Summary
Full Decision
ARBITRAL DECISION (consult full version in PDF)
The arbitrator Professor Doctor Jónatas Machado, designated by the Deontological Council of the Centre for Administrative Arbitration to serve on this Arbitral Tribunal, renders the following decision:
1 REPORT
1. A..., a Collective Investment Undertaking established in accordance with German law, with Portuguese tax identification number..., with registered office in ..., ... ..., Germany, (hereinafter referred to as the "Claimant"), represented by B..., in its capacity as managing company, with registered office at the same address, hereby, in accordance with and for the purposes of the provisions of item a) of article 2(1) and article 10 of the Legal Framework for Tax Arbitration ("LFTA"), requests the establishment of an Arbitral Tribunal of the Centre for Administrative Arbitration, in accordance with the provisions of article 6(1) of the LFTA, for the purpose of examining the legality of the acts of withholding at source of Corporate Income Tax ("CIT") levied on the payment of dividends relating to the year 2016, or the referral of the question to the Court of Justice of the European Union (CJEU) by means of a preliminary ruling, in accordance with article 267 of the Treaty on the Functioning of the European Union (TFEU).
2. The request for establishment of the arbitral tribunal was accepted by the President of the CAAD on 12.02.2019.
3. In accordance with articles 5(2)(a), 6(1) and 11(1) of the LFTA, the Deontological Council of this Centre for Administrative Arbitration (CAAD) designated Professor Doctor Jónatas Machado as sole arbitrator on 15.02.2019.
4. The parties were duly notified of this designation, to which they did not object, in accordance with the combined provisions of articles 11(1)(b) and (c) and 8 of the LFTA and articles 6 and 7 of the Deontological Code of the CAAD.
5. By virtue of the provisions of article 11(1)(c) and 11(8) of the LFTA, as communicated by the President of the Deontological Council of the CAAD, the Arbitral Tribunal was constituted on 23.04.2019.
6. The Tax Authorities ("TA") (or "Respondent"), having been notified, pursuant to the provisions of article 17 of the LFTA, to submit its response, came to argue, in its defence of 29.05.2019, for the dismissal of this request for arbitral decision, the maintenance in the legal order of the disputed tax assessment and its absolution from the claim.
7. As it was not requested by the parties and was considered unnecessary, the tribunal waived the meeting provided for in article 18 of the LFTA, by means of an order rendered on 30.05.2019.
8. In their final submissions, presented by the Claimant on 21.06.2019, and on 15.07.2019 by the Respondent, the parties sustained and reinforced their respective positions, the latter having formulated its own preliminary ruling questions.
1.1 Description of Facts
9. The Claimant, with tax residence in Germany, is a legal entity under German law, more specifically a Collective Investment Undertaking ("CIU") established under the form of a contract and not a corporation, commonly referred to as an investment fund, and is a taxpayer subject to CIT, non-resident for tax purposes in Portugal, without any permanent establishment in the country.
10. The Claimant is an autonomous open-ended fund based on a contract between the managing entity "B...", its investors and the bank responsible for the custody of securities, having as its object the administration, management and investment of its assets and being managed by that investment fund management entity, with registered office in Germany, according to the scheme:
11. The managing entity invests the capital deposited by investors in its own name, with the assets belonging to the Claimant fund – separated from the other assets of the managing entity and the bank responsible for custody – in a regime of co-ownership with the respective investors.
12. Under the law applicable in Germany, as a general rule, there are no restrictions on the number of participation units that can be issued. Investors may acquire participation units through the managing entity, the bank responsible for custody or third parties. No voting rights are associated with the participation units.
13. Investors become co-owners of the assets held by the Claimant in proportion to their investments, and they are not granted the right to dispose of the Claimant's assets. Only the managing entity has the right to dispose of the assets belonging to the Claimant, and both are subject to supervision by the federal entity responsible for supervision of the provision of financial services.
14. It is the managing entity that has the right to decide, distribute or retain the income of the Claimant, with the rights of investors limited to the right to receive dividends and to request, at any time, the redemption of participation units.
15. From a tax perspective, the Claimant is an entity resident for tax purposes in Germany, subject to corporation tax in its country of residence, although it has been granted an exemption (under Section 1, paragraph 1 of the German Corporate Income Tax Code – "German Corporate Income Tax Act" – and Section 11, paragraphs 1 and 2 of the German Investment Tax Code – "German Investment Tax Act") – constituting a situation of fiscal transparency that leads to taxation in the sphere of investors – which makes it impossible for the Claimant fund to recover the tax as a credit for international double taxation or to file any application for reimbursement of taxes borne or paid abroad.
16. In the year 2016, the Claimant held shareholdings in the following companies resident in Portugal, under the custody of bank F...:
C... SGPS, S.A. 54,036.00
D... S.A. 82,220.00
E...SGPS S.A. 92,188.00
17. The Claimant, in the year 2016, in its capacity as shareholder of companies resident in Portugal, received dividends subject to taxation in Portugal, as it is the State of source of the income, which were subject to taxation by withholding at source at the rate of 25% provided for in article 87(4) of the CIT Code, in the total amount of 11,958.96 €, as follows:
18. Convinced that the aforementioned withholding at source constitutes a violation of the freedom of movement of capital enshrined in article 63 of the TFEU, the Claimant presented, on 29.12.2017, under the provisions of articles 98 and 137 of the CIT Code, 132 of the Tax Procedure Code and 22 of the Fiscal Benefits Act ("FBA"), an application for administrative review of the acts of withholding at source of CIT relating to the year 2016, in which it requested the annulment of the same on the grounds of illegality due to direct violation of European Union Law, as well as recognition of its right to reimbursement of the tax unduly borne in Portugal.
