CAAD 96/2019-T: Withholding Tax on Dividends to Non-Resident CIUs Violates EU Free Movement of Capital

ARBITRAL TAX JURISPRUDENCE

Case No. 96/2019-T

Date of Decision: 2023-11-03

Corporate Income Tax (IRC)

Value of Claim: € 10,031.69

**Subject Matter: IRC - Withholding tax on dividends distributed to non-resident Collective Investment Undertakings (CIUs) in Portugal – Reform of arbitral decision (attached to decision).
Replaces the arbitral decision of 29 October 2019.

ARBITRAL DECISION

Claimant: A...

Respondent: Tax and Customs Authority

Following Judgment No. 93/19.7BALSB delivered on 28 September 2023 by the Supreme Administrative Court and having become final on 12 October 2023, a new arbitral decision is hereby issued.

SUMMARY:

Article 63 TFEU must be interpreted as opposing a Member State's legislation by virtue of which dividends distributed by companies resident in that State to a non-resident Collective Investment Undertaking (CIU) are subject to withholding at source, whereas dividends distributed to a resident CIU are exempt from such withholding.

I – REPORT

On 13 February 2019, A..., Tax Identification Number..., with registered office in..., ..., ... ..., Germany, hereinafter referred to as "Claimant," requested the constitution of an arbitral tribunal and filed an application for arbitral decision pursuant to subparagraph a) of paragraph 1 of Article 2 and subparagraph a) of paragraph 1 of Article 10 of Decree-Law No. 10/2011 of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to only as LRATM), seeking a declaration of illegality of withholding tax acts on Corporate Income Tax (IRC) applied to the payment of dividends for the year 2016, in the amount of €10,031.69 (ten thousand, thirty-one euros and sixty-nine cents), and consequently, the annulment of the challenged assessments and the payment of compensation interest.

The Claimant is represented in these proceedings by its attorneys, Dr. B..., Dr. C..., Dr. D..., and the Respondent, the Tax and Customs Authority (hereinafter referred to as TA), is represented by jurists, Dr. E... and Dr. F....

Having verified the formal regularity of the application pursuant to subparagraph a) of paragraph 2 of Article 6 of the LRATM, the undersigned was appointed as arbitrator by the President of the Ethics Committee of CAAD.

The Arbitrator accepted the appointment, and the Arbitral Tribunal was constituted on 26 April 2019, at the registered office of CAAD, located at Avenida Duque de Loulé, No. 72-A, in Lisbon, as evidenced by the notice of constitution of the arbitral tribunal attached to these proceedings.

The Claimant, on 18 May 2019, filed with the proceedings the certified translation of documents written in a foreign language that it had declared its intention to submit when filing the request for constitution of the arbitral tribunal.

On 3 June 2019, after being duly notified, the Respondent filed its Reply and attached the administrative file.

On 25 July 2019, the Claimant filed a motion requesting suspension of the arbitral proceedings, motivated by the fact that another arbitral proceeding raising the same questions had been referred for preliminary ruling to the Court of Justice of the European Union.

On 26 July 2019, the Claimant filed a motion with proof of payment of the subsequent arbitral fee attached.

On 8 October 2019, the Respondent filed a motion indicating that it had no objection to the request for suspension of proceedings filed by the Claimant.

There being no need for additional evidence production beyond that already incorporated in the proceedings, with no apparent need for the parties to amend their respective procedural submissions, and the proceedings containing all elements necessary for rendering a decision, for reasons of procedural economy and expedition, the prohibition on futile acts, under the principle of tribunal autonomy in case management, and procedural simplification and informality, on 18 October 2019, by order, the Tribunal deemed it appropriate to dispense with the holding of the meeting provided for in Article 18 of the LRATM, as well as the submission of written submissions.

In that order, the Tribunal further determined to render a decision by the deadline set forth in Article 21, paragraph 1 of the LRATM.

On 24 October 2019, the Claimant filed a response motion to the order mentioned above, in which it renewed the request for suspension of these proceedings.

On 29 October 2019, a decision was rendered in these proceedings and in the sense of dismissing the claim filed.

Dissatisfied with the tenor of the arbitral decision, the Claimant appealed by writ of error to the Supreme Administrative Court, to which case number 93/19.7BEALSB was assigned.

On 28 September 2023, the Supreme Court of Justice rendered a Judgment in the proceedings identified above, thereby granting the appeal and, consequently, annulling the arbitral decision identified above.

II. THE CLAIMANT'S POSITION

The Claimant sustains its claim, in summary, as follows:

The Claimant supports the request for a declaration of illegality of withholding tax acts on Corporate Income Tax (IRC) applied to the payment of dividends for the year 2016, in the amount of €10,031.69 (ten thousand, thirty-one euros and sixty-nine cents), and consequently, the annulment of the challenged assessments, based on violation of EU law and constitutional law.

Indeed, according to the Claimant, in the present case, there is a manifest violation of the principle of non-discrimination on grounds of residence and nationality as regards freedom of movement of capital, provided for in Article 63 TFEU and Article 1 of Directive 88/361/EEC of 24 June 1988. "With regard to the domestic taxation system for dividends, when the same are paid by a resident entity to a taxpayer also resident in Portugal, such income is subject to withholding at source as a final tax at a rate of 25% (see Articles 94, paragraph 1, subparagraph c), 94, paragraph 3, subparagraph b) and 94, paragraph 4 of the CIRC). However, in the case of CIUs established in accordance with national legislation, they were, at the time of the relevant facts, exempt from IRC on dividends obtained, pursuant to Article 22 of the Tax Benefits Statute (…)" a treatment different from that afforded to CIUs resident in another Member State of the European Union, as is the case here, taxing the income in question, contrary to EU principles.

The Claimant further states that "(...) the distribution of dividends between EU Member States cannot be subject to any restrictions, since European Union Law establishes a legal framework designed to eliminate any discrimination in the movement of capital, namely in cross-border investments (direct or indirect), as well as to eliminate any restrictions that may affect the free movement of capital."

