TAX NEWS - 2010

European Union Tax: Tax on interest paid to nonresident financial institutions

The European Court of Justice (ECJ) has rejected an application by the European Commission for a declaration that, by taxing interest paid to nonresident financial institutions more heavily than interest paid to financial institutions resident in Portugal, Portugal was in breach of EU law (i.e. the free movement of capital and the freedom to provide services).

Portugal levies a 20% withholding tax on gross interest paid by Portuguese borrowers to nonresident lenders (unless the rate is reduced under a tax treaty), while interest paid to resident lenders benefit from an exemption. However, the ECJ concluded that the Commission had failed to produce evidence that nonresidents were subject to a higher tax rate and dismissed the application.