Portuguese resident banks and Portuguese branches of foreign banks. The CSB was established as part of Portugal's response to the financial crisis, intended to contribute to banking sector stability and address externalities created by the banking industry. For resident institutions, the tax base is calculated on net liabilities (allowing deductions for own capital), while for branches of EU institutions, it has been applied to gross liabilities without such deductions, creating a potential discrimination issue under EU law.
Can a foreign bank's branch in Portugal challenge the Banking Sector Contribution through tax arbitration at CAAD?
Yes, foreign bank branches operating in Portugal can challenge the Banking Sector Contribution through tax arbitration at CAAD (Centro de Arbitragem Administrativa). The procedure involves submitting a request for constitution of an arbitral tribunal after exhausting administrative remedies. In this case, the claimant first filed an administrative appeal (reclamação graciosa) which was tacitly rejected. The arbitration request must be filed within the legal timeframe established in article 10(1)(a) of the RJAT and article 102(1)(a) of the Tax Procedure Code. The claimant has legal personality, capacity, and legitimacy to challenge tax assessments through CAAD, regardless of being a branch of a foreign institution, ensuring access to Portuguese tax dispute resolution mechanisms for all entities subject to Portuguese taxation.
What is the procedure for filing a tax arbitration claim against a tacit rejection of a gracious complaint (reclamação graciosa)?
When an administrative appeal (reclamação graciosa) is tacitly rejected by the tax authorities' failure to respond within the legal deadline, taxpayers can challenge this implicit dismissal through tax arbitration at CAAD. The procedure requires: (1) filing a request for constitution of an arbitral tribunal within the statutory deadline; (2) payment of the initial arbitration fee; (3) the CAAD President accepting the request and notifying the Tax Authority; (4) constitution of the arbitral tribunal (either through party appointment or designation by CAAD); (5) the Tax Authority submitting its response and the administrative file; (6) optional hearing for witness examination and oral arguments; (7) payment of the subsequent arbitration fee; and (8) issuance of the arbitral decision. The arbitration addresses both the legality of the tacit rejection and the underlying tax assessment.
How is the Banking Sector Contribution calculated for Portuguese branches of foreign banks?
The Banking Sector Contribution for Portuguese branches of foreign banks has been calculated on the basis of gross liabilities without deductions, creating a significant differential treatment compared to resident institutions. While Portuguese resident banks can deduct own capital from their liabilities when determining the CSB tax base (taxation on 'net' liabilities), branches of EU banking institutions have been required to calculate CSB on their total gross liabilities without such deductions. This methodological difference results in a higher tax base for branches despite potentially similar economic situations. The claimant argues this constitutes discrimination under EU law, violating the freedom of establishment and the principle of equivalence, as branches and resident institutions should receive comparable tax treatment when providing the same banking services in Portugal.
What are the legal grounds for declaring the illegality of a Banking Sector Contribution assessment in Portugal?
Legal grounds for challenging the illegality of a Banking Sector Contribution assessment in Portugal include: (1) Violation of parliamentary law reserve (articles 103-104 of the Portuguese Constitution), arguing that contributions constitute taxes requiring proper legislative authorization that cannot be improperly delegated to regulatory instruments; (2) Breach of the principle of tax equality and equivalence, questioning whether the taxed entity actually causes or benefits from the externalities the CSB aims to address; (3) Violation of EU law, particularly the freedom of establishment and prohibition of discrimination under the TFEU, when differential treatment exists between branches of EU institutions and Portuguese resident banks; (4) Disproportionate tax burden resulting from calculation methodology that disadvantages certain taxpayers; and (5) Lack of legal basis or improper application of CSB to entities that previously were not subject to the contribution, raising questions about consistent administrative practice and legitimate expectations.