The Claimant further contends that "the provision of the Tax Benefits Statute under analysis in this pleading (Article 22) also violates the CRP, specifically Article 8 of the CRP, which establishes the principle of the primacy of EU Law over domestic law," which translates into "(...) manifest non-conformity with the principle of the primacy of EU Law, which materializes in a violation of our constitutional text."

III. THE RESPONDENT'S POSITION

In its Reply, the Respondent argued, in summary, as follows:

The Respondent begins its response by arguing, immediately, that "(...) it is not the responsibility of the TA to assess the conformity of domestic norms with those of the TFEU, nor to assess their constitutionality (...) it must act in accordance with law, and cannot, as a rule, refrain from applying a tax norm contained in a legal instrument due to alleged unconstitutionality, unless the Constitutional Court has already declared that unconstitutionality with binding force, pursuant to Article 281 of the CRP. And, on the other hand, the TA cannot accept, directly and automatically, the interpretive guidance of the CJEU when such guidance does not, at its origin, address the assessment of compatibility between Portuguese domestic law provisions and European law."

Regarding the tax regime applicable to CIUs established and operating in Portugal and those established and operating in Germany, the Respondent argues that those covered by Article 22 of the Tax Benefits Statute are subject to Stamp Duty taxation pursuant to item 29 of the General Stamp Duty Table, resulting in "taxation, for each quarter, at the rate of 0.0025% of the total net value of CIUs invested in money market instruments and deposits, and at the rate of 0.012% on the total net value of other CIUs, and in this case, the taxable base may include distributed dividends."

The Respondent further notes that "(...) these CIUs are equally obligated to settle and remit autonomous taxation applicable to distributed profits when the corresponding equity interests are not held, without interruption, for at least one year," something that does not occur with CIUs, such as the Claimant, not covered by Article 22 of the Tax Benefits Statute. The Respondent considers that "the regimes applicable to CIUs established under national legislation and those established and operating in Germany are not generally comparable, because the taxation of the former comprises taxation in IRC on taxable profit that includes marginal income and relies essentially on Stamp Duty, whereas the latter were exempt from income tax and, apparently, also from other taxes."

As regards the alleged violation of EU law, the Respondent argues that "the conclusion that the taxation regime of CIUs covered by Article 22 of the Tax Benefits Statute is contrary to European Union Law and violates the TFEU provisions relating to the principle of non-discrimination on grounds of nationality, nor those relating to freedom of movement of capital, is deemed to be superficial and simplistic, insofar as it is based only on paragraph 3 of that provision, ignoring paragraph 8 of the same rule, as well as taxation in Stamp Duty."

With respect to the alleged violation of Article 8 of the CRP, the Respondent states that "it should be noted that what is at issue is not compliance with European Law norms contained in Regulations or Directives, but only decisions of the CJEU which underlie specific facts and provisions of the legal-tax systems of other Member States."

And concludes that "the withholding at source effected on dividends paid to the Claimant complies with the provisions of national legislation and the convention for the avoidance of double taxation concluded between Portugal and Germany, and should be maintained in the legal order."

IV. PRELIMINARY MATTERS

The Tribunal is competent and properly constituted pursuant to subparagraph a) of paragraph 1 of Article 2 and Articles 5 and 6, all of the LRATM.

The parties have legal personality and capacity, are duly parties, are properly represented, and the proceedings are free of nullities.

V. MATERIAL FACTS

For the conviction of the Arbitral Tribunal regarding the established facts, the documents attached to the proceedings and the administrative file were relevant.

Furthermore, it should be noted that the Tribunal does not need to rule on everything alleged by the parties; rather, it is the Tribunal's duty to select the facts relevant to the decision and to distinguish between proven and unproven matters, all in accordance with Article 123, paragraph 2, of the Tax Procedure and Process Code (CPPT) and Articles 607, paragraphs 3 and 4 of the Code of Civil Procedure (CPC), applicable pursuant to Article 29, paragraph 1, subparagraphs a) and e), of the LRATM.

Thus, the facts relevant to the judgment are selected and determined in function of their legal relevance, which is established with regard to the various plausible solutions of the legal question(s) in issue (see Article 511, paragraph 1, of the former CPC, corresponding to Article 596 of the current CPC).

Accordingly, having regard to the positions adopted by the parties in their respective submissions (application for constitution of the tribunal and Claimant's submissions and Respondent's Reply), the documentary evidence attached to the proceedings and the testimonial evidence produced at the hearing held, the following facts are established as proven and relevant to the decision:

ESTABLISHED FACTS

With relevance to the decision, the following facts are established as proven:

1. The Claimant is a legal entity under German law, more specifically a Collective Investment Undertaking (CIU), established in contractual form, commonly referred to as an investment fund – undisputed fact;

2. The Claimant is a taxpayer for purposes of Corporate Income Tax (IRC), is non-resident, has no permanent establishment, for tax purposes, in Portugal, and has its tax residence in Germany – see Doc. No. 1 attached with the application for arbitral decision;

3. The Claimant is managed by an investment fund management entity, G..., with registered office in Germany – see Doc. No. 2 attached with the application for arbitral decision;

4. The Claimant is an open-ended autonomous fund based on a contract between the management entity "G...", its investors and the bank responsible for the custody of securities – see Doc. No. 3 attached with the application for arbitral decision;

5. The Claimant, not being a CIU established in corporate form (Investment Company), but merely in contractual form (investment fund), does not legally take the form of a commercial company, and therefore, under German law, is not subject to any obligation to register in the German Commercial Register – see doc. No. 4 attached with the application for arbitral decision;

6. Given the rules to which the Claimant is subject, the management entity thereof invests the capital deposited by investors in its own name, with the assets belonging to the Fund being in a regime of joint ownership with the respective investors – undisputed fact;

7. The Fund's assets are separated from the other assets of the management entity, pursuant to applicable regulatory law, and are thus protected against actions brought against investors, the management entity and the bank responsible for custody – see doc. No. 5 attached with the application for arbitral decision;

8. The Claimant and its respective management entity are entities subject to supervision by the Bundesanstalt für Finanzdienstleistungsaufsicht ("BaFin"), a federal entity responsible for the supervision of Germany's financial sector – see Doc. No. 6 attached with the application for arbitral decision;

9. The Claimant holds various financial investments in Portugal, consisting of the holding of equity interests in companies resident for tax purposes in Portugal – undisputed fact;

10. In 2016, the Claimant, in its capacity as shareholder of companies resident in Portugal, received dividends subject to taxation in Portugal – undisputed fact;

11. In 2016, the entity responsible for the custody of securities held in Portugal was H...; – undisputed fact;

12. The dividends received by the Claimant during the year 2016 were subject to taxation by final withholding at source at the rate of 25%, provided for in Article 87, paragraph 4 of the CIRC – undisputed fact;

13. The Claimant held various equity interests in companies resident in Portugal – undisputed fact;

14. The investors of the Investment Funds were treated, until the end of the 2017 financial year, as if they held the assets of the investment funds directly.

