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CJEU rules that the Portuguese tax regime applicable to UCIs restricts the free movement of capital

In a decision that will unlock a number of pending cases and encourage EU (and third country) UCIs to apply for a refund of Portuguese withholding tax suffered in respect of dividend (and potentially also interest) payments, the CJEU held that the differential dividend withholding tax treatment of foreign and domestic UCIs infringed the free movement of capital (Case C-545/19 AllianzGI-Fonds AEVN). The central issue in the case was the application of a 25% withholding tax in respect of Portuguese dividend payments to foreign UCIs, while UCIs set up and operating under Portuguese law are exempt from tax on the same payments under the domestic special tax regime for UCIs.

In 2015, the Portuguese legislator revised its special tax regime applicable to undertakings for collective investment (UCIs) from an “entry-taxation” model to an “exit-taxation” model so that the investors rather than the UCI would be taxed on income distributions.

There were several reasons for this change, including the complexity of the former regime and a desire to compete with special tax regimes in force in other EU Member States. While the change was clearly well intentioned, the “new” tax regime only applies to UCIs that are set up and operate under Portuguese law. The result is clearly discriminatory: Portuguese sourced investment income distributed to a resident UCI is exempt from Corporate Income Tax (CIT), while the same income distributed to a non-resident UCI is subject to Portuguese withholding tax.

As was to be expected, a foreign UCI investing in Portuguese companies initiated several claims before tax arbitration courts seeking a refund of the withholding tax levied in Portugal. A Portuguese tax arbitration court referred several questions based on one of these claims to the Court of Justice of the European Union (CJEU), which issued a decision on 17 March (Case C-545/19 AllianzGI-Fonds AEVN).


Under the Portuguese general CIT framework, dividends paid by resident companies are normally subject to withholding tax at 25%. An exemption may apply if the payee is a Portuguese tax resident entity. In respect of dividends paid to non-resident entities, the withholding tax is final, but the rate may be reduced under a double tax treaty or the income may qualify for an exemption under the Portuguese rules (which generally does not apply to UCIs). According to the special tax regime, UCIs set up and operating under Portuguese law are generally not subject to CIT on investment income (e.g. dividends and interest). Thus, dividends paid to a resident UCI are not subject to the 25% withholding tax, whereas dividends paid to a foreign UCI would be (subject to any reduction of the withholding tax rate under an applicable double tax treaty).

The claimant in Case C-545/19 was AllianzGI-Fonds AEVN, a UCI set up and operating under German law, which held shares in Portuguese companies from which it received dividends in 2015 and 2016. The dividends were subject to the 25% withholding tax and the UCI could not claim relief in Germany because it was exempt from income tax there.

The claimant initiated the administrative procedure in Portugal to claim a withholding tax refund arguing that the Portuguese UCI tax regime breaches Article 18 of the Treaty on the Functioning of the European Union (TFEU) (which prohibits discrimination on the grounds of nationality) and restricts the free movement of capital enshrined in Article 63 of the TFEU. The Portuguese tax authorities rejected the claim and the claimant challenged the decision in a tax arbitration court. The tax authorities argued that the special tax regime applicable to Portuguese UCIs was not discriminatory as it also taxes dividends, albeit under a different taxation method to withholding tax: Portuguese UCIs pay a quarterly stamp duty on their net asset value, and dividends distributed by Portuguese companies are, in certain cases, subject to a specific CIT charge.

In this context, the Portuguese tax arbitration court referred five questions to the CJEU which, in summary, sought to determine:

  • whether Article 63 (free movement of capital) or Article 56 (freedom to provide services) of the TFEU preclude tax legislation such as the Portuguese UCI tax regime where withholding tax applies to payments made by Portuguese companies to non-resident UCIs, when those payments would have been exempt if the recipient had been a Portuguese UCI,
  • whether this difference in treatment is justified if UCIs resident in Portugal are subject to a different taxation method, and
  • whether resident and non-resident UCIs should be compared just at an entity level or also at an investor level.

CJEU judgment

The CJEU decided that, as the Portuguese rules tax dividends differently depending on whether they are received by a resident or a foreign UCI, this was a free movement of capital case. Relying on its prior case law, the CJEU stated that, by imposing a withholding tax on dividend payments made to non-resident UCIs, the Portuguese special tax regime treats non-residents disadvantageously, which discourages both non-resident UCIs from investing in Portugal and Portuguese resident entities from investing in non-resident UCIs and so restricts the free movement of capital.

With regard to the comparability analysis, the CJEU considered the Portuguese Government’s argument that the dividends obtained by resident UCIs are not exempt, but rather subject to a “stamp duty” on the net asset value plus a specific CIT charge. The CJEU reasoned that, as the stamp duty’s taxable amount is the UCI’s net asset value, it should be considered a wealth tax that cannot be likened to a CIT. And even if it could, a resident UCI could easily avoid paying the duty by re-distributing the dividends immediately after earning the underlying income. As the specific CIT charge applies only to dividends distributed within one year, and hence in very few cases, the CJEU argued that it could also not be equated to the general CIT that is withheld from Portuguese-source dividends.

Citing its case law, the CJEU pointed out that, if a Member State, either unilaterally or through a convention, taxes not only resident, but also non-resident, recipients on dividends paid by resident companies, the non-resident’s situation becomes comparable to that of the resident. Accordingly, in the case at hand, the non-resident UCI’s situation was comparable to that of a resident UCI. Moreover, as the UCI’s residence is the sole distinguishing criterion in the domestic provisions, the comparability analysis should be carried out at the level of the UCI.

The Portuguese Government had sought to argue that any restriction to the free movement of capital resulting from the Portuguese UCI tax regime was justified by overriding public interest reasons, namely the need to safeguard the coherence of the Portuguese tax system and the balanced allocation of taxing rights between Portugal and Germany, but the CJEU rejected those arguments.

In conclusion, the CJEU ruled that Article 63 of the TFEU should preclude the Portuguese UCI tax regime from withholding tax only on dividends paid to non-resident UCIs, but not to Portuguese UCIs.


The CJEU’s judgment in Case C-545/19 is intriguing. Although it follows an array of similar decisions on other EU Member States’ regimes, it collides head-on with the Advocate General’s opinion that the different tax treatment was permitted under EU law because Portugal used a different tax method for resident UCIs.

The decision will certainly unlock a number of pending cases in tax arbitration courts and encourage European UCIs that have paid withholding tax in Portugal to seek a refund. The judgment also opens the door to UCIs resident in third countries to claim Portuguese withholding tax refunds because it is based on the free movement of capital.

And finally, but no less importantly, we should not forget that the Portuguese UCI tax regime applies not only to dividends but also to interest payments, meaning that foreign UCIs may try to file claims for a refund of withholding tax suffered on interest payments on an analogous basis.

It remains to be seen how the Portuguese legislator will adjust the UCI tax regime to align it with EU law.


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