Fund Taxation Alert 2024-06

We are pleased to announce a further significant development following on from the landmark decision by the Court of Justice of the European Union in 2022, which confirmed that Portugal's withholding tax (WHT) regime on dividends paid to non-EU investment funds was contrary to the free movement of capital.

In a recent judgment, accessible here, the Supreme Administrative Court (“Court”) ruled that imposing a WHT on dividends paid to a US investment fund, while exempting dividends paid to resident investment funds, constitutes a restriction on the free movement of capital and is therefore prohibited under EU law.

The Court judgment is based on a thorough analysis of the relevant legal principles, including Article 63 of the Treaty on the Functioning of the European Union (TFEU), which guarantees the free movement of capital. The key points from the Judgment are the following:

• Dividends distributed by resident companies to non-resident are subject to withholding tax, while dividends distributed to resident are exempt from WHT tax.
• This distinction is contrary to Article 63 of the TFEU, which prohibits restrictions on the free movement of capital.
• The Portuguese government's argument that the WHT is necessary to prevent tax avoidance was not accepted by the Court.

Portugal’s WHT regime on dividends paid to non-resident investment funds is no longer tenable, and the Portuguese government should take steps to amend its legislation accordingly.

We therefore strongly advise asset managers with funds that have been subject to Portuguese WHT on dividends to carefully assess their options for reclaiming unduly paid taxes.

Our team is available to assist you in navigating the complexities of these WHT reclaims.

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