19. On 15.11.2018, the Claimant was notified of the final decision of dismissal of the Administrative Review Application, based on the understanding that it would not be the responsibility of the TA "to assess the conformity of internal rules with those of the TFEU, nor to assess their constitutionality."
1.2 Arguments of the Parties
20. The arguments brought in the proceedings focus on the question of the conformity of the application of withholding at source on dividends distributed to the Claimant with the freedom of movement of capital enshrined in article 63 of the Treaty on the Functioning of the European Union (TFEU).
21. The Claimant alleges that the assessment act violates the freedom of movement of capital of article 63 of the TFEU with arguments which are summarized below:
a) Pursuant to item c) of article 20(1) of the CIT Code, dividends are considered income resulting from financial income;
b) With regard to the domestic regime for taxation of dividends, whenever they are paid by a resident entity to a taxpayer who is also resident in Portugal, such income is subject to withholding at source on account of the final tax at a rate of 25%, in accordance with article 94(1)(c), 94(3)(b) and 94(4) of the CIT Code;
c) In the case of CIUs established in accordance with national legislation, these were, at the date of the tax events, exempt from CIT on dividends obtained, in accordance with article 22 of the FBA, as stipulated in article 22(3) of the said legal provision, "For the purpose of determining taxable income, the income referred to in articles 5, 8 and 10 of the Personal Income Tax Code are not considered";
d) Decree-Law No. 7/2015, of 13 January, reformed the regime for taxation of CIUs, amending the FBA and the Stamp Tax Code ("STC"), the new regime being applicable to income obtained after 1 July 2015;
e) Pursuant to the General Regime for CIUs (Law No. 16/2015, amended by Decree-Law No. 124/2015, of 7 July), the establishment of an investment fund in accordance with the national legal order implies its residence in Portugal, thus precluding the possibility of a CIU resident in another Member State of the European Union being established in accordance with national legislation and benefiting from the exemption provision laid down in article 22 of the FBA;
f) Pursuant to article 19(1) of the General Regime for CIUs, the establishment of a CIU in Portugal is subject to prior authorization from the Securities Market Commission (CMVM), which is responsible for verifying compliance with the multiple requirements provided therein;
g) A CIU established under foreign legislation (specifically, under the legislation of another Member State of the European Union) and subject therein to the supervisory powers of the respective regulatory entity does not meet the requirements laid down in Portuguese legislation and certainly will not be subject to supervision by the CMVM;
h) In cases of distribution of dividends by companies resident in Portugal to CIUs not established under Portuguese law, the income obtained in Portugal is subject to withholding at source at the final liberatory rate of 25%, as provided for in articles 94(1)(c), 94(3)(b), 94(4) and 87(4) of the CIT Code, not benefiting from the regime provided for in article 22 of the FBA;
i) A CIU established under the General Regime for CIUs, upon distribution of dividends from companies seated in Portugal, was subject, in the year 2016, to a more favourable tax regime than that applicable to a CIU established in accordance with the legislation of any other Member State of the European Union upon distribution of dividends from a Portuguese source;
j) The Claimant is unable to recover the withheld tax at source (Portugal) in its State of residence (Germany), by virtue of its status as a tax-exempt entity, which precludes the application of the rules of the corresponding Double Taxation Convention (DTC);
k) The TFEU provides a common set of rules for commerce and economic relations between the Member States of the EU, aimed at creating an internal market and economic and monetary union;
l) Article 18 of the TFEU establishes a general prohibition of discrimination based on nationality, a principle that is made concrete, with regard to the free movement of capital, in article 63, which prohibits all forms of discrimination based on nationality or the place of investment among entities/persons resident in Member States of the EU;
m) Annex I to Council Directive 88/361/EEC of 24 June 1988 establishes a nomenclature of capital movements, which retained the indicative value it had for the definition of the concept of capital movement (see judgment of 16 March 1999, Trummer and Mayer, C-222/97, Reports, p. I-1661, No. 21), specifying that this concept includes dividend distribution operations;
n) The distribution of dividends made by companies resident in Portugal to the Claimant is capable of being qualified as a capital movement within the meaning of article 63 of the TFEU and of Directive 88/361/EEC of 24 June 1988;
o) The distribution of dividends between Member States of the EU cannot be subject to any restrictions, nor to any discrimination based on nationality or the place of investment, since European Union Law establishes a legal framework designed to eliminate any discrimination in the movement of capital, in particular in cross-border investments (direct or indirect), as well as to eliminate any restrictions that may affect the free movement of capital;
p) From the jurisprudence of the European Union it follows that the general prohibition of discrimination, as an unjustified restriction on the freedom of establishment provided for in article 63 of the Treaty, covers both direct restrictions and indirect restrictions, including administrative measures and administrative guidelines in relation to any type of investment;
q) The CIT Code subjects to taxation both CIUs established under Portuguese law (albeit exempt) and CIUs established under the rules of other Member States – in our case, the Claimant – leaving no doubt whatsoever that CIUs are in objectively comparable situations;
r) In light of the jurisprudence of the CJEU (e.g. C 493/09, Commission v. Portugal, 06.11.2011; C-338/11 to C-347/11 – Santander Asset Management SGIIC, S.A., 10.05.2012; C-480/16 – Fidelity Funds Case, 21.06.2018) the comparability of the situation of CIUs resident in Portugal or in another Member State is clear, and it is equally clear that Portuguese legislation under analysis does not aim to establish any anti-abuse measure or prevent abusive tax practices, so the discriminatory treatment accorded to the Claimant finds no justification here;
s) There is discriminatory treatment and a clear restriction of the freedom of movement of capital prohibited by article 63 of the TFEU and article 1 of Directive 88/361, since the Claimant is subject to taxation in Portugal on the dividends obtained here, whereas CIUs established under Portuguese law are exempt on the same income;
t) The provision of the FBA challenged here is contrary to European Union Law, since it collides with the provisions of the TFEU relating to the principle of non-discrimination on grounds of nationality, as well as those relating to the free movement of capital provided for in article 63 thereof, having the effect of discouraging CIUs established in other Member States from investing their capital in companies seated in Portugal and hindering the raising of capital in Portugal;
u) The rules of European Union Law prevail over domestic law, by virtue of the principle of the supremacy of international law, as provided for in article 8 of the Constitution of the Portuguese Republic ("CRP") and article 1 of the General Tax Law ("GTL"), without the need for any act of internal transposition.
