Free movement of capital and administrative burdens

The CJEU has held that the requirement for an overseas pension fund to present a certificate from its local authorities containing specified information about its pension fund status and tax residence in order to obtain a refund of withholding tax on dividends paid by a Portuguese company were in breach of the fundamental freedom of movement of capital: Santander Renta Variable Espana Pensiones v Autoridade Tributaria e Aduaneira (Case C-525/240). A strict requirement based only on the presentation of a certified declaration was disproportionate and could not be justified. Non-resident taxpayers must be allowed to put forward other forms of proof that they qualify for the exemption, since such information could ultimately be checked by the Portuguese tax authorities under mutual assistance mechanisms that exist between Member States.

However, the Court considered that, provided such certified declarations were within the competence of local authorities, making exemption from withholding tax on payment of the dividend by the paying company dependent on it being provided with such a certificate prior to payment of the dividend was not contrary to the free movement of capital.

Background

The case concerns a Spanish pension fund in receipt of dividends from a Portuguese company. The Spanish pension fund sought to take advantage of provisions of the Portuguese Tax Code which exempted from withholding tax dividends received by an EU pension fund provided that such fund meets a number of requirements. In addition, the Code required that proof must be provided to the dividend paying entity prior to payment “by means of a declaration confirmed and certified by the authorities of the Member State … responsible for the supervision” of the fund. Where the recipient pension fund was not able to obtain such a declaration before payment, then the Code provided the opportunity to apply for a refund of the tax withheld by submitting a claim and the required declaration attesting to the tax residence and liability to income tax in the relevant period. The Spanish pension fund was unable to provide the necessary declaration as proof and argued that the very specific requirements constituted an illegal restriction on its fundamental freedom of movement of capital.

Decision of the CJEU

The CJEU first noted that, since Portuguese pension funds were exempt from withholding tax on dividend payments received from a Portuguese company, that the additional administrative measures placed on EU pension funds from outside Portugal could discourage investment by non-residents in Portuguese companies and amounted to a restriction on the free movement of capital. However, the difference in treatment between resident and non-resident pension funds might be justified by an overriding reason in the public interest. In this case, Portugal argued that the additional administrative requirements placed on non-resident pension funds were justified by the need to guarantee effectiveness of fiscal supervision and ensure the effective collection of tax.

The CJEU noted that it was established case law that Member States might require a taxpayer to provide such proof as they consider necessary in order to determine if the conditions for granting a tax advantage have been met and the content, form and detail must be to enable the Member State to levy tax effectively. However, the requirements must not make it impossible or excessively difficult for a non-resident taxpayer to obtain the tax advantage. Therefore, non-residents must not be subject to excessive administrative burdens that make it in fact impossible to benefit from the tax advantage.

In this case, in order to enjoy the exemption from corporation tax or in order to obtain a refund of that tax, the law requires that a non-resident pension fund provide a declaration that is confirmed and certified by the tax authorities responsible for its supervision in its Member State of residence, demonstrating, (a) that that fund guarantees, exclusively, the payment of pension and other related retirement benefits, (b) that it is managed by institutions for occupational retirement provision to which Directive 2003/41 applies and (c) that it is the beneficial owner of the income.

Accordingly, the legality of this requirement depends on whether the non-resident pension fund is located in a Member State where the authorities have the power to issue such a declaration. If the supervisory authorities in the relevant Member State do not have the necessary powers (or such a declaration cannot be issued within a reasonable time period) then the Portuguese requirement for such a declaration would be not be legal.

However, even if the relevant authorities did have the power, it must still be considered whether the requirements is disproportionate in going beyond what is necessary to attain the appropriate objectives. On that question, the CJEU noted that it was necessary to distinguish between the situation where the non-resident pension fund is seeking an exemption and where it is seeking a repayment of withholding tax.

As regards exemption, the Court noted that here the requirement is for the dividend paying company to be provided with the relevant declarations prior to paying the dividend. As such, it is the relevant dividend paying companies that must be satisfied that the substantive conditions for exemption are met. Since those companies must be certain of the claim for exemption, then, in principle, the requirement for a certified declaration by the relevant authorities would not be excessive.

However, as regards a repayment of withholding tax, the Court noted that the position is different. Unlike the dividend paying company, the Portuguese tax authorities have the benefit of mutual assistance mechanisms between Member States that are sufficient to check the accuracy of evidence put forward by non-resident pension funds claiming reimbursement of withholding tax. Moreover, the Court has already held that legislation which indiscriminately prevents taxpayers adducing evidence which satisfies criteria other than those laid down in legislation goes beyond what is necessary to guarantee the effectiveness of fiscal supervision and the effective collection of taxes. As a result, the strict application of a requirement to submit a certified declaration from the local authorities of the non-resident pension fund is disproportionate and illegal.

Comment

This is another case that confirms that procedural and administrative formalities put in place by Member States for the obtaining of tax advantages by non-residents may constitute a restriction on the fundamental freedoms. It is only if those administrative measures can be justified as necessary, appropriate and not disproportionate that they will be compliant with EU law. And, in