15. The income generated within the funds was attributed proportionally to investors, with taxation occurring upon distribution of fund income or redemption/sale of participation units.

16. The funds were responsible for payment on account of tax due by investors upon such operations, on their behalf.

17. In the year 2016, the Claimant received dividends and bore tax in Portugal by withholding at source in the following amounts – see docs. No. 7 and 8 attached with the application for arbitral decision:

1. The Claimant filed a refund request for tax withheld at source in excess of the rate provided for in the Agreement for the Avoidance of Double Taxation (DTT) concluded between Portugal and Germany (corresponding to 10%), by submitting Form 21 RFI – undisputed fact;

2. The Claimant, in 2016, bore in Portugal, after partial refund effected under the DTT between Portugal and Germany, the total amount of €10,031.69 (ten thousand, thirty-one euros and sixty-nine cents);

3. On 29 December 2017, the Claimant filed a gracious appeal against the withholding tax acts on IRC for the year 2016, which was processed at the Lisbon Tax Authority under case number REC.../18 – see doc. No. 10 attached with the application for arbitral decision;

4. On 15 November 2018, the Claimant was notified, by letter DFLISBOA... of 12.11.2018 from the Lisbon Tax Authority, of the final decision by the Chief of the Administrative Justice Division of the Lisbon Tax Authority, under delegation of authority, dismissing the gracious appeal identified above – see doc. No. 10 attached with the application for arbitral decision;

5. On 13 February 2019, the Claimant filed the present application for arbitral decision with the Center for Administrative Arbitration – CAAD.

UNPROVEN FACTS

As stated, regarding the established factual matters, the tribunal does not need to rule on everything alleged by the parties; rather, it is the tribunal's duty to select the facts relevant to the decision and to distinguish between proven and unproven matters, as provided in Article 123, paragraph 2, of the CPPT and Articles 607, paragraphs 2, 3 and 4 of the Code of Civil Procedure, applicable pursuant to Article 29, paragraph 1, subparagraphs a) and e), of the LRATM.

Thus, the facts relevant to the judgment were, as stated above, selected and determined in function of their legal relevance, with no other factual allegations being relevant to the proper resolution of the dispute.

III – THE LAW

I – PRELIMINARY ISSUE: REQUEST FOR SUSPENSION OF THESE ARBITRAL PROCEEDINGS VIA PRELIMINARY RULING

The Claimant in the present arbitral application requested, on a subsidiary basis, the referral of these proceedings to the Court of Justice of the European Union for a preliminary ruling on the question of the incompatibility of Article 22 of the Tax Benefits Statute with European Union Law, pursuant to Article 267 TFEU.

Subsequently, on 25 July 2019, by motion filed with this Arbitral Tribunal, the Claimant requested suspension of the proceedings due to acceptance of the preliminary ruling of the same contested questions in proceedings No. 93/2019-T, regarding those at issue here.

It occurs that this Arbitral Tribunal understands that it should not suspend these proceedings or refer them for preliminary ruling to the CJEU for the reasons set forth below and explained hereinafter.

Article 267 TFEU provides that: "[t]he Court of Justice of the European Union shall have jurisdiction to give preliminary rulings concerning:

a) the interpretation of the Treaties;

b) the validity and interpretation of acts adopted by the institutions, bodies, offices or agencies of the Union.

Where such a question is raised before any court or tribunal of a Member State, that court or tribunal may, if it considers that a decision on the question is necessary to enable it to give judgment, request the Court to give a preliminary ruling thereon.

Where such a question is raised in a case pending before a court or tribunal of a Member State whose decisions are not subject to a right of appeal provided by domestic law, that court or tribunal shall bring the matter before the Court.

(...)"

Indeed, and as is well known, the Arbitral Tribunal is considered a court or tribunal of a Member State for purposes of the aforementioned legal provision. Judgment of the CJEU of 12.06.2014, Case No. C-377/13.

In November 2012, Recommendations were published in the Official Journal of the European Union addressed to national courts on the initiation of proceedings for preliminary rulings (2012/C 338/01), the text of which follows from the adoption, on 25 September 2012 in Luxembourg, of the new Rules of Procedure of the Court of Justice (OJ L 265 of 29.9.2012, p. 1).

Indeed, in replacement of the information note on the presentation of requests for preliminary rulings by national courts (OJ C 160 of 28.5.2011, p. 1), these Recommendations are intended to reflect the innovations introduced by these Rules, which may have an impact both on the very principle of a preliminary ruling to the Court of Justice as well as on the modalities of such referrals.

Of relevance to these proceedings, this Arbitral Tribunal considers it important to emphasize points 7, 12, 13 and 18 of the aforementioned Recommendations.

Accordingly, point 7 of the aforementioned recommendations provides that:

"[t]he role of the Court in proceedings for a preliminary ruling is to interpret or assess the validity of European Union law and not to apply that law to the factual situation underlying the main proceedings. That task falls to the national judge; consequently, the Court does not rule on questions of fact raised in the context of the dispute in the main proceedings nor on any divergences of opinion as to the interpretation or application of the rules of national law."

Point 12, in turn, advises that a preliminary ruling referral to that Court should not be made when:

i. jurisprudence on the matter already exists (and when the possibly new framework does not raise any real doubt as to the possibility of applying that jurisprudence to the specific case); or

ii. when the correct way to interpret the legal rule in question is unambiguous.

