Fund Taxation Alert 2022-04

Portugal: CJEU decides that Portuguese taxation of dividends received by foreign UCITS is contrary to EU law

Portugal: CJEU decides that Portuguese taxation of dividends received by foreign UCITS is

On March 17, 2022, the Court of Justice of the European Union (‘CJEU’) rendered its decision on case C-545/19. This case concerns the compatibility of the Portuguese withholding tax levied on dividends paid by Portuguese companies to foreign undertakings for collective investment in transferable securities (‘UCITS’) with EU law. In contrast to the opinion of the Advocate General (‘AG’), the CJEU concluded that the Portuguese legislation under dispute is contrary to the free movement of capital.


The claimant is a tax-exempt UCITS established in Germany, that received dividend income from investments in Portuguese companies and it disputed the Portuguese regime on the grounds of discrimination prohibited under EU law.

In Portugal, dividends distributed by Portuguese entities to UCITS set up under Portuguese law are exempt from corporate income tax (CIT), being taxed only in the hands of the investors at the time of the distribution. However, since 2015, domestic UCITS are subject to a quarterly ‘stamp duty’ of 0.0125 percent, levied on the total net asset value of the UCITS (including, inter alia, unpaid dividends). On the other hand, foreign UCITS are subject to a final withholding tax of 25 percent to the extent that they are subject in their country of establishment to a CIT rate lower than 60 percent of that applied in Portugal. The withholding tax can be reduced under double tax treaties in force.

The decision

The CJEU observed that, based on settled case law, measures that are likely to dissuade non-residents from making investments in a Member State or to dissuade residents from making investments in other States, restrict the free movement of capital. The CJEU therefore held that the difference in treatment between domestic and foreign UCITS represents a restriction of the free movement of capital prohibited by Article 63(1) TFEU.

The CJEU then addressed the issue of whether such a restriction is justified. The court first observed that the situation of a German UCITS is comparable to that of a domestic UCITS and noted that the stamp duty levied on domestic UCITS is a tax on assets, which is not comparable to a tax on the income derived by legal entities. Furthermore, even if one would assimilate the stamp duty to a tax on dividends, domestic UCITS could avoid the payment by distributing the income immediately to investors. Additionally, the Court noted that the stamp duty applies only in cases where a minimum holding period is not met with respect to shares held in the companies distributing the dividends. In practice, it therefore impacts a limited number of cases.

Consequently, in the CJEU’s view, the fact that foreign UCITS are not subject to stamp duty does not place them in an objectively different situation compared to domestic UCITS.

The CJEU also recalled that the comparability analysis should be based on an overall assessment having regards to the aim, purpose, and content of the Portuguese legislation. The reported aim of the measures under dispute, which needs to be verified by the referring court, is to prevent economic double taxation, by transferring the tax burden from the domestic UCITS to the level of the investors. In this context, because Portugal chose to levy tax on the income received by foreign UCITS, the latter are in a situation comparable to that of UCITS established in Portugal.

Finally, the CJEU rejected the justifications brought forward by the Portuguese government, i.e. the need to safeguard the coherence of the Portuguese tax system and the need to ensure a balanced allocation of taxing rights. Regarding the latter, it referred to its previous case-law based on which this justification cannot be invoked in cases where a Member State chose not to tax domestic UCITS on the domestic dividend income received. Consequently, the Court found that the Portuguese withholding tax on dividends paid to foreign UCITS constitute an unjustified breach of EU law.

KPMG Comment

The decision from the CJEU confirms we should always look into the fundamental principles clearly laid down in Aberdeen and Santander cases and ascertain whether non-resident UCITS end up being subject to a higher tax burden compared to resident UCITS. This principle should be followed irrespective of the different taxation techniques which are defined for each group of taxpayers.

Considering this positive decision, we recommend all asset managers to (1) continue filing WHT reclaims in Portugal due to the increased chances of success, and (2) approaching the Arbitration Court in case a reclaim is rejected.

This decision also gives a positive sign for the test case which is currently pending at the Fiscal Federal Court in Germany.

A team of tax specialist and project managers can assist you with filing these WHT reclaims.

Should you have any questions/comments, do not hesitate to contact us.