Fund Taxation Alert 2024-02

In its AllianzGI Fonds AEVN (C-545/19) decision, the Court of Justice of the European Union (‘CJEU’) , confirmed that the Portuguese legislation, which grants exemption on dividends distributed by Portuguese entities to UCITS set up under Portuguese law, creates a discrimination against foreign UCITS, that are subject to a final withholding tax of 25% (or 35% in certain cases). CJEU came to the conclusion that the Portuguese legislation under dispute was contrary to the free movement of capital. 

Following this decision by CJEU, several similar cases have now received positive decisions by the Portuguese Arbitration Court, 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”).

For further details please check our previous KPMG Alert: Fund Taxation Alert 2022-04 - Newsletter

The Supreme Administrative Court (“Court”) Judgment No. 7/2024, published in the Portuguese Official Gazette of 26 February 2024, reiterates the discriminatory treatment applicable to non-resident investment funds. In its reasoning, the Court indicated that: 

1) The tax status of an investment fund shareholders is irrelevant for determining whether it is discriminatory for an EU country to tax dividends based solely on the place of residence of the fund; 

2) Article 63 of the Treaty on the Functioning of the European Union (TFEU) prohibits an EU country from imposing withholding tax on dividends paid to a non-resident investment fund while exempting dividends paid to a resident investment fund;  

3) The Portuguese domestic law disregards principles set forth by TFEU by limiting the exemption regime to resident investment funds, excluding foreign investment funds that are constituted in accordance with their domestic legislation in the EU. 

Unfortunately, despite having cases with the same outcome, either at the CJEU level or the Supreme Administrative Court,  no updates are expected to occur in the Portuguese tax legislation during 2024. Therefore, we will continue to see the intervention of the Arbitration Court, by applying 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.

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, the two following situations regarding the limitation period are possible:

• 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.