Point 13, notably, provides that, "a national court or tribunal may, in particular when it considers itself sufficiently enlightened by the case-law of the Court, decide for itself the correct interpretation of European Union law and its application to the factual situation of which it is seised."

Finally, one should consider point 18 of the same recommendations, according to which "[a] national court or tribunal may make a request for a preliminary ruling from the moment at which it considers that a decision on the interpretation or the validity is necessary in order to enable it to give its judgment."

Now, the fact is that in the case at hand, no doubt arises for this Arbitral Tribunal regarding the interpretation of the norms applicable to the specific case, considering itself sufficiently enlightened by the jurisprudence emanating from the CJEU and the Portuguese higher courts, such that, being in a position to decide for itself the correct interpretation of European Union law and its application to the factual situation of these proceedings, it deems appropriate to refuse the preliminary ruling referral.

Accordingly, and having regard to the recommendations enunciated above, the suspension of these proceedings and the referral thereof for preliminary ruling to the CJEU are deemed not to be warranted.

II – ISSUE FOR DECISION

The disputed question in these proceedings is whether withholding at source under the IRC on dividends distributed by companies resident in Portugal to CIUs established in another Member State of the European Union – in the specific case, in Germany – while simultaneously exempting from taxation CIUs established and domiciled in Portugal, is illegal due to violation of EU law and constitutional law.

Now, let us examine this.

The Claimant in the present application for arbitral decision, A..., Tax Identification Number ..., Collective Investment Undertaking (CIU) established in the Federal Republic of Germany, filed on 2017/12/29, with the Lisbon Tax Authority, a gracious appeal, pursuant to Articles 137 of the Corporate Income Tax Code (CIRC) and 132 of the Tax Procedure and Process Code (CPPT), challenging the withholding of IRC as a final tax from May and June of the year 2016, processed through payment documents No.... and ..., in the total amount of €16,719.48 (sixteen thousand, seven hundred nineteen euros and forty-eight cents).

Such withholdings were applied to dividends at the rate of 25%, pursuant to subparagraph c) of paragraph 1, subparagraph b) of paragraph 3 and paragraph 4, all of Article 94, and paragraph 4 of Article 87, both of the CIRC.

Invoking paragraph 2 of Article 10 of the Convention on the Avoidance of Double Taxation of Income and Capital concluded between Portugal and the Federal Republic of Germany, approved for ratification by Article 1 of Law No. 12/72 of 13 June, hereinafter referred to only as the Convention, the Claimant would subsequently present, following those withholdings, the declaration Form 21 - RFI, seeking refund of Portuguese tax on dividends on shares resulting from application of a rate higher than the 15% provided for in the Convention, reason for which the gracious appeal would be aimed only at the difference between the 25% rate applied and the aforementioned 15%, in the amount of €10,031.69 (ten thousand, thirty-one euros and sixty-nine cents).

The immediate object of the present application for arbitral decision is the dismissal of said gracious appeal, dated 8 November 2018, authored by, by delegation, the Chief of Administrative Justice of the Lisbon Tax Authority, with the legal grounds briefly summarized below and which were transposed into the present arbitral application (see point 11, pp. 2-3) and the immediate object is the assessment of the legality of withholding at source under the IRC, with the legal grounds briefly summarized below and which were transposed into the present arbitral application.

According to the Claimant, Article 22, paragraph 1, of the Tax Benefits Statute, as amended by Article 2 of Decree-Law No. 7/2015 of 13 January, in not exempting from final withholding at source dividends distributed by resident companies to CIUs resident in other Member States of the European Union, while paragraph 3 exempts that withholding when such dividends are distributed to CIUs acting and operating in accordance with national legislation, violates Article 63, paragraph 1, TFEU (Treaty on the Functioning of the European Union).

This provision prohibits all restrictions on movements of capital not provided for in Chapter 4 of Title IV of the Treaty, when carried out between Member States of the European Union or between them and third countries.

Such restriction would only be legitimate, or, that is, the restriction on capital movements resulting from the withholdings challenged would only be legitimate, if the Claimant had the possibility of, in the State of residence, fully recovering the tax paid in Portugal – a matter of extreme importance in the assessment of the specific case.

The fact that, in the Federal Republic of Germany, the Claimant benefits from an exemption, pursuant to Section 1, paragraph 1, of the German Corporate Income Tax Code - "German Corporate Income Tax Act" - and Section 11, paragraph 1.2 of the German Investment Tax Code ("German Investment Tax Act"), would, however, prevent it, under Article 10, paragraph 2, of the Convention, from recovering in that country the tax paid through refund or alternatively as a tax credit for double taxation, of taxes borne or paid abroad.

The withholdings in question in their entirety would thus, in the understanding of the Claimant, be contrary to the principles established in European Union Law, in particular with Article 63 of the TFEU and the primacy of EU law over domestic law expressed in Article 8, paragraph 4, of the CRP.

Thus, national legislation expressly grants to CIUs established and operating in Portugal the possibility of benefiting from a regime that allows them to receive dividends completely free from taxation, provided merely that they are established in accordance with national legislation.

But, on the other hand, it does not allow CIUs established in other Member States of the European Union to benefit from an identical exemption, with the result that dividends distributed to them are subject to effective and final IRC taxation of 25%, not recoverable in the country of residence.

This withholding can only be reduced, and not completely eliminated, to the amounts provided for in Conventions on the Avoidance of Double Taxation, when these are applicable (in the specific case to 15%).

This has the effect of reducing the dimension of the question at hand to only a 10% withholding.

These withholdings should thus, to the extent not recoverable either in the source State, in which only the tax resulting from application of the 15% rate provided for in the Convention can be recovered, or in the State of residence, where the Claimant benefits from a general income tax exemption, be annulled, but in case of doubt of the Arbitral Tribunal, it should resort to the mechanism of preliminary ruling regulated in Article 267 TFEU. A question that the Claimant raised through the motion it filed on 25 July 2019 and which is attached to the proceedings.