22. The TA counter-argued on the basis of the following grounds:
a) The TA cannot accept directly and automatically the interpretative guidance of the CJEU, when these do not, at their origin, have an assessment of compatibility between the provisions of Portuguese domestic law and European law;
b) The Claimant chose not to request reimbursement under article 10(2) of the DTC concluded between Portugal and Germany, which establishes a maximum limit for the tax levied in the source State of 15% of the gross amount of dividends;
c) The legislative option to "relieve" these taxpayers from taxation in CIT, by subtracting from the taxable base the income typical of CIUs, that is, capital income (article 5 of the Personal Income Tax Code), real estate income (article 8 of the Personal Income Tax Code) and capital gains (article 10 of the Personal Income Tax Code) as provided for in article 22(3) of the FBA, and also providing for exemption from municipal tax and state tax, under article 22(6) of the FBA, is inseparable from the transfer of taxation to the scope of Stamp Tax;
d) Item 29 was added to the General Stamp Tax Table, which results in taxation, for each quarter, at the rate of 0.0025% of the global net value of CIUs applied to money market instruments and deposits, and at the rate of 0.0125%, on the global net value of the remaining CIUs, in which case the taxable base may include distributed dividends;
e) Taxation in Stamp Tax applies only to CIUs covered by article 22 of the FBA, which means that it excludes CIUs established and operating under foreign legislation;
f) Dividends, in addition to not forming part of the CIT taxable base, also benefit from the exemption from withholding at source (cf. article 22(10) of the FBA);
g) The Claimant says nothing about the subjection of CIUs to autonomous tax rates provided for in article 88 of the CIT Code, provided for in article 22(8) of the FBA, which reveals the intention of the legislator to subsume dividends obtained by these undertakings under article 88(11) of the said article;
h) CIUs covered by article 22 of the FBA – as occurs with pension funds – by benefiting from partial CIT exemption, are obliged to calculate and deliver autonomous taxation, at the rate of 23%, on distributed profits, when the corresponding shareholdings are not held continuously for at least one year;
i) CIUs not covered by article 22 of the FBA, as is the case of the Claimant, are not subject to autonomous taxation on dividends;
j) Only in cases where a CIU covered by article 22 of the CIT Code obtains dividends distributed by a company resident in Portugal and the corresponding shareholdings are held continuously for a period of less than one year, the tax burden is lower than that borne by dividends paid to an Investment Fund established in Germany;
k) Investment Funds established under German legislation – until 31 December 2017 – were generally treated as transparent investment vehicles, with any income generated by them being taxable in the sphere of their investors in Germany, regardless of whether it was distributed to the investors;
l) Distributed income and imputed income (as well as interim gains) were generally classified as capital income and taxed at a fixed rate of 25%, plus a solidarity surcharge and, if applicable, a church tax, at a maximum rate of 28.625%;
m) Dividends distributed by a company resident in Portugal to an Investment Fund established under German legislation in 2016 were only subject to withholding at source, definitively, at the rate of 15% (the maximum rate established in article 10 of the DTC) and since income generated in the Fund, distributed and imputed, were only taxed in the sphere of investors, certainly the taxes borne by the Fund were also imputed to investors;
n) If the Claimant had been established under national legislation, no withholding tax in the sphere of CIT would have been levied on dividends obtained in 2016, but autonomous taxation could have been levied, at the rate of 23%, and possibly stamp tax provided for in Item 29 of the General Stamp Tax Table;
o) German investors in Investment Funds were treated as if they directly held the assets of the investment funds, therefore, any income generated in the sphere of the Fund was attributed to the investors and taxed accordingly, but, for the determination of income imputed per participation unit, Investment Funds were obliged to publish, in the electronic federal journal, daily and annual reports with tax-relevant information;
p) The tax regimes applicable to CIUs established under national legislation and CIUs established and operating in Germany are not generically comparable, since the taxation of the former comprises taxation in CIT on a taxable income that integrates marginal income and rests primarily on Stamp Tax, whereas the latter were exempt from income tax and, apparently, also from other taxes;
q) It cannot be categorically stated that a CIU established under the General Regime for CIUs upon distribution of dividends from companies seated in Portugal was subject, in 2016, to a more favourable tax regime than that applicable to a CIU established in accordance with the legislation of any other Member State of the European Union upon distribution of dividends from a Portuguese source;
r) For the purpose of comparing the tax burden on dividends earned in Portugal by CIUs covered by article 22 of the FBA and CIUs established in Germany, it is reductive and clearly insufficient to extract conclusions to consider only withholding tax and ignore other tax impositions liable to burden dividends;
s) It is not clearly demonstrated that, although the Claimant is unable to recover the tax withheld at source (Portugal) in its State of residence (Germany), due to its status as a tax-exempt entity, the part of the tax not recovered by the fund is not recovered by the investors;
t) In light of articles 63 and 65 of the TFEU, to assess whether the tax treatment applied to dividends obtained in Portugal is less advantageous than the tax treatment given to dividends obtained by CIUs covered by article 22 of the FBA and whether such differentiation is capable of affecting investment in shares issued by resident companies, one would have to compare the tax withheld at source, definitively, at the rate of 15%, and the taxes – CIT and Stamp Tax – which affect the latter, and which together may, in certain cases, exceed 23% of the gross value of dividends;
u) The tax withheld from the Claimant may possibly give rise to a foreign tax credit in the sphere of investors, a question which the Claimant also omitted or at least did not clarify;
v) It cannot be stated that objectively comparable situations are at issue, since the taxation of dividends operates according to different modalities and nothing indicates that the tax burden that burdens dividends earned by CIUs covered by article 22 of the FBA may be lower than that affecting dividends earned in Portugal by the Claimant, on the contrary, there being only an appearance of discrimination in the form of taxing dividends;
