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Brussels, 11 July 2006

Direct taxation: Commission decides to take Portugal to Court over discriminatory taxation of foreign banks

The European Commission has decided to refer Portugal to the European Court of Justice under Article 226 (2) of the EC Treaty, because Portugal has not amended its tax legislation concerning outbound interest payments. A withholding tax of 20 % is levied on the gross interest paid by Portuguese resident borrowers to non-resident lenders. Interest paid to resident financial institutions, on the other hand, is not subject to a withholding tax, although it is subject to the Portuguese corporate income tax. The result is that interest payments to foreign banks may sometimes be taxed more heavily than interest payments to Portuguese banks. The Commission considers that the higher taxation of foreign banks restricts the freedom to provide services and the free movement of capital. Portugal has not responded satisfactorily to the Commission's Reasoned Opinion of December 2005 requesting Portugal to change its law (see IP/06/42).

Under Article 80 (2) (c) of the Portuguese Corporate Income Tax Code (CIRC), a withholding tax of 20 % is applicable to the gross interest paid by Portuguese resident borrowers to non-resident lenders. Double taxation agreements may provide for a lower rate, but in any event the non-resident bank is not allowed a deduction for the costs it incurred in raising the capital lent.

By contrast, interest paid to resident financial institutions is subject only to the Portuguese corporate income tax. This means that they pay tax only on the net interest they receive, that is the interest received minus the cost (interest) paid in order to acquire the necessary capital.

In many instances foreign institutions therefore pay a higher tax in Portugal than Portuguese institutions on the interest they receive on loans made to Portuguese borrowers. The higher taxation restricts foreign institutions from cross-border lending, and discourages Portuguese borrowers from taking out loans from foreign providers. These taxation rules therefore constitute an infringement of Article 49 of the EC Treaty, guaranteeing the freedom to provide services.

The Portuguese system also constitutes a restriction to the free movement of capital provided for in Article 56 of the EC Treaty.

In its Green Paper 'Mortgage Credit in the EU' of July 2005 (see IP/05/971), the Commission has already indicated that it will take action against national mortgage taxation rules that are not compatible with EU law.

The Commission considers it appropriate to compare the Portuguese taxation of domestic lenders with that of foreign lenders. The European Court of Justice made a similar comparison in the Gerritse judgement of 12 June 2003 (Case C-234/01), ruling that insofar as resident artists were allowed a tax deduction for their costs, such deduction must also be granted to non-resident artists.

Commission's case reference numbers is 1999/4073.
New: For the press releases issued on infringement procedures in the taxation or customs area see:
For the latest general information on infringement measures against Member States see:

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