The Portuguese tax authority has started to deny withholding tax refunds (requested by non-resident recipients who had not yet completed the two-year holding period required for the application of the Interest and Royalties Directive by the time the relevant interest was due) based on a lack of beneficial ownership. There have also been instances where treaty benefits were denied on the same basis, but this is less common. It may also only be a matter of time before the application of the Parent-Subsidiary Directive is challenged on the same basis.

When considering whether the recipient is the beneficial owner of the relevant payment, the Portuguese tax authority follows the CJEU’s reasoning in the Danish conduit cases, i.e., the concept of beneficial owner should be interpreted as designating an entity who actually benefits from the income that is paid to it. Hence, an entity should not be considered as benefiting from the income paid to it when it serves as a mere conduit company that lacks economic substance.

An entity should, in principle, be deemed to act as a conduit company when all or almost all of the income is passed on by it to entities which do not fulfil the conditions for the application of the Interest and Royalties Directive.

The absence of actual economic substance must be inferred from an analysis of all the relevant factors relating, in particular, to the management of the company, its balance sheet, the structure of its costs and expenditure actually incurred, the staff that it employs, and the premises and equipment that it has.

Cases concerning questions of beneficial ownership have reached the Portuguese courts but have, so far, focused on procedural points, rather than a substantive application of the test. There has, for example, been a case concerning beneficial ownership in the context of the Portugal/ Canada double tax treaty (Case 45/10.2BELR (Tribunal Central Administrativo Sul)). The court decided that, because the Canadian tax authorities had certified on the relevant form that the conditions for the application of the treaty were fulfilled, the burden of proving that the Canadian Trust in receipt of the relevant income was not its beneficial owner rested on the Portuguese tax authority, and not the taxpayer. As the tax authority had failed to discharge that burden, the treaty applied, and the relevant tax had to be refunded.

Where the recipient is not the beneficial owner of the relevant income, it is unclear whether one could look through to the actual beneficial owner, for example to apply the double tax treaty between Portugal and the beneficial owner’s jurisdiction. This is not expressly provided for in the legislation and, so far, there has been no case law on the point, but the Portuguese tax authority tends to accept such an approach.