The oldest tax in Portugal sidestepped by EU Law arguments

The stamp tax is the oldest tax in the Portuguese tax system (its structure dates back to 1660) and despite being reformed in 2000 it remains a rather international outlier especially when it comes to taxation of financial transactions.

A new decision of the Arbitration Court (CAAD) finally addresses a point I have been raising for more than 10 years, namely that Portuguese stamp tax (if and when) applied to cross-border upstream financing on cash pooling group structures would be discriminatory and contrary to the EU free movement of capital.

Cash pooling as a treasury management tool to bridge (physically or notionally) balances of different group entities is very efective to reduce banking costs and allocating cash surpluses to right entities. Despite very popular for MNE, in Portugal tax advisors have struggled with aspects ranging from withholding taxes on interest, transfer pricing issues and stamp tax levied on financial transactions.

Stamp tax has long introduced some exemptions for intra-group short-term financing that could apply to cash-pools but the Portuguese tax authorities took a rather restrictive stance sometimes bluntly contrary to EU Law. This lead to the need for a new provision in 2020 Budget Law specifically granting exemption to cash pooling arrangements.

The good news is that discriminatory treatments are not erased by a change of law with effects only to the future. Courts and taxpayers continue to challenge the validity for past cases.

Case 277/2020-T sheds some light on the correct interpretation of the specific stamp tax exemption covering “short-term financing not exceeding one year term granted exclusively for coverage treasury short-falls concluded by any company on behalf of (…) companies in relationship of domination or group (“relação de domínio ou de grupo”)”.

The Facts of the Case

PTCo is a Portuguese company part of a French based group. In 2010, PTCo joined a multi-jurisdictional cash pooling agreement aimed at ensuring the treasury management of group entities. Under the cash pool, the treasury surpluses were transferred to FRCo, a French based holding and treasury manager. Since PTCo had excess surpluses, the FRCo appears as debtor and PTCo as creditor charges monthly interest.

PTCo requested the annulment of stamp tax assessments based on a twofold argument: (i) upstream surpluses are only used in France and therefore should fall-out of territorial scope of the rules; or (ii) short-term upstream financing operations should be considered exempt based on EU law principles.

Upstream Loans and Territorial Scope

On the territorial scope, the court favored the tax authorities arguments. The Arbitration Court relied on a 2018 Supreme Court Decision that ruled the “relevant connecting factor for assessing the territorial scope is the location where the credit is granted” rather than an opposing 2019 Arbitration Court decision that decided considered that “no stamp tax is under Portuguese law when the lender is Portuguese and the debtor is a foreign based entity managing treasury surpluses”.

Extension of the stamp tax exemption based on EU Law

On the scope of the exemption, the Portuguese Court favored with PTCo arguments. The Arbitration Court reasoning is simple, namely if application of the stamp tax exemption actually differs whether the debtor is based in Portugal or abroad then one needs to evaluate if such “removal” or “difference in treatment” constitutes a restriction on the EU free movement of capital.

The Court goes on to consider that indeed there is no objective difference in this case that could justify different treatment and hence this rule constitutes an unjustified restriction on the freedom of capital. Final point to mention that the Arbitration Court found that there was no need to ask for a preliminary ruling to the EU Court of Justice (based on acte clair doctrine endorsed by CILFIT C-283/81).

Final Comments

• Such 10 year-plus battles to clarify that a non-resident may not be treated in a discriminatory manner compared with a tax resident way have to be reduced drastically to increase tax certainty on cross-border investment.
• On the territorial scope, I still believe the outcome is not the most correct specially from a tax policy perspective, even if one may accept the literal interpretation on the connecting factors. On the policy side, one could ask what is the economic reasoning behind charging stamp tax on outbound financings? We all remember the times of Portuguese banks having to set-up branches in other jurisdictions to limit the reach of stamp tax but times are today different for the Banks so why not change that policy? Why should we still have in the 21st century policy to make Portuguese financing more expensive than foreign financing?
• On the extension of the exemption, the outcome although not final is an excellent indication that this issue will be resolved. Even if under corporate law a dominant or group position is only relevant when companies are headquartered in Portugal (territorial limitation) this should not be the case under tax law. The fact that the merits of this decision are not limited to EU Countries (as freedom of capital also covers third countries) and stamp tax paid in the last 4 years remains disputable, means that more cases will likely come. 

Perhaps to avoid further sidesteps it is time to take on a reform of some cross-border financing aspects of stamp tax that do not make sense in today's international financial architecture and new fintech financial platforms.

10 January 2021

Tiago Cassiano Neves

 "Opinions expressed are solely my own and do not express the views of any law firm or organization to whom I am affiliated"