w) SANATION
23. The request for arbitral decision is timely, in accordance with article 10(1) of the LFTA.
24. The Arbitral Tribunal is properly constituted (articles 5(2), 6(1), and 11 of the LFTA), and is materially competent (articles 2(1)(a) of the LFTA).
25. The parties have legal personality and capacity and are duly represented.
26. The proceedings do not suffer from nullities and no exceptions have been raised, so it is possible to proceed to a decision on the merits of the case.
2 GROUNDS FOR THE DECISION
2.1 Facts Established as Proven
27. Based on the documents brought in the proceedings, the following facts relevant to the decision of the case sub judice are established as proven:
a) The Claimant, with tax residence in Germany, is a legal entity under German law, more specifically a CIU established in the form of a contract and not a corporation. (Documents 1, 2, 3, 4, 6);
b) The Claimant is an entity resident for tax purposes in Germany, subject to corporation tax in its country of residence, and has been granted an exemption (under Section 1, paragraph 1 of the German Corporate Income Tax Code – "German Corporate Income Tax Act" – and Section 11, paragraphs 1 and 2 of the German Investment Tax Code – "German Investment Tax Act") (Documents 3, 4, 5, 6);
c) On 11.05.2016 dividends in the gross amount of € 47,835.80 were distributed to the Claimant and subject to tax withholding in the amount of € 11,958.95 (Document 7);
d) The Claimant is the beneficiary of the income (cf. document no. 7 and 8);
e) F..., S.A., responsible for the custody of the securities, proceeded with the withholding and delivery to the TA (Document 7 and 8);
f) On 29.12.2017 the Claimant filed an application for administrative review of the acts of withholding at source of CIT relating to the year 2016, requesting their annulment on the grounds of illegality due to direct violation of European Union Law, as well as recognition of its right to reimbursement of the tax unduly borne in Portugal (cf. document no. 9);
g) On 15.11.2018, the Claimant was notified of the final decision dismissing the Administrative Review Application, based on the understanding that it would not be the responsibility of the TA "to assess the conformity of internal rules with those of the TFEU, nor to assess their constitutionality." (Document no. 10).
2.2 Facts Not Established as Proven
28. With relevance to the decision on the merits there are no alleged facts that should be considered as not proven.
2.3 Reasoning
29. With regard to the factual matters the Tribunal does not have to rule on everything that was alleged by the parties, it being incumbent upon it to select the facts that matter for the decision and to distinguish the proven facts from the unproven facts (cf. art. 123(2) of the Tax Procedure Code and article 607(3) of the Code of Civil Procedure, applicable by virtue of article 29(1)(a) and (e) of the LFTA).
30. The facts relevant to the judgment of the case are chosen and delineated in accordance with their legal relevance, which is established with regard to the various plausible solutions to the questions at issue in the dispute (v. 596(1) of the Code of Civil Procedure, by virtue of article 29(1)(e) of the LFTA).
31. Thus, the facts listed above are considered proven, with relevance to the decision.
2.4 Question to be Decided
32. The question to be decided consists of determining the conformity of the provisions of the CIT Code and the FBA in force at the date of the tax events relating to the regime for taxation of dividends earned by the CIU in question with the principles established in the TFEU, in particular with article 63 of the TFEU. In other words, the issue is whether withholding tax in CIT on dividends distributed by companies resident in Portugal to CIUs established in other Member States of the European Union (in this case Germany), while simultaneously exempting from taxation the distribution of dividends to CIUs established and domiciled in Portugal, violates, or does not violate, article 63 of the TFEU.
33. It is important to keep in mind the internal connection that article 26 of the TFEU establishes between the creation of the internal market and the freedom of movement of capital. This is presented, by article 63 of the TFEU, as a fundamental freedom of the internal market, endowed with constitutional relevance within European Union Law. As such, it enjoys normative supremacy over domestic law, and it is the responsibility of legislative and administrative public authorities to take the necessary domestic measures for transposition, execution and implementation, as the case may be, of the relevant primary and secondary law, so as to ensure the effectiveness of the free movement of capital.
34. It is the responsibility of national courts, in their capacity as broadly European courts, to ensure the supremacy of application of European Union Law, disapplying domestic law to the contrary. In this context, the importance of the interpretative role of the CJEU should be emphasized, in particular in cases of failure to act and preliminary rulings, and national courts should conform to the understanding of the provisions of the Treaties that comes to be expressed in the jurisprudence of that court, on pain of failure to comply with European Union Law and of responsibility on the part of the Member State, in line with the Francovich jurisprudence.
