An interesting piece of news in the sphere of tax law has recently been provided by the Court of Justice of the European Union (CJEU) decision that found Portuguese withholding tax rules to be breaching EU law.
The case concerns a loan given to Auto Estradas do Litoral SA ("Brisal"), a Portuguese company by the Irish bank – KBC Finance Limited. The question before the CJEU was whether, under the EU law, withholding tax can be imposed on the gross amount of interest or must the taxpayer be allowed to decrease taxable income by costs associated with such income.
The CJEU found that applying Portuguese withholding tax on the gross amount of interest was discriminating and restricting the freedom in providing services, because resident financial institutions in Portugal were granted the right to deduct business expenses from their taxable income. Furthermore, the CJEU emphasised that Portuguese tax authorities should allow deduction of lender's business expenses which directly relate to interest income, including travel and accommodation, legal, and other costs.
Putting this development into context of the overall EU business framework, this ruling may have implications for the Union's Member States that impose withholding taxes on interest and other types of income. At the same time, such an aftermath could open the door for EU businesses to question the validity of withholding tax payments historically, which may cause a disruption in the economic equality of EU member states.