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April 25, 2022

Portugal | European Court of Justice decision on withholding tax applicable on dividends distributed to nonresident Undertakings for Collective Investment discussed

Executive summary

The European Court of Justice (ECJ) has held that European Union (EU) Law is to be interpreted as prohibiting an EU Member State (in the instant case, Portugal) from imposing withholding tax (WHT) on dividends distributed by a resident company to a nonresident Undertaking for Collective Investment (UCI), to the extent that the legislation of that EU Member State provides a Corporate Income Tax (CIT) exemption, and thus WHT dismissal, on dividends distributed by the same companies to a resident UCI.

Accordingly, claim opportunities to request a refund of CIT unduly withheld may be available to foreign UCIs that have received dividends from Portuguese companies.

Detailed discussion

The ECJ has already ruled in several past court cases (related with other EU jurisdictions), that it is contrary to EU Law to impose less favorable tax treatment on dividends distributed to nonresident entities, when compared to the tax treatment on dividends distributed to resident entities.

Recently, the Portuguese tax framework applicable to UCIs was also analyzed in a case1 submitted to the ECJ for determination.


In July 2015, Portugal established, through Decree Law n.º 7/2015, of 13 January, the tax regime for Portuguese UCIs. Under this tax regime, investment income (e.g., dividends, interest, royalties), rental income and capital gains obtained by resident UCIs is not considered for CIT purposes, provided that certain conditions are met.

Nevertheless, nonresident UCIs receiving the same type of income in Portugal do not benefit from this tax regime. Instead, as a general rule, they are subject to and not exempt from CIT in Portugal.

The Portuguese tax framework applicable on dividends distributed by Portuguese companies to resident and nonresident UCIs may be summarized as follows:

  • Resident UCIs: dividends are exempt from CIT at the level of the UCI, thus under the Portuguese tax law the distribution of dividends is not subject to WHT.
  • Nonresident UCIs: dividends distributed to nonresident entities (including UCIs operating under a foreign regulation similar to that applicable to Portuguese UCIs), are subject to CIT in Portugal. Such taxation operates through WHT at a rate of 25% (or 35% if the beneficial owner of the bank account where the income is paid is not disclosed or when the beneficiary is resident in a tax haven jurisdiction). Potentially, this WHT rate may be reduced under a Double Tax Treaty (DTT) or potentially eliminated under the domestic WHT exemption transposing (and enlarging the scope of) the EU Parent-Subsidiary Directive as explained below.

    As a general rule, the WHT on dividends paid to nonresident entities may only be waived if the conditions to apply the participation exemption are met (inter alia, at least 10% of the share capital or voting rights of the distributing company is held, directly or directly and indirectly, by the recipient entity for at least a consecutive period of one-year and the recipient entity is subject to CIT in the respective country of residence).

    Also, the Portuguese participation exemption regime on dividends distributed to nonresident entities does not apply on a worldwide basis. Instead, it is limited to foreign recipients with residence in an EU Member-State, in a European Economic Area (EEA) Member State with an exchange of information agreement with Portugal, or in a country that has signed a DTT with Portugal and such treaty provides an exchange of information clause in similar terms as within the EU.

    Finally, it should be noted that if the dividend is not eligible for WHT relief, the WHT due and levied is a final payment of the tax due in Portugal, although in some cases EU and EEA entities may potentially claim a partial refund of the WHT if certain conditions are met.

Case overview

The plaintiff in the case is a nonresident UCI, set-up and located in Germany (also, managed by an Alternative Investment Fund Manager located in Germany). During 2015 and 2016, this entity held participations in the share capital of several Portuguese resident companies.

Upon the distribution of dividends by the Portuguese companies, the nonresident UCI was ultimately subject to WHT at the rate of 15% (under the applicable DTT). However, this WHT could not be recovered in Germany since, according to the German tax law, the UCI was exempt from CIT in Germany (thus no tax credit was available) and no reimbursement of the WHT paid abroad (i.e., in Portugal) would be available.

In 2017, the plaintiff filed a petition before the Portuguese tax authorities (PTA) to claim back the WHT levied in 2015 and 2016. This petition was refused by the PTA and, in 2019, the plaintiff filed a case before the Portuguese Arbitral Court on tax matters.

The plaintiff claimed that UCIs that are set-up and operate according to the Portuguese law are subject to a more favorable tax regime in comparison with foreign UCIs, stating that dividends distributed by Portuguese resident companies to Portuguese UCIs are exempt from CIT in Portugal (consequently, not subject to WHT).

In summary, the plaintiff claimed that the Portuguese tax framework foresees a discriminatory treatment to nonresident UCIs – when compared to Portuguese UCIs – and such discrimination is not admissible under EU law, namely, asserting that it foresees a restriction on the free movement of capital that is not compatible with EU Law.

The Portuguese Arbitral Court suspended the court proceedings and presented several questions to the ECJ to determine if there is an incompatibility with the EU law.

Position of the ECJ

The ECJ stated that, in principle, all EU Member States shall avoid restrictions to the free movement of capital, which includes any provision that may discourage nonresident entities to invest in an EU Member State.

In the case at hand, the ECJ stated that the discrimination between the tax treatment applicable to resident and nonresident UCIs is clear, since the former is exempt from CIT (thus not subject to WHT), while the latter is subject to CIT (through WHT that is a final tax paid in Portugal). Therefore, the court concluded that this unfavorable tax treatment might dissuade nonresident UCIs to invest in Portugal.

The ECJ also found that EU Law does not exclude the right of EU Member States to apply a different tax treatment between taxpayers that are not in an identical situation (namely on the grounds of tax residency or the place in which the capital is invested). However, this right shall be construed in a strict manner and, therefore, shall not be interpreted as if any difference in the tax treatment between resident and nonresident entities is compatible with EU law.

The ECJ stated that any difference of treatment shall be based on either:

  • Situations that are not objectively comparable
  • An important reason of general interest

Although the PTA tried to sustain that the situation of resident UCIs and nonresident UCIs was not objectively comparable, this position was not upheld by the ECJ. Apart from this, the PTA also ended up sustaining that that there was a reason of general interest to justify such difference, which the ECJ also did not agree.

In this context, the ECJ ruled that the provision on the free movement of capital shall be interpreted as prohibiting an EU Member State (in this case Portugal) from imposing WHT on dividends distributed by a resident company to a nonresident UCI, to the extent that the legislation of that EU Member State provides a CIT exemption (consequently, not subject to WHT) on dividends distributed to a resident UCI.


Under the grounds that the current Portuguese CIT treatment over dividends distributed by Portuguese companies to nonresident UCIs is discriminatory when compared with the tax treatment applicable to resident UCIs, nonresident UCIs may file an Administrative Claim with the PTA to request the refund of any WHT levied.

As the free movement of capital applies beyond the EU, there are arguments for UCIs resident in third party jurisdictions to also be able to claim the Portuguese WHT.

It is worth mentioning that currently the Portuguese legislature has not amended the applicable domestic provisions. It also has not issued any administrative instruction with their position; thus the PTA may likely reject this claim. If this is the case, the PTA's decision may be challenged either before the Portuguese Judicial Courts or the Portuguese Arbitral Court.


For additional information with respect to this Tax Alert, please contact the following:

Ernst & Young S.A., International Tax and Transaction Services, Lisbon

Ernst & Young LLP (United States), Portuguese Tax Desk, New York



1AllianzGI-Fonds AEVN (C-545/19).