Freedom of Movement of Capital
35. Enshrined in article 63 of the TFEU, the freedom of movement of capital establishes an intimate relationship with the other fundamental freedoms, namely, freedom of movement of persons, freedom of establishment and freedom to provide services, differentiating itself from them in so far as it extends to third States. The freedom of movement of capital implies the prohibition of discrimination between capital of the Member State and capital from outside. Member States may regulate to some extent the movement of capital, but they cannot discriminate. When it comes to conceptually densifying the normative scope of the freedom of movement of capital, the absence of a definition of this concept is observed. For this reason, the CJEU has successively accepted and emphasized the enumerative and indicative, but not exhaustive, value of Directive No. 88/361/EEC, including its Annex I, in particular section IV, where a vast constellation of cross-border transactions and operations on certificates of participation in collective investment undertakings, which include those relevant in the present case, are subsumed under the concept. Indeed, the distribution of dividends made by companies resident in Portugal to the Claimant is capable of being qualified as a capital movement within the meaning of article 63 of the TFEU and of Directive 88/361/EEC of 24 June 1988.
36. Four fundamental aspects of legal regime should be emphasized, because they have great hermeneutic and methodological relevance. The first concerns the direct applicability of article 63 TFEU and the inherent prohibition of unjustified restrictions on the free movement of capital. The second relates to the fact that the fundamental freedoms of the internal market have the Member States as their main addressees, which must refrain from adopting legislative, administrative and judicial measures restricting the same. The third aspect concerns the relationship of complementarity – and sometimes overlap – that the freedom of movement of capital establishes with the freedoms of movement of goods and persons, freedom of establishment and freedom to provide services. The fourth aspect concerns the progressive increase in the importance of the freedom of movement of capital in the internal market, especially from the creation of the Economic and Monetary Union (EMU). One of the main objectives of the EMU is, precisely, to facilitate the free transfer of capital between the Member States in the context of the internal market and economic and financial relations with third States. The creation of an internal market presupposes, by definition, the gradual and effective abolition of the different national markets, in favour of a single internal market, so as to promote economic growth at the European scale through more easy availability of capital.
Normative Scope and Taxation
37. The normative scope of the freedom of movement of capital of article 63 of the TFEU covers several domains (e.g. physical movement of currency; investment in real property and credit securities), one of which is, precisely, the tax treatment of capital movements, which falls under the scope of its direct applicability. Although direct taxation is within the competence of the Member States, it must be exercised in compliance with European Union Law, without any discrimination based on nationality or residence.
38. The specific problem of the tax treatment of dividend distribution has occupied a central place in European jurisprudence, including not only the CJEU but also the EFTA Court. Both this latter body, in the Focus Bank case, and the CJEU, in cases such as ACT GLO, Denkavit, Amurta, Truck Center, Aberdeen Property, Commission v. Netherlands, Commission v. Portugal, Santander Asset Management and Sofina SA, to cite only some of the most relevant examples, despite some factual and legal differences in their respective decisions, point overall in the direction that it should be considered that the differentiated tax treatment of residents and non-residents – e.g. imputing to resident investors a tax credit and subjecting non-resident entities to tax withholding without imputation; withholding tax on dividends paid to non-residents and not withholding in the case of dividends paid to residents – constitutes, in principle, a violation of the freedom of movement of capital and in some cases also of the freedom of establishment, putting at issue the functioning of the internal market.
39. Although they are not always in a comparable situation, residents and non-residents are placed in that position from the moment the Member State in question, unilaterally or by convention, chooses to tax non-resident shareholders in a less favourable manner than residents, with regard to the dividends that both receive from resident companies. Particularly relevant, under the freedoms of establishment and movement of capital, is the fact that the less favourable tax treatment of non-residents dissuades them, as shareholders, from investing in the State of residence of the dividend-distributing enterprises, and also constitutes an obstacle to the raising of capital abroad by those enterprises.
40. On the other hand, European jurisprudence has insisted on the notion that a Member State cannot fail to comply with its legal obligations arising from the fundamental freedoms of the internal market by considering that another Member State will take care to compensate in some way for the unfavourable treatment generated by its own legislation. In this field the general principle applies that the freedoms of movement of capital and establishment require equal tax treatment of dividends paid to residents and non-residents by the host Member State, in the event that both are subject to dividend taxation.
41. When it comes to interpreting and applying the fundamental freedoms of the internal market, the understanding prevails, widely supported by the CJEU, according to which freedom is the rule and restrictions on freedom are the exception. The latter comprise both limitations to the exercise of freedom and discrimination in the exercise of freedom. Given the exceptional character of restrictions, they must be duly justified and subject to restrictive interpretation. The admissibility of restrictions on the free movement of capital by Member States is provided for in article 65 of the TFEU, following the lines of derogations to the freedom of movement of capital already provided for in Directive No. 88/361/EEC. The analysis of the specific case must be carried out on the basis of the normative premises outlined above.
Comparability of Situations
42. Article 65(a) of the TFEU provides for the possibility of Member States applying relevant provisions of tax law that establish a distinction between taxpayers that are not in identical situations with regard to the place of residence or the place where capital is invested. However, this provision must be attenuated by the requirement of article 65(3) of the same Treaty, according to which any exception cannot constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments, as defined by article 63. That is, restrictions have as their limit the guarantee of the freedom of movement of capital itself. It is thus important, for this purpose, to know whether the situation of investment funds resident and non-resident in Portugal is objectively comparable.
43. Recall that, in the case of investment funds resident in Germany, article 10 of the relevant DTC permits the tax withheld at source, definitively, to be limited to the rate of 15%. However, as the investment funds in question enjoy an exemption under German law, being considered fiscally transparent, they cannot benefit from that article. At first glance, one could say that this impossibility results from the fact that they enjoy a tax advantage, the exemption, which their Portuguese counterparts do not enjoy. These benefit from the exemption from withholding, while being subject to two taxes – CIT and Stamp Tax – the cumulative effect of which may, in certain cases, exceed 23% of the gross value of dividends.