According to the Respondent's Reply, reproducing the grounds for dismissal of the gracious appeal, the prohibition, imposed by Article 63, paragraph 1, TFEU, of all restrictions on movements of capital between Member States and between Member States and third countries, not provided for in Chapter 4 of Title IV of Part III, does not prevent, pursuant to Article 65, paragraph 1, TFEU, Member States from applying, in the exercise of their fiscal sovereignty, the pertinent provisions of their domestic law, which distinguish between taxpayers not in an identical situation as regards their place of residence or the place where their capital is invested, provided that, pursuant to paragraph 3, the measures and procedures adopted for that purpose do not constitute a means of arbitrary discrimination, nor a concealed restriction on the free movement of capital and payments, as defined in Article 63 TFEU.

The Respondent would further note that it is not the responsibility of the TA to assess the conformity of domestic tax norms with TFEU doctrine, nor to assess their constitutionality, since, as results from the Judgment of the Plenary of the Supreme Administrative Court (SAC), Case No. 0564/18.2BALSB of 30/01/2019, its activity is subordinate to law, and it cannot refrain from applying any legal norm on grounds of unconstitutionality, unless the Constitutional Court has already declared that unconstitutionality with binding general force, pursuant to subparagraph a) of paragraph 1 of Article 281 of the CRP.

The Respondent would add, in its Reply, that for purposes of characterizing as discriminatory the taxation of dividends distributed to non-resident investment funds, the subtraction from the taxable base of the IRC of dividends distributed to CIUs established in accordance with national legislation should be associated with the subjection of these to item 29 of the General Stamp Duty Table (GSDT), which covers only investment funds acting and operating under national legislation, covered by Article 22 of the Tax Benefits Statute and not, as is obvious, investment funds acting and operating under foreign legislation, even if in other Member States of the European Union.

Such subjection would be the counterpart to the exemption from IRC of distributed profits, provided for in paragraph 3 of Article 22 of the Tax Benefits Statute.

Indeed, pursuant to that item, on the total net value of investment funds acting and operating in accordance with national legislation, a quarterly taxation applies at the rate of 0.0025%, when they invest exclusively in money market instruments and deposits, and in the remaining cases, where the taxable base may include distributed dividends, at the rate of 0.0125%.

The conclusion of a discrimination prohibited by paragraph 3 of Article 63 TFEU is not compatible, in turn, with the subjection, determined by paragraph 8 of Article 22 of the Tax Benefits Statute, in accordance with necessary adaptations, of CIUs acting and operating in accordance with national legislation, to the rates of autonomous taxation provided for in Article 88 of the CIRC, including the 23% rate provided for in paragraph 11 of that latter legal rule.

Here are included distributed profits from entities subject to IRC paid to taxpayers benefiting from complete or partial exemption, including in this case, income from capital, when the equity interests to which the profits relate have not remained in the ownership of the same taxpayer, without interruption, for one year prior to the date when they are placed at the taxpayer's disposal and are not to be maintained for the time necessary to complete that period.

As is obvious, according to the Respondent, CIUs not covered by Article 22 of the Tax Benefits Statute, such as the Claimant, are not subject in the national territory to autonomous taxation on dividends, which also undermines the conclusion of discriminatory taxation, since such autonomous taxation also has a compensatory function for the exemption from IRC of distributed profits to investment funds established and operating in accordance with national legislation.

On the other hand, even if that were not the case, any resulting economic double taxation of participants in CIUs authorized and operating in accordance with German legislation, arising from the subjection to withholding at source of dividends distributed in Portugal and the income of the CIUs paid or made available in the Federal Republic of Germany, would be neutralizable through the mechanism provided for in Article 10, paragraph 2, of the Convention, and does not support the argument invoked by the Claimant that such neutralization would be opposed by the general exemption enjoyed by CIUs established and operating in accordance with German legislation.

In fact, investment funds established under German legislation, until 31 December 2017, and thus including the 2016 financial year in which the withholdings at source challenged here took place, were characterized as transparent investment vehicles, with the consequent taxation exclusively in the sphere of investors and the consequent exemption of the funds. In the absence of a Memorandum describing the legal regime to which the Claimant is subject, prepared by WTS Steuerberatungsgesellschaft GmbH in its capacity as "legal advisers" of the Claimant in Germany, such information was extracted by the Respondent from the Deloitte tax@hand website, accessible through: www.taxathand.com/article/9698/Germany/2018/Taxation-of-investment-fund-income-revised.

That is, German investors in the Investment Funds were treated, until the end of the 2017 financial year to which the withholdings challenged relate, as if they held the assets of the investment funds directly.

The income generated within the funds was thus attributed proportionally to investors, with taxation occurring upon distribution of fund income or redemption/sale of participation units. The funds were responsible for payment on account of tax due by investors upon such operations, on their behalf.

To that extent, the exemption of income tax on investment funds would not prejudice the neutralization of economic double taxation in the sphere of the holders of participation units, pursuant to Article 10, paragraph 2, of the Convention, reason for which the regime of Article 22 of the Tax Benefits Statute would not violate the principle of non-discrimination, as previously defined, and the dismissal of the gracious appeal of the withholdings effected should be maintained.

In this manner, given the absence of any relevant doubt as to the non-discriminatory character of the taxation in question, application of the mechanism of preliminary ruling provided for in Article 267 TFEU would not be justified.

These are the arguments advanced by the parties in defense of their position regarding the disputed issue in these proceedings. Let us then examine who is correct:

It should be noted, preliminarily, that the present application for arbitral decision does not fall within the doctrine of the aforementioned Judgment of the SAC of 30/01/2019, drawn up in this case with regard to the inexigibility of compensation interest when taxation is based on norms only subsequently declared unconstitutional.

It is true that only constitutional provisions regarding rights, freedoms and guarantees are directly applicable and binding on public and private entities, pursuant to paragraph 1 of Article 18 of the CRP.

This means "by way of analogy" that public entities, except where rights, freedoms and guarantees are at stake, cannot refuse to apply law on grounds of unconstitutionality, and public officials and agents who do so incur disciplinary liability.

That prohibition does not, however, cover courts, including arbitral courts, which, under the model of diffuse review of the constitutionality of norms regulated in Article 280 of the CRP, may refuse, without limitations, to apply norms that they consider unconstitutional.

On the other hand, what is at issue is not the unconstitutionality of any norms, but the application of domestic law allegedly incompatible with European Union Law.

