Portugal Discriminates Against Foreign Service Providers, Says EC

by Ulrika Lomas, for LawAndTax-News.com, Brussels

11 January 2007

The European Commission on Tuesday sent Portugal a formal request to amend its legislation concerning the tax rules under which non-resident entities providing services in Portugal are subject to a withholding tax based on the gross amount of their income, whereas domestic providers are taxed only on their net profits.

The Commission considers that these rules are incompatible with the EC Treaty, which guarantees the free provision of services.

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.

Portugal notes that these rules do not apply to those service providers from the majority of EU and EFTA/EEA Member States with whom Portugal has signed a Double Tax Convention (DTC). For those cases where the rules are applicable, Portugal remarks that the difference in the tax base might be offset by the difference between the rate applicable to resident entities and the final withholding tax applied to non-resident entities.

The Portuguese Government also claims that the measures are necessary to combat tax fraud.

However, the Commission considers that there is discrimination to foreign services providers from Member States who have not signed a DTC with Portugal. The Commission is of the view that discrimination exists when it cannot be ensured that differences in the level of taxation due to the differences in the tax bases are always offset by the differences in the tax rates.

It also regards the chosen measures as disproportionate since there are other methods of preventing fraud, for example by requiring the service provider to give information, by mutual assistance and information exchange with other EU Member States under EU Directive 77/799/EEC and by mutual assistance in the recovery of claims under EU Directive 2001/44/EC.

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