44. On the other hand, the tax withheld from the Claimant may possibly give rise to a foreign tax credit in the sphere of investors individually considered. In either case, the taxation of dividends operates according to different modalities, and nothing indicates that the tax burden that burdens dividends earned by CIUs covered by article 22 of the FBA may be lower than that affecting dividends earned in Portugal by German funds. These differences may be invoked, prima facie, to support that these are not comparable situations.
45. However, at issue is whether the determination of the comparability of the situation of funds resident and non-resident in Portugal should take into account the tax situation in which investment funds non-resident in Portugal find themselves in their respective State of residence – taking into account the relevant legal regime and the DTCs between Portugal and those States – especially in the case of Member States of the European Union or members of the European Economic Area, or still take into account the concrete situation of their respective investors. Normative solutions that required to take into account, for the purpose of comparison, the concrete situation of investment funds from all 28 Member States, based on the relevant DTCs, if any, or to inquire into the tax impact of withholding and measures to mitigate economic double taxation on the tax situation of each investor individually considered would be extremely complex, even in a situation where the shareholders were themselves legal entities, each resident in a different jurisdiction.
46. In other words, if one wanted to make a determination case by case for each non-resident investment fund or individual investor, the administrative work involved, although it might compensate Member States through an increase in revenue, ends up being, taking into account the large number of investors in some funds, administratively impracticable. Both investment funds resident in Portugal and non-resident ones may have institutional and individual shareholders from all States of the European Union and from third States. Significant differences in ease and administrative practicability are at issue. Differently, if the analysis is confined to the level of the tax situation of investment funds resident and non-resident to whom dividends are distributed, a single determination will suffice.
47. In this context, what should be relevant is the direct impact that tax rules have on the activity of the funds and not on the tax situation of investors individually considered. These do not necessarily have the same nationality as the funds, since it is today extremely easy to carry out cross-border investments, and that very same fact is one of the objectives of the internal market and the freedom of movement of capital. The tracing of individual investors spread throughout the world and the application of a different set of rules to each one of them, depending on their country of domicile, would present an impracticable situation for courts which, in the future, were called upon to analyze the conformity of the national tax legislation in question with the freedoms of establishment and movement of capital.
48. The Claimant fund, resident in Germany, may have foreign investors, including Portuguese, and the funds that are fiscally resident in Portugal may have foreign investors, including German ones. The present action was not brought by the investors nor are they parties to it, nor is it permissible to bring into play the (for tax purposes) position of said investors. Article 22 of the FBA does not establish any link between the tax treatment of dividends of national origin received by CIUs – resident or non-resident – and the tax situation of its unit holders. Similarly, the TA does not assess the position of investors in CIUs established (and resident for tax purposes) in Portugal to recognize to them the tax regime provided for in article 22 of the FBA.
49. It should therefore be considered decisive, for the purpose of comparability, that Portuguese law expressly differentiates, for the purposes of withholding tax, between resident and non-resident investment funds – and not the tax situation, more or less advantageous, that non-resident funds may enjoy in their respective States of residence or indeed the individual tax situation of their respective investors. From the point of view of the Member State in question, resident and non-resident funds are in a comparable situation if both are subject to its taxation. As the CJEU emphasized in the Santander Asset Management case, when a Member State chooses to exercise its tax authority over dividends paid by resident companies solely on the basis of the place of residence of the beneficiary CIUs, the tax situation of the unit holders of the latter is devoid of relevance for the purpose of assessing whether or not the said regulation is discriminatory. It also does not seem to this Arbitral Tribunal to be relevant to ascertain the tax impact that, in the most varied individual and concrete situations, the subjection of Stamp Tax of CIUs resident in Portugal may produce in this or that investment fund, given that there is a tax subject to a logic of a patrimonial nature entirely distinct from income taxation. The criterion to be taken into account is, in the first place, that of the wording of article 22 of the FBA, and only then should other factors be considered.
50. As emphasised above, resident and non-resident funds are placed in a comparable position from the moment Portugal chooses to tax non-residents in a less favourable manner than residents, dissuading them, as shareholders, from investing in resident dividend-distributing enterprises and hindering the raising of capital abroad by these same enterprises. On the other hand, Portugal cannot fail to comply with the legal obligations arising from the fundamental freedoms of the internal market by considering that other Member States will take care, in some way, to compensate for the unfavourable treatment generated by its own legislation.
Justification of the Differentiation
51. Within the scope of the fundamental freedoms of the internal market, the problem of the so-called limits of limits assumes the greatest importance. It is thus important to inquire whether the differentiation between resident and non-resident funds, under article 22 of the FBA in the wording relevant at the date of the events, can be justified, in light of article 65(1)(b) of the TFEU, namely as a measure indispensable to prevent infringements of national laws and regulations, in particular with regard to tax and prudential supervision of financial institutions. It should be emphasized that the derogation itself provided for in that provision is further limited by article 65(3) of the same – a special rule limiting the limits – which provides that the national provisions to which article 65(1) refers "must not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments, as defined in article 63".
52. In the understanding of this Arbitral Tribunal, it would be difficult to argue convincingly in the direction of the indispensability of the differentiating measure in question. First, it is the Portuguese State that, in the exercise of its tax jurisdiction, deliberately chooses to differentiate between resident and non-resident funds, exempting the former from withholding tax on the distribution of dividends and subjecting the latter to it, placing them in a comparable situation, and then treating them differently. Now, it is not clear how such differentiation is indispensable to the prevention of tax infringements. Indeed, it is not apparent how the differentiation in question can prevent tax evasion, there being nothing in it that refers to the prevention of arrangements or structures that are merely artificial, devoid of genuine economic substance. Recall that the criterion of indispensability points to the justification of the differentiation in question only when there are no alternative means less restrictive – of limiting and differentiating – at the disposal of the Member State in question, adequate to the protection of the tax or supervisory system.