Paragraph 3 of Article 8 of the CRP consecrates the principle opposite to that resulting from paragraph 1 of Article 18 of the CRP, by providing that norms emanated by the competent bodies of international organizations of which Portugal is a member apply directly in the domestic order, provided such is established in their constituent treaties.

EU law in force thus prevails over incompatible domestic law, which, to the extent of that incompatibility, is ineffective, without need for prior judicial declaration of that ineffectiveness.

Such direct effect encompasses all public and private entities.

When taxation is based on domestic law incompatible with directly applicable EU norms, as is the case here, there is thus, in the case of the cited Judgment of the SAC, no ground for inexigibility of compensation interest provided that the other legal prerequisites are met.

Now,

What is at issue in the present application for arbitral decision is the existence of an alleged discriminatory taxation of dividends paid to investment funds established and operating in the Federal Republic of Germany, subject, unlike dividends paid to investment funds established in accordance with national legislation, to withholding at source, and, confirming such discriminatory taxation, whether it can be, or cannot be, neutralized by the mechanism provided for in Article 10, paragraph 2, of the Convention concluded between Portugal and Germany.

Article 63, paragraph 1, TFEU prohibits all restrictions on movements of capital between Member States and between Member States and third countries within the said Chapter IV of Title IV of Part III, with paragraph 2 extending that prohibition to all restrictions on payments between Member States and between Member States and third countries.

According to the Judgment of the Court of Justice of the European Union (CJEU) of 21/06/18, Case C-480/16, the measures prohibited by Article 63, paragraph 1, TFEU, as restrictions on movements of capital, are all those susceptible to dissuading non-residents from investing in a Member State, or dissuading residents of that Member State from investing in other Member States (also in that sense, Judgment of 10/05/2012, Cases C‑338/11 to C‑347/11, and other jurisprudence cited therein).

Although the jurisprudence of the Court of Justice does not directly constitute a source of law, it decisively contributes to the uniformization of the application of EU Law, such that the interpreter-applier, absent justified grounds, cannot fail to consider it, on pain of compromising the purpose of uniformization underlying the mechanism of preliminary ruling.

There is no doubt that, pursuant to paragraphs 1 and 3 of Article 22 of the Tax Benefits Statute and Article 94 of the CIRC, CIUs resident in Portugal and CIUs resident in another Member State are subject, as regards dividends distributed to them by companies resident in Portugal, to differentiated treatment.

Indeed, according to those legal norms, dividends distributed by companies resident in Portugal to non-resident CIUs are subject to withholding at source.

In contrast, dividends distributed by those companies to CIUs established and operating in accordance with national legislation are not subject to withholding at source.

By subjecting to withholding at source, in the general terms, dividends paid to non-resident CIUs, but exempting dividends distributed to resident CIUs, the national regulation would thus, in light of the criteria underlying the aforementioned EU jurisprudence, without prejudice to any subsequent neutralization, proceed to unfavorable treatment of dividends paid to non-resident Collective Investment Undertakings in Securities (CIUSs).

Such unfavorable treatment is abstractly susceptible of dissuading, on one hand, non-resident CIUs from investing in companies with registered office in Portugal and, on the other hand, domestic investors from acquiring equity interests in non-resident CIUSs.

Thus, one could consider that the regulation in question constitutes a restriction on the free movement of capital, abstractly prohibited by Article 63 TFEU.

However, subparagraph a) of paragraph 1 of Article 65 TFEU, by providing that Article 63 does not prejudice the right of Member States to apply the pertinent provisions of their tax law, which establish a distinction between taxpayers not in an identical situation as regards their place of residence or the place where their capital is invested, expressly admits the derogation from the prohibitions on capital movements between Member States or between Member States and third countries, to which Article 63 TFEU refers.

This provision, given its exceptional character, must be, according to the cited jurisprudence, subject to restrictive interpretation.

Accordingly, it cannot be interpreted to mean that any tax legislation that entails a distinction between taxpayers based on the place of residence or the Member State in which they invest their capital is automatically incompatible with the TFEU.

Indeed, the derogation provided for in subparagraph a) of paragraph 1 of Article 65 TFEU is framed by the subsequent paragraph 3, which provides that the national provisions referred to in paragraph 1 of that norm must not constitute a means of arbitrary discrimination, nor a concealed restriction on the free movement of capital and payments, as defined in Article 63.

Thus, for the difference in treatment to be considered compatible with the Treaty provisions on the free movement of capital, it is necessary that it address objectively comparable situations or be justified by an overriding reason of general interest, the only cases in which it should not be considered discriminatory nor covertly restrictive of the free movement of capital and payments.

Now, the CJEU rendered, on 17 March 2022, a Judgment in proceedings No. C-545/19, whose understanding is reported and adopted in the present proceedings, since this is one of the most recent judicial guidance on the question at hand and regarding which this Tribunal has no reason or ground to decide differently.

As noted above, what is at issue in the present application for arbitral decision is the existence of an alleged discriminatory taxation of dividends paid to investment funds established and operating in the Federal Republic of Germany, subject, unlike dividends paid to investment funds established in accordance with national legislation, to withholding at source, and, confirming such discriminatory taxation, whether it can be, or cannot be, neutralized by the mechanism provided for in Article 10, paragraph 2, of the Convention concluded between Portugal and Germany.

Article 63, paragraph 1, TFEU prohibits all restrictions on movements of capital between Member States and between Member States and third countries within the said Chapter IV of Title IV of Part III, with paragraph 2 extending that prohibition to all restrictions on payments between Member States and between Member States and third countries.

According to the Judgment of the Court of Justice of the European Union (CJEU) of 17/03/2022, Case C-545/19, the measures prohibited by Article 63, paragraph 1, TFEU, as restrictions on movements of capital, are all those susceptible to dissuading non-residents from investing in a Member State, or dissuading residents of that Member State from investing in other Member States (also in that sense, Judgment of 10/05/2012, Cases C‑338/11 to C‑347/11, and other jurisprudence cited therein).

