Portugal Taken To Task Over Tax Treatment Of Foreign Banks

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

13 July 2006

The European Commission announced on Tuesday that it has decided to refer Portugal to the European Court of Justice under Article 226 of the EC Treaty, because Portugal has not amended 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 that it considers that the higher taxation of foreign banks restricts the freedom to provide services and the free movement of capital.

Given that Portugal has not responded satisfactorily to the Commission's Reasoned Opinion of December 2005 asking the country to change its law, the matter has been referred to the ECJ.

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