53. Second, and in line with what has just been said, it would always be possible to exempt from withholding (or reduce the amount thereof) both investment funds resident in Portugal and funds resident in other Member States and, simultaneously, give the same general tax treatment to investors resident in Portugal for dividends received from companies resident in Portugal or in other Member States, following the guidance defined by the CJEU's jurisprudence on economic double taxation. The existence of less restrictive alternatives of relatively easy legislative implementation is evidence that there is, in the case, a disproportionate and therefore illegitimate differentiation. On the other hand, the CJEU has held that a tax treatment unfavourable to a fundamental freedom cannot be considered compatible with European Union Law due to the eventual existence of other benefits. In its own words, if Member States use the freedom to tax income generated in their territory, they are obliged to respect the principle of equal treatment and the freedoms of circulation guaranteed by the primary law of the Union.
54. Moreover, and this is a third aspect relevant under article 65(1) and (3) of the TFEU, the guarantee of the coherence of the Portuguese tax system also cannot be invoked to justify the differentiation of withholding regime, in so far as the CJEU's jurisprudence requires a direct link between the tax advantage in question and the compensation of that advantage through a specific imposition, a situation that does not necessarily occur through the possible subjection of CIUs to autonomous tax rates of CIT and Item 29 of the General Stamp Tax Table, the latter being a tax of a patrimonial nature and logic.
55. The quarterly application of Stamp Tax to funds in different conditions (e.g. funds with sudden asset appreciation, followed by alienation and distribution of dividends; funds with conservative investment profile and relatively constant investment portfolio value), being dependent on the possible capitalization of income from dividends, can generate, within each of the successive fiscal years, considerable arbitrary disparities of tax treatment between the various resident investment funds and between these and non-resident ones, with evident impact on their respective cash flows. This reality is all the more significant given that, according to the CJEU's jurisprudence, the assessment of the existence of any disadvantageous treatment of dividends paid to non-residents must be carried out in relation to each fiscal year individually considered.
56. On the other hand, the application of the autonomous tax rate of 23% provided for in article 88(11) of the CIT Code – by force of article 22 of the FBA – is dependent on the eventual fact of non-permanence, continuously, of the shareholdings to which the profits correspond in the ownership of the taxpayers provided for therein during the year prior to the date of their placing at disposal, and of their non-maintenance during the time necessary to complete that period, situations of eventual and uncertain occurrence. Now, the disparities of tax treatment thus generated do not necessarily ensure the neutralization of the tax disadvantage in which non-resident funds were placed, subject to tax withholding capable of dissuading them from investing in Portugal and of dissuading those resident in Portugal from investing in investment funds from other Member States.
57. The argument of the general interest in ensuring a balanced distribution and exercise of tax authority does not hold either, and it should be understood, with the CJEU, that when a Member State has chosen not to tax resident CIUs benefiting from dividends of domestic origin, it cannot invoke the need to ensure a balanced distribution of taxing power between the Member States to justify the taxation of non-resident CIUs benefiting from such income. That is, in no case can it be understood that these are restrictions justified by reasons of public security or public order.
58. Similarly, in the fourth place, the guarantee of the effectiveness of financial supervision does not justify, by itself, the differentiation of treatment between resident and non-resident funds in Portugal. As a matter of fact, if it is true that a CIU established under foreign legislation (specifically, under the legislation of another EU Member State) and subject therein to the supervisory powers of the respective regulatory entity does not meet the requirements provided for in Portuguese legislation and certainly will not be subject to supervision by the CMVM, it is also true that the CJEU has already held, in a case involving our country, the inadmissibility of a national regulation that absolutely prevents a given fund from proving that it satisfies the requirements that would allow it to benefit from the exemption, in particular by providing the relevant supporting documents that allow the national tax authorities to verify, clearly and precisely, that these funds meet, in their State of residence, requirements equivalent to those provided for by national legislation.
59. As has been repeatedly stated by the CJEU, the freedom of movement of capital enshrined in article 63 of the TFEU should be interpreted in a broad sense and the possibilities of restriction thereto, provided for and limited in article 65 of the same Treaty, must be indispensable to the pursuit of weighty public interests, duly justified and interpreted in a restrictive manner. It is upon the Portuguese State that the burden falls of proving that its tax and financial objectives could not be pursued by alternative means less restrictive than the difference in tax treatment in question, a burden that is manifestly not met by the arguments put forward by the TA, without prejudice to recognizing its committed and competent effort in that regard. The underlying guidance followed by the CJEU's jurisprudence on the normative scope of the freedom of movement of capital, its limits and the limits of the limits, makes this probative task impossible in the specific case.
60. This Arbitral Tribunal accepts as valid the notion, repeatedly sustained by the CJEU, that the recognition of a broad margin of discretion for Member States in the field of capital regulation would render the respective freedom of movement illusory. Given the cautious language incorporated in them, it is clear that the exceptions of article 65(1)(a) and 65(3) of the TFEU should be applied only in rare and special circumstances. This is a significant barrier difficult to overcome by the Portuguese State.
61. The CJEU jurisprudence referred to above allows this Arbitral Tribunal to sustain that article 63 of the TFEU constitutes, for the case sub judice, a situation of an acte éclairé. The same, supported by multiple cases, provides sufficiently reliable parameters on the interpretation and application that should be made of the provision in question in relation to the factual and normative circumstances of the specific case. Having the CJEU rendered various decisions to the effect of judging incompatible with the freedom of establishment and movement of capital multiple differentiations in the matter of withholding tax on dividends distributed to residents and non-residents in cases with contours substantially similar to those here present – regardless of the nature of the proceedings that led to those decisions and even if the facts were not strictly identical – this Tribunal, in the exercise of the duties incumbent upon it, of asserting the primacy of European Union Law over domestic law and of following the interpretative guidance adopted by the CJEU, and in the capacity that is recognized to it as an organ for referral, concludes that there is no, in concreto, duty of preliminary ruling referral provided for in article 267 § 1(a) and § 3 of the TFEU, understanding that there is clearly a non-indispensable and unjustified restriction on the freedom of movement of capital enshrined in article 63 of the TFEU.
