Advocate General Kokott of the Court of Justice of the European Union (CJEU), in a May 6 opinion, advised the CJEU to rule that EU free movement of capital requirements do not require member states to tax non-resident and resident investment vehicles according to the same tax system, so long as the differential tax treatment does not result in a heavier tax burden for the non-resident.
The issue is before the CJEU on a request for a preliminary ruling from a Portuguese court. Portugal levies withholding tax on dividends distributed by resident companies when those dividends are paid to non-resident collective investment undertakings that are not subject to corporate tax in their state of residence.
However, for collective investment vehicles resident in Portugal, neither withholding nor corporate tax applies. Instead, the investment vehicles are taxed quarterly via a “stamp duty” charged on net assets and the dividends are taxed when distributed under Portuguese revenue tax.
Kokott said that there would be a restriction on EU movement of capital only if the differential tax treatment of dividends treats non-resident corporations less favorably than resident ones. It is for the Portuguese court, with the facts before it, to assess whether the tax treatment in question results in a heavier tax burden for non-residents.
“Since the tax legislature normally has a certain degree of leeway in the way it structures different taxation systems,” Kokott added, “it should be sufficient if the level of taxation is not exactly identical, but only roughly comparable.”
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