Portugal must grant company at least partial tax deduction for dividends received from Tunisian or Lebanese subsidiaries, EU court rules

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by Davide Anghileri

On 24 November, the Court of Justice of the European Union gave its decision in SECIL – Companhia Geral de Cal e Cimento SA v. Fazenda Pública (Case C-464/14).

The preliminary ruling was issued in a dispute between a Portuguese company and the tax authorities of Portugal in relation to the tax treatment of the distribution of dividends made by two companies resident outside the EU, specifically one located in Tunisia, the other in Lebanon.

At the center of the dispute is the interpretation of Article 63 and 64 TFEU, Articles 31, 33, 34, 35, and 89 of the Euro-Mediterranean Agreement between the European Community and its Member States and, respectively, the Republic of Tunisia and the Republic of Lebanon.

SECIL is a Portuguese public company which is subject, in that Member State, to the taxation system for groups of companies.

In 2009, SECIL received dividends in the amount of Euro 6.288.683,39 from a related company, Ciments de Gabès, resident in Tunisia, and acquired in 2000. That same year, SECIL also received dividends in the amount of Euro 2.022.478,12 from another related company, Ciments de Sibline, resident in Lebanon and acquired in 2002.

Dividends thus received were taxed in Portugal, where no mechanism to eliminate or mitigate economic double taxation was applied.

In 2012, SECIL brought an action against that decision to deny a reverse charge of corporation tax relating to the financial year 2009 before the Tribunal Tributário de Lisbonne (Lisbon Tax Court), claiming, in essence, that the refusal to apply the rules eliminating economic double taxation in force in Portugal in the financial year 2009 to dividends distributed by Ciments de Gabès et Ciments de Sibline failed to respect the EC-Tunisia Agreement, the EC-Lebanon Agreement, and Articles 49 and 63 TFEU.

The Lisbon Tax Court decided to stay the proceedings and to refer the case to the Court of Justice for a preliminary ruling, asking whether the provisions of the TFEU relating to the free movement of capital as well as the provisions of the EC-Tunisia and EC-Lebanon agreements must be interpreted as precluding the tax treatment granted in Portugal to dividends distributed to a company established in that Member State by companies established in non-member States, namely, respectively, the Republic of Tunisia and the Republic of Lebanon.

The Court stated that the tax law regarding treatment of dividends, must be assessed in the light of the free movement of capital (Article 63 TFEU), which has an external scope, and not in the light of freedom of establishment, which does not apply to non-member States.

The Court pointed out in the instant case, double economic taxation of dividends received by a resident company is avoided or mitigated when the company paying the dividends is established in Portugal, whereas this is not the case when the company is established in a non-member State, such as the Republic of Tunisia or the Republic of Lebanon.

This different of treatment discourages companies resident in Portugal from investing capital in companies established in non-member States, the Court said, and therefore a law that allows an EU resident company to deduct, in full or in part, from its taxable amount dividends received where the dividends are distributed by a company which is resident in the same Member State, but cannot make such a deduction where the distributing company is resident in a non-member State, constitutes a restriction on the movement of capital between Member States and non-member States which is in principle prohibited by Article 63 TFEU.

However, the Court also noted that a restriction may be justifiable by the need to ensure the effectiveness of fiscal supervision and to prevent tax evasion if it is impossible for the tax administrations of the Member State to obtain information from the non-member State in which the company distributing the dividends is resident that allows the tax authorities to verify that the latter company is subject to tax.

The Court also said, though, that the refusal to grant a partial deduction in accordance with Article 46(11) of the Corporation Tax Code, in that version, cannot be justified based on the need to ensure the effectiveness of fiscal supervision where that provision may be applied to situations in which the tax liability of the distributing company in the State in which it is resident cannot be verified, a matter which it is for the referring court to determine.

Regarding the stand still clause, namely, the question of whether Article 64(1) TFEU authorized the legislation at issue even though it constitutes a restriction on the movement of capital because the restriction existed on 31 December 1993, the court concluded that Portugal waived its power when it adopted provisions which alter the logic underlying the earlier legislation.

In fact, Portugal concluded international agreements, such as the EC-Tunisia and EC-Lebanon agreements, which provides, in a provision with direct effect, for a liberalisation of a category of capital referred to in Article 64(1) TFEU. That a change in the legal framework must therefore be deemed to amount, in its effects on the possibility of invoking Article 64(1) TFEU, to the introduction of new legislation, based on a logic different from that of the existing legislation.

With respect to the EC-Tunisia and the EC-Lebanon agreements, the Court stated that the agreements have direct effect and that the Portuguese legislation constitutes a restriction on the free movement of capital, prohibited in principle as regards direct investment and, in particular, the repatriation of the proceeds of those investments under the two agreements

Moreover, again, with respect to the EC-Tunisia and the EC-Lebanon agreements, the Court also said that the refusal to grant a full or partial deduction of the dividends received from the beneficiary company’s taxable amount may be justified by overriding reasons in the public interest relating to the need to preserve the effectiveness of fiscal supervision; however, the refusal to grant such a partial deduction cannot be justified by overriding reasons in the public interest relating to the need to preserve the effectiveness of fiscal supervision, where that provision can be applied in situations in which the distributing company’s tax liability in the non-Member state, in which that company is resident, cannot be verified, a matter which it is for the referring court to determine.

Therefore, the Court concluded that the answer to be given to the referring court, concerning the consequences of the interpretation of Articles 63 to 65 TFEU and the EC-Tunisia and EC-Lebanon agreements on the case at issue in the main proceedings, is as follows:

  • Where the authorities of the Member State in which the beneficiary company is resident can obtain information from the Republic of Tunisia, the State in which the company paying the dividends is resident, allowing them to verify that the condition relating to the tax liability of the company distributing these dividends is satisfied, Articles 63 and 65 TFEU and Article 34(1) of the EC-Tunisia Agreement preclude the refusal to grant, pursuant to Article 46(1) or Article 46(8) of the CIRC, a full or partial deduction from the taxable amount of the company receiving the dividends distributed, and the Portuguese Republic may not to rely, in this respect, on Article 64(1) TFEU;
  • Articles 63 and 65 TFEU and Article 34(1) of the EC-Tunisia Agreement and Article 31 of the EC-Lebanon Agreement preclude a refusal to grant, in accordance with Article 46(11) of the CIRC, a partial deduction of the taxable amount of the company receiving the dividends where that provision can be applied in situations in which the tax liability of the companies distributing those dividends in Tunisia and Lebanon, the States in which those companies are resident, cannot be verified, a matter which it is for the referring court to determine. Moreover the Portuguese Republic cannot rely on Article 64(1) TFEU in that regard;
  • The amounts collected in breach of Union law must be repaid, with interest, to the taxpayer.

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Davide Anghileri

Davide Anghileri

PhD researcher and lecturer at University of Lausanne

Davide Anghileri is a PhD candidate at the University of Lausanne, where he is writing his thesis on the attribution of profits to PEs. He researches transfer pricing issues and lectures for the Master of Advanced Studies in International Taxation and Executive Program on Transfer Pricing.

Anghileri, a Contributing Editor at MNE Tax, previously worked as a policy advisor to the Swiss government on BEPS issues. He can be reached at danghileri@yahoo.it.

Davide Anghileri