Although the jurisprudence of the Court of Justice does not directly constitute a source of law, it decisively contributes to the uniformization of the application of EU Law, such that the interpreter-applier, absent justified grounds, cannot fail to consider it, on pain of compromising the purpose of uniformization underlying the mechanism of preliminary ruling.

There is no doubt that, pursuant to paragraphs 1 and 3 of Article 22 of the Tax Benefits Statute and Article 94 of the CIRC, CIUs resident in Portugal and CIUs resident in another Member State are subject, as regards dividends distributed to them by companies resident in Portugal, to differentiated treatment.

Indeed, according to those legal norms, dividends distributed by companies resident in Portugal to non-resident CIUs are subject to withholding at source.

In contrast, dividends distributed by those companies to CIUs established and operating in accordance with national legislation are not subject to withholding at source.

By subjecting to withholding at source, in the general terms, dividends paid to non-resident CIUs, but exempting dividends distributed to resident CIUs, the national regulation would thus, in light of the criteria underlying the aforementioned EU jurisprudence, without prejudice to any subsequent neutralization, proceed to unfavorable treatment of dividends paid to non-resident Collective Investment Undertakings in Securities (CIUSs).

Such unfavorable treatment is abstractly susceptible of dissuading, on one hand, non-resident CIUs from investing in companies with registered office in Portugal and, on the other hand, domestic investors from acquiring equity interests in non-resident CIUSs.

Thus, one could consider that the regulation in question constitutes a restriction on the free movement of capital, face to the orientation of the most recent EU jurisprudence, specifically prohibited by Article 63 TFEU.

Otherwise, let us consider:

The aforementioned CJEU Judgment, whose orientation we follow here, concerns, similarly to what occurs with the case at hand, "(...) a request for annulment of acts that effected withholding at source on dividends paid to the applicant in the main proceedings by companies established in Portugal as well as the compatibility with European Union law of national legislation that reserves the possibility of benefiting from the exemption of such withholding at source to CIUs established and operating in accordance with Portuguese legislation or whose management entity operates in Portugal through a permanent establishment." (see paragraph 32 of the judgment).

In that judgment, the CJEU considered that:

"37 In the case at hand, it is an established fact that the tax exemption provided for by the national legislation at issue in the main proceedings is granted to CIUs established and operating in accordance with Portuguese legislation, whereas dividends paid to CIUs established in another Member State cannot benefit from that exemption.

38 By effecting withholding at source on dividends paid to non-resident CIUs and by reserving to resident CIUs the possibility of obtaining exemption from that withholding at source, the national legislation at issue in the main proceedings accords unfavorable treatment to dividends paid to non-resident CIUs.

39 That unfavorable treatment may dissuade, on one hand, non-resident CIUs from investing in companies established in Portugal and, on the other, resident investors in Portugal from acquiring equity interests in CIUs and constitutes, accordingly, a restriction on the free movement of capital prohibited, in principle, by Article 63° TFEU (see, by analogy, Judgment of 21 June 2018, Fidelity Funds and Others, C‑480/16, EU:C:2018:480, nos. 44, 45 and jurisprudence cited)."

In fact, and contrary to what is alleged by the Respondent, the EU judgment in reference considered that non-resident CIUs were in a comparable situation to resident CIUs in national territory, clarifying that:

"43 In order to assess the comparability of the situations at issue, the referring court asks, on one hand, whether the situation of the holders of equity interests should be taken into account in the same way as that of the CIUs and, on the other, whether the possible existence, in the Portuguese tax system, of certain taxes to which only resident CIUs are subject is relevant.

(...)

57 Therefore, the fact that non-resident CIUs are not subject to stamp duty and to the specific tax provided for in Article 88°, paragraph 11, of the Corporate Income Tax Code does not place them in an objectively different situation in relation to resident CIUs with respect to the taxation of dividends of Portuguese origin.

(...)

61 In the case at hand, as regards, in the first place, the object, content and purpose of the Portuguese regime concerning the taxation of dividends, whether at the level of the CIUs themselves or of their holders of equity interests, it results both from the Reply of the referring court to the request for information from the Court of Justice as well as from the Reply of the Portuguese Government to the written questions directed to it in the context of the present proceedings that the aforementioned regime was designed in a logic of "exit taxation," that is, CIUs that are established and operating in accordance with Portuguese legislation are exempt from income tax, with the burden that this latter represents being transferred to holders of equity interests who have the status of residents, with holders of equity interests who are non-residents being exempt from it.

(...)

67 Having the Portuguese Republic opted to exercise its tax jurisdiction over the income earned by non-resident CIUs, the latter are accordingly in a situation comparable to that of CIUs resident in Portugal as regards the risk of economic double taxation of dividends paid by companies resident in Portugal (see, by analogy, Judgment of 21 June 2018, Fidelity Funds and Others, C‑480/16, EU:C:2018:480, no. 56 and jurisprudence cited).

(...)

69 Now, a non-resident CIU may have holders of equity interests who have their tax residence in Portugal and over whose income that Member State exercises its power of taxation. From this perspective, a non-resident CIU is in a situation objectively comparable to that of a CIU resident in Portugal (see, by analogy, Judgment of 21 June 2018, Fidelity Funds and Others, C‑480/16, EU:C:2018:480, no. 61)."

Further noting that:

"73 "(...) the criterion of distinction to which the national legislation at issue in the main proceedings refers, which concerns solely the place of residence of the CIUs, does not allow for the conclusion of the existence of an objective difference in situations between resident and non-resident undertakings.

74 Having regard to all the foregoing, it must be concluded that, in the case at hand, the difference in treatment between resident and non-resident CIUs concerns situations objectively comparable."

… to conclude and declare that:

"Article 63° TFEU must be interpreted as opposing a Member State's legislation by virtue of which dividends distributed by companies resident in that State to a non-resident Collective Investment Undertaking (CIU) are subject to withholding at source, whereas dividends distributed to a resident CIU are exempt from such withholding."

Now, the aforementioned CJEU Judgment, whose orientation we follow, is absolutely transparent as regards the matter at hand, clearing up any doubt that might exist thereon, such that, considering:

on one hand, that a national court "may itself decide the correct interpretation of European Union law and its application to the factual situation of which it is seised";

on the other, that "(...) it has been uniformly understood by jurisprudence and is a corollary of the obligation to make a preliminary ruling provided for in Article 267 of the Treaty on the Functioning of the European Union (which replaced Article 234 of the Treaty of Rome, former Article 177), [that] the jurisprudence of the CJEU has binding character for national courts when it concerns questions of European Union Law (in this sense, the following can be seen:

Judgments of the Supreme Administrative Court: of 25.10.2000, case no. 25128, published in Appendix to the Diário da República of 31.01.2003, p. 3757; of 07.11.2001, case no. 26432, published in Appendix to the Diário da República of 13.10.2003, p. 2602; of 07.11.2001, case no. 26404, published in Appendix to the Diário da República of 13.10.2003, p. 2593)." (see arbitral decision rendered in case No. 821/2021-T, of 26 April 2022);

on the other, still, that the aforementioned CJEU Judgment of 17.03.2022, rendered in case No. C-545/19, concluded in the sense that "[a]rticle 63° TFEU must be interpreted as opposing a Member State's legislation by virtue of which dividends distributed by companies resident in that State to a non-resident collective investment undertaking (CIU) are subject to withholding at source, whereas dividends distributed to a resident CIU are exempt from such withholding,"

… and lastly that, it is established in our legal order, through the provision of Article 8, paragraph 4, of the Constitution of the Portuguese Republic, the primacy of European Union Law over Domestic Law, which provides that "the provisions of the treaties governing the European Union and the norms emanated from its institutions, in the exercise of their respective competencies, apply in the domestic order, in accordance with the terms defined by European Union law, with respect for the fundamental principles of the rule of law and democratic state,"

… this Arbitral Tribunal understands that, in the case at hand, the discriminatory treatment sanctioned by EU law is verified, such that, it declares the illegality, based on incompatibility with Article 63 TFEU, of Article 22, paragraph 1, of the Tax Benefits Statute, of the withholdings at source and the dismissal of the gracious appeal, for being affected by the defect of violation of law, with the other legal consequences, namely refund of the tax paid unduly.

In light of the foregoing, having regard to the fact that we are faced with a violation of EU law, with respect to the withholding at source of dividends earned by the Claimant, the granting of the present arbitral application is determined, with nothing further to be assessed regarding the other defects invoked by the Claimant.

III – COMPENSATION INTEREST

The Claimant further petitions that the right to compensation interest be recognized, on the basis of error attributable to the administration.

Article 43, paragraph 1, of the General Tax Law and Article 61 of the Tax Procedure and Process Code provide that compensation interest is due when it is determined in a gracious appeal or judicial challenge that there was error attributable to the administration resulting in payment of a tax debt in an amount higher than legally due.

Error attributable to the administration is deemed to exist when the error is not attributable to the taxpayer and rests on erroneous assumptions of fact not attributable to the taxpayer.

Now, resulting from the tax acts challenged, the obligation to pay tax in an amount higher than legally due, compensation interest is due in accordance with legally provided terms, the legislator presuming, in these cases in which annulment of the assessment occurs, that there was prejudice in the sphere of the taxpayer by reason of having been deprived of the patrimonial amount that had to be delivered to the State due to an illegal assessment. Consequently, the taxpayer has the right to such indemnification, independent of any allegation or proof of prejudice suffered.

In the present case, it will be unquestionable that, following the establishment of the illegality of the assessment acts, there will be occasion for refund of the tax by force of the provision of Article 43, paragraph 1, of the General Tax Law, and Article 100 of the General Tax Law passing, necessarily by there the re-establishment of the "situation that would exist if the tax act subject to the arbitral decision had not been performed."

Similarly, it will be undoubted that the illegality of the act is attributable to the Tax Authority, which autonomously performed it illegally.

As regards the concept of "error," it has been understood that only in cases of annulments based on defects relating to the tax legal relationship will there be occasion for payment of compensation interest, with such right not being recognized in cases of annulments due to procedural or formal defects.

Accordingly, being at issue the application, by the TA, of the exemption and withholdings resulting from Article 22 of the Tax Benefits Statute and Articles 94, paragraph 1, subparagraph c), paragraph 3, subparagraph b) and paragraph 4 and Article 87, paragraph 4 of the CIRC, respectively, causing a differentiation of treatment between resident and non-resident investment funds, in violation of the freedom of movement of capital, established in Article 63 TFEU, notwithstanding the TA having applied the legal norms in force, the fact is that we are faced with a defect of violation of substantive law, such that the Claimant has the right to compensation interest, in accordance with subparagraph c) of paragraph 3 of Article 43 of the General Tax Law, from the date on which this Decision becomes final.

DECISION

In accordance with the foregoing, the following is decided:

1. To dismiss the request for preliminary ruling for interpretation provided for in Article 267 § 1 subparagraph a) and § 3 of the CJEU.

2. To grant the application for arbitral decision filed by the Claimant, and consequently, to annul the assessment acts for withholding at source of Corporate Income Tax applied to the payment of dividends for the year 2016, in the amount of €10,031.69 (ten thousand, thirty-one euros and sixty-nine cents);

3. To condemn the Respondent to the restitution of the amount of €10,031.69 (ten thousand, thirty-one euros and sixty-nine cents) relating to withholding at source under the IRC borne in Portugal on dividends distributed in the year 2016.

4. To grant the request for payment of compensation interest.

VALUE OF THE CASE

The value of the case is set at €10,031.69 (ten thousand, thirty-one euros and sixty-nine cents) pursuant to Article 97-A, paragraph 1, a), of the CPPT, applicable by force of subparagraphs a) and b) of paragraph 1 of Article 29 of the LRATM and paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

COSTS

Costs to be borne by the Respondent in accordance with Article 22, paragraph 2 of the LRATM, Article 4 of the RCPAT, and Table I attached hereto, which are set at the amount of €918.00.

Let notification be made.

Lisbon, 3 November 2023

The Arbitrator

(Jorge Carita)

CAAD: Tax Arbitration
Case No.: 96/2019-T
Subject Matter: IRC - Withholding tax on dividends distributed to non-resident CIUs in Portugal.

Replaced by the arbitral decision of 03 November 2023.