Client Alert

CJEU Finds Withholding Tax to Be Contrary to EU Law

July 26, 2016

By Arun Birla & Michael Graham


The Court of Justice of the European Union (“CJEU”) ruled on 13 July 2016 that withholding tax rules in Portugal were in breach of EU law. This ruling could have profound implications for Member States which impose withholding taxes on payments of interest (and potentially other payments) to businesses in the EU, and could open the door for EU businesses to challenge the validity of historic withholding tax payments.


The case concerned withholding tax on interest payments made in relation to a commercial loan between a Portuguese borrower, Brisal—Auto Estradas do Litoral SA (“Brisal”) and an Irish Bank, KBC Finance Limited (“KBC”). Under Portuguese law, Brisal was subject to withholding tax at 15% (as per the Irish / Portuguese Double Tax Treaty), payable gross, irrespective of KBC’s business expenses relating to the loan.

The CJEU held that the imposition of withholding taxes would not of itself be a breach of EU law. The CJEU however held that imposing Portuguese withholding tax on the gross amount of interest payments to KBC was discriminatory and a restriction on the freedom to provide services, given that Portuguese resident financial institutions were allowed to deduct business expenses when computing their taxable income.

The CJEU stressed that Portuguese withholding taxes should therefore take into account the lender’s business expenses which directly relate to income received, and this would include travel and accommodation expenses, legal, or tax advice and potentially financing costs.


Although the CJEU was dealing with Portuguese withholding taxes, the ruling should equally extend across the EU, to the extent that a Member State levies withholding taxes on gross interest payments (i.e. without deducting expenses), which is generally the case.

It is also important to stress that, although the CJEU only discussed withholding tax on interest payments to financial institutions, it is difficult to see why the CJEU’s ruling would not equally apply to withholding taxes on interest payments to other commercial lenders (although some Tax Authorities may well argue such a distinction).

In addition, an argument could be made that the court ruling should extend to withholding taxes on royalty payments and rent, as these are typically paid gross.

The CJEU ruling also opens the possibility for EU businesses to challenge the validity of historic withholding tax payments, given that they may have been in breach of EU law.

Unless Member States amend their domestic rules on withholding taxes (and potentially double tax treaties) to take account of the lender’s expenses, the CJEU ruling may spell the end of withholding taxes on interest payments relating to intra-EU loans.

For UK businesses, this ruling should apply up until the UK formally leaves the EU (and would impact historic payments of withholding taxes to HMRC), and could continue post-Brexit depending on the terms of any agreement reached between the UK and the EU. Taxpayers who may be impacted should consider filing protective claims.

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Uwe Halbig

German Public Auditor/Tax Advisor

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