3.5. Request for Restitution of Amounts Paid and Indemnatory Interest
62. The Claimant makes a request for restitution of the amounts collected by the TA, as well as for payment of indemnatory interest. Pursuant to the provisions of article 24(b) of the LFTA, the arbitral decision on the merits of the claim from which no appeal or challenge lies binds the TA from the end of the period provided for appeal or challenge, and the TA must, in the exact terms of the finding in favour of the taxpayer in the arbitral decision and until the end of the period provided for spontaneous execution of the sentences of tax courts, "re-establish the situation that would exist if the tax act subject of the arbitral decision had not been practised, adopting the acts and operations necessary for that purpose", in accordance with the provisions of article 100 of the GTL [applicable by virtue of the provisions of article 29(1)(a) of the LFTA] which establishes that "the tax administration is obliged, in the event of full or partial allowance of an application for review, judicial challenge or appeal in favour of the taxpayer, to immediately and fully restore the lawfulness of the act or situation subject of the dispute, including the payment of indemnatory interest, if applicable, from the end of the deadline for execution of the decision".
63. Notwithstanding the fact that article 2(1)(a) and (b) of the LFTA uses the term "declaration of illegality" to define the competence of the arbitral tribunals operating in the CAAD, making no reference to condemnatory decisions, it has long been understood that the powers that are attributed to tax courts in judicial challenge proceedings are included in their competences, and this is the interpretation that is in tune with the sense of the legislative authorization on which the Government based itself to approve the LFTA, in which it is proclaimed, as the first guiding principle, that "the tax arbitration procedure must constitute an alternative procedural means to the judicial challenge procedure and the action for the recognition of a right or legitimate interest in tax matters".
64. Although it is, essentially, a procedure for the annulment of tax acts, the procedure of challenge admits the condemnation of the TA to payment of indemnatory interest, as can be inferred from article 43(1) of the GTL, in which it is established that "indemnatory interest is due when it is determined, in an application for review or judicial challenge, that there was an error attributable to the services from which results the payment of the tax debt in an amount greater than that legally due" and from article 61(4) of the Tax Procedure Code (in the wording given by Law No. 55-A/2010, of 31 December, to which corresponds article 61(2) in the original wording), which "if the decision recognizing the right to indemnatory interest is judicial, the period for payment is counted from the beginning of the period of its spontaneous execution".
65. Thus, article 24(5) of the LFTA, by saying that "payment of interest, regardless of its nature, is due in accordance with the provisions of the general tax law and the Tax Procedure and Process Code", should be understood as permitting the recognition of the right to indemnatory interest in the arbitration procedure. This understanding stems from the principle of effective judicial protection and the corresponding expansion of the discretionary powers of administrative and tax jurisdiction. Therefore, the Claimant has the right to be reimbursed for the tax paid and indemnatory interest by virtue of the said articles 24(1)(b) of the LFTA and 100 of the GTL, as this is essential to "re-establish the situation that would exist if the tax act subject of the arbitral decision had not been practised".
66. In the case at hand, the application by the TA of the exemption and the withholdings resulting, respectively, from articles 22 of the FBA and 94(1)(c), 94(3)(b), 94(4) and 87(4) of the CIT Code, creating a differentiation between resident and non-resident investment funds, with potential impact within each of the successive fiscal years, in violation of the freedom of movement of capital, a fundamental freedom of the internal market, enshrined in article 63 of the TFEU, in terms, moreover, that would always give rise to responsibility by the Portuguese State, in line with the Francovich jurisprudence. In its action, the TA applied the national legal rules in force, despite them violating European Union Law as it has been interpreted by the CJEU. Since the primacy of European Union Law over national law is a primacy of application and not a primacy of validity, it is incumbent upon this arbitral tribunal to disapply the national law contrary to European Union Law, declaring the respective illegality. In which case, under article 43(3) of the GTL, indemnatory interest is due from the final judgment date.
3 DECISION
This Arbitral Tribunal therefore decides as follows:
1) To declare the illegality of the tax withholding acts in question by reason of errors in the legal premises, namely, by violation of the freedom of movement of capital enshrined in article 63 of the TFEU;
2) To condemn the Respondent to the restitution of the sum of 11,958.96 € relating to CIT withholdings at source borne in Portugal on dividends distributed in the year 2016, under the provisions of articles 94 of the CIT Code and 22 of the FBA and to payment of indemnatory interest from the final judgment date, in accordance with article 43(3) of the GTL;
3) To find the request for a preliminary ruling for interpretation provided for in article 267 § 1(a) and § 3 of the TFEU not well-founded.
4 VALUE OF THE PROCEEDINGS
The value of the proceedings is fixed at 11,958.96 € in accordance with article 306(1) of the Code of Civil Procedure and article 97-A(1)(a) of the Tax Procedure and Process Code, applicable by virtue of articles 29(1)(a) and (b) of the LFTA and article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings.
5 COSTS
The arbitration fee is fixed at 918.00 € to be paid by the Respondent in accordance with articles 12(2) and 22(4), both of the LFTA, and article 4(4) of the Regulation of Costs of Tax Arbitration Proceedings and Table I attached thereto.
Let notice be given.
Lisbon, 23 July 2019
The Arbitrator
Jónatas E. M. Machado
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