EC Requests Portugal To End Discrimination Against Investments Held Abroad

by Carla Johnson, Investors Offshore.com, London

29 February 2008

The European Commission has sent Portugal a formal request to amend legislation concerning the tax rules applicable to investments held in financial institutions established outside Portugal.

The income flowing from these investments may, in certain cases, be more heavily taxed than the income of investments held in Portugal.

The Commission considers that these rules are incompatible with the EC Treaty, which guarantees the free movement of capital. The request is in the form of a ‘reasoned opinion’ under Article 226 of the EC Treaty.

According to Portuguese rules, capital income derived either from national or foreign sources is subject to final withholding tax at a 20% rate.

However, for certain categories of capital income derived from national or foreign sources, which are put at their disposal by financial institutions established in Portugal, resident taxpayers can opt for taxation under the progressive tax rates.

Progressive tax rates imposed on the income of individuals range from 10.5% to 42%. Accordingly, for many people (that is to say, those whose marginal rate of tax is lower than 20%), the fiscal treatment of the income obtained from financial investment within the Portuguese territory results in a lower tax burden than that imposed on income flowing from investment held outside Portugal.

The ECJ has already stated that measures taken by Member States which are liable to dissuade its residents from making investments in other Member States constitute restrictions on the free movement of capital of Article 56 EC (Case C-513/03, Van Hilten).

If Portugal does not reply satisfactorily to the reasoned opinion within two months the Commission may refer the matter to the Court.

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