Fund Taxation Alert 2021-07

Withholding tax reclaim in Portugal – Positive decision from the arbitration courts

Withholding tax reclaim in Portugal – Positive decision from the arbitration courts


Olivier Schneider

Partner, Financial Services Tax

KPMG in Luxembourg



Foreign funds, including Luxembourg-resident funds (such as a UCITS SICAV) are subject to 25% withholding on dividend income in Portugal. The withholding can further be reduced to 15% under the respective Double Tax Treaty (DTT) between EU member states and Portugal. However, the same type of entity established in Portugal would not be subject to such withholding on dividend income in Portugal. In other words, Portuguese resident funds should get an exemption from withholding tax on dividends in Portugal.

This constitutes a case of discrimination in tax treatment between taxpayers domiciled in the European Union (EU), which is against the core principle (i.e. freedom of movement of capital) laid down in Article 63 (1) of the Treaty of Functioning of European Union (TFEU). The principle has been discussed by various courts of EU member states several times in the past and on each occasion, the respective court including the Court of Justice of the European Union (CJEU) has firmly reiterated the same principle i.e. different tax treatment between resident and non-resident funds would constitute a restriction on the freedom of movement of capital.

Recently, the Arbitration courts constituted in Portugal on matters (case number 922/2019-T & case number 68/2020-T) pertaining to the same issue have also rendered positive decisions in favor of Luxembourg and German funds investing in Portugal.

Way forward

Based on the positive decisions rendered by the Arbitration Courts in Portugal, foreign investment funds should continue filing withholding reclaims in Portugal and should initiate legal proceedings before the Arbitration Court in case of a rejection of refund applications filed.

The possibility of going to the tax arbitration court will only exist (i) upon an express denial of the hierarchical appeal, and (ii) if such denial directly addresses the legality of the withholding (i.e. if the rejection is grounded on a substantive analysis of the legality of the tax assessment and not on the non-compliance with procedural requirements regarding the claim, such as filing deadlines, legitimacy, etc.).

What is also important to note is that an administrative claim has to be filed within a 2-year deadline which, according to the most recent approach from the Portuguese Tax Authorities in similar cases, is to be counted from the date that the withheld tax has to be surrendered to the Portuguese Tax Authorities by the withholding agent (the 20th day of the month after the tax is withheld – i.e. an administrative claim challenging corporate income tax withheld on 24 April 2019, has to be filed until 20 May 2021).

Nevertheless, if taxpayers fail to meet the deadline of such administrative claim, they may still challenge the legality of the tax withheld by filing an “extraordinary administrative claim” before the Tax Authorities, within a 4-year deadline, to be counted from the date on which the tax was withheld. Within this extraordinary administrative claim, taxpayers may ask for the reimbursement of the withheld tax however at the expense of the right to indemnity interest (which are due only if the withholding tax is annulled one year after the claim is submitted and computed and will be computed as from the completion of such one-year period).

Recent Development

The Advocate General rendered her opinion in AllianzGI-Fonds Case (C-545/19) on 6 May 2021, a case regarding whether the free movement of capital requires a member state to tax non-resident and resident investment vehicles under the same tax regime.

The Advocate General is of the opinion that all aspects of the Portuguese tax law should be taken into consideration while analyzing whether there is a discrimination between resident and foreign UCITS funds from withholding tax point of view. Based on this argument, she further states that UCITS funds established in Portugal are not absolutely exempted from taxation in Portugal because they are subject to another tax, i.e. stamp duty, on a quarterly basis and this alternative tax technique must be taken into account in the present case in determining whether a restriction exists. Therefore, the principle laid down in the Fidelity case should not be taken into consideration because Portugal does not waive taxation but applies different tax techniques.

Consequences and recommendations for the next steps

Article 63 of TFEU should not be interpreted subjectively but rather objectively. A subjective interpretation would allow a situation like in the present case where a wider aspect of Portuguese law (by allowing the other types of taxation i.e. stamp duty as a justifiable reason to bring comparability) has been taken into consideration while deciding whether this would be a restriction on the free movement of capital. From this article it clearly emerges that the freedom is the rule and restriction is an exception.

Therefore, we are of the view that the current approach adopted by the Portuguese Tax Authorities is clearly a violation of Article 63. Indeed, contrary to the Advocate General’s opinion, we should always look into the fundamental principles clearly laid down in Aberdeen and Santander case and ascertain whether non-resident UCITS end up being subject to a higher tax burden vis-à-vis resident UCITS. The principle should be followed irrespective of the different taxation techniques which are defined for each group of taxpayers. Moreover, the relevance afforded by the Advocate General to the stamp duty taxation of domestic funds is flawed on the following grounds:

  • The taxable events applicable in case of stamp duty taxation of domestic funds is different than that applicable in case of dividend taxation of foreign UCITS funds, and
  • Foreign UCITS funds are not presented with the possibility of opting the stamp duty of taxation in exchange of an exemption of the dividend taxation.

Accordingly, we recommend all asset managers to continue challenging this position by (1) filing WHT reclaims in Portugal, and (2) approaching the Arbitration Court once a reclaim is rejected, taking into consideration that the Arbitration Court has rendered positive decisions, in line with our opinion, in a few cases as mentioned above. 

Olivier Schneider

+352 22 51 51 5504

Prashant Roy

+352 22 51 51 5543