Portugal Criticised Over Tax Treatment Of Foreign Banks

by Ulrika Lomas, Tax-News.com, Brussels

18 January 2006

The European Commission announced on Monday that it has sent Portugal a formal request to amend its tax legislation concerning outbound interest payments.

A withholding tax of 20% is levied on the gross interest paid by Portuguese resident borrowers to non-resident lenders. Interest paid to resident financial institutions, on the other hand, is not subject to a withholding tax, although it is subject to the Portuguese corporate income tax.

The result is that interest payments to foreign banks may sometimes be taxed more heavily than interest payments to Portuguese banks.

The Commission stated this week that it considers that the higher taxation of foreign banks restricts the freedom to provide services and the free movement of capital.

"The current rules restrict Portuguese consumers from taking out mortgage loans from banks outside Portugal" explained EU Taxation and Customs Commissioner László Kovács, adding that:

"Elimination of the restriction will make the Portuguese financial markets more competitive, to the benefit of the Portuguese consumers".

The request is in the form of a ‘reasoned opinion’ under Article 226 of the EC Treaty. If Portugal does not reply satisfactorily to the reasoned opinion within two months the Commission may refer the matter to the European Court of Justice.

Recommended