A positive outcome for EU UCIs wishing to claim refunds of withholding tax on Portuguese dividends

The European Court of Justice (ECJ) recently issued a favorable ruling in relation to withholding tax (WHT) imposed on Portuguese-sourced dividends paid to a German UCITS (Undertaking for Collective Investment in Transferable Securities). 

The decision, made in the AllianzGI‑Fonds AEVN case (C-545/19), stems from a preliminary ruling request made by a Portuguese tax arbitration tribunal.

According to Portuguese tax law, dividends paid to a non-resident undertaking for collective investment (UCIs) are subject to WHT, while the same type of income is not taxed when paid to certain resident UCIs. The ECJ ruled that this differentiated treatment is incompatible with the principle of free movement of capital. This change should now allow other UCIs, resident in or outside the EU, to claim back the WHT suffered on dividends distributed by Portuguese resident companies.

The facts

Under Portuguese law applicable to the relevant tax years, dividends, real estate income and capital gains received by UCIs, irrespective of their legal form, incorporated and operating under Portuguese law, are not included in the calculation of the taxable profit for corporate income tax (CIT) purposes, nor is there a WHT at source upon distribution to them by resident companies. However, this regime is not available for UCIs incorporated under a foreign law, meaning that non-resident UCIs will suffer WHT on dividends paid by companies resident in Portugal.

Between 2015 and 2016, AllianzGI‑Fonds AEVN, an open-end UCITS set up in accordance with German law and having its seat in Germany, received dividends from Portuguese resident companies which triggered WHT at a standard rate of 25%. Although AllianzGI‑Fonds AEVN was able to recover part of the tax withheld under the Double Taxation Treaty entered into between Portugal and Germany, it filed an administrative claim before the Portuguese tax authorities on the grounds of a breach of EU law and for its right to reimbursement of the tax unduly levied in Portugal to be recognized. Following the refusal to follow-up on that request, AllianzGI‑Fonds AEVN submitted an application for arbitration to an arbitration tribunal, which is an alternative route to standard tax courts available in Portugal. Despite the existence of consistent case law in favour of non-Portuguese UCIs, the arbitrators decided to suspend the case and to refer to the ECJ for a preliminary ruling on whether the Portuguese law is in line with the fundamental principles of EU law.         

The Decision of the ECJ

Contrary to the Advocate-General’s opinion and to what the tax authorities argued, the ECJ found that UCIs incorporated under foreign law (non-resident UCIs) and UCIs set up in accordance with Portuguese law (resident UCIs) are in comparable situations, and the different treatment is thus exclusively based on the place of residence of the UCIs. This represents an inadmissible discrimination that infringes the fundamental principle of free movement of capital as anchored in the Treaty on the Functioning of the EU. To be noted that a reference was made to previous judgements such as the Santander Asset Management SGIIC (C‑338/11 to C‑347/11) and the Fidelity Fund (C‑480/16) cases, amongst others.

The ECJ held that none of the valid justifications commonly accepted to restrict the freedom of movement of capital, notably the preservation of coherence of the tax system and the need to preserve a balanced allocation of taxing powers between Member States, should be applicable in the case at hand.

The ECJ ultimately confirmed that the fact to submit dividends paid to non-resident UCIs to WHT, whereas dividends distributed to resident UCIs are exempt from such WHT, is contrary to the principle of free movement of capital.

Practical Considerations

Domestic courts, including arbitration tribunals, should be bound by the interpretation of the ECJ in the AllianzGI‑Fonds AEVN case. The same applies to the tax authorities, which should no longer be able to argue that the principle of legality prevents them from disregarding domestic law in presence of breach of EU law.

EY strongly encourages Luxembourg UCITs, either in the form of a SICAV or FCP, to claim the refund of CIT charged on dividends distributed by companies resident in Portugal. The refund of WHT requires filing a mandatory administrative claim within two years from the date by which WHT must be handed over by the withholding agent (i.e., the 20^th day of the month following the one in which the payment occurs) to the authorities.