Fund Taxation Alert 2022-06

Portugal – The way forward for investment funds to reclaim WHT

Portugal – The way forward for investment funds to reclaim WHT

As mentioned on our publication of March 31, 2022, the Court of Justice of the European Union (‘CJEU’) rendered its decision on case C-545/19, confirming that the Portuguese legislation under dispute is contrary to the free movement of capital.

The CJEU decision

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

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 impact of the decision

Following this decision by the CJEU, several similar cases that were on hold with the Portuguese Arbitration Court have now received positive decision, meaning that the funds are entitled to receive a refund on unduly paid WHT. These are final decisions that cannot be appealed by the Portuguese Tax Authorities (“PTA”).

From a procedural point of view, once the decision has been communicated to the PTA, they have a deadline of 30 working days to execute it, counted from the date that such a decision becomes final and unappealable. If not executed, there is a 1-year deadline to file a subsequent special claim specifically intended at a forced execution of the Court’s decision to receive the WHT and late interest payment. In practice, once these special claims are filled and the Tax Authorities are notified, the payments are processed in 2 or 3 months. 

Regarding the implications of the case in changes to the Portuguese legislation, at least until the end of 2022, we do not expect changes to occur because this point has not been addressed in the current Law Budget discussions for 2022. However, it is expected that the Arbitration Court will apply the same reasoning and decision for subsequent cases that have the same characteristics, without the need to ask for a preliminary decision from the European Court of Justice. Therefore, we can expect a reduced timeframe from the moment of filling the appeal to the final decision.

KPMG recommendation

As such our recommendation to all asset managers is to (1) continue filing WHT reclaims in Portugal due to the increased chances of success, and (2) approach the Arbitration Court in case a reclaim is rejected.

To file the WHT reclaims there are two situations regarding the time limitation period, meaning that:

  • for an administrative reclaim the deadline is 2 years from the date that the withholding tax is legally due to be surrendered before the Tax Authorities  (e.g. to challenge withholding tax levied on March 25, 2021, which is legally due to be surrendered before the Tax Authorities on April 20, 2021, ends on April 20, 2023) 
  • for an extraordinary administrative reclaim the time limitation period is 4 years counted from payment date (e.g., the 4 years deadline for challenging withholding tax levied on March 25, 2021, ends on March 25, 2025).

In practice, this means that if the 2 years’ time limit period to file an ordinary administrative reclaim has expired, it is possible to directly file an extraordinary administrative reclaim. However, this is only necessary to the extent that the later was dismissed by the PTA on the grounds that the 2 years’ time limit to challenge the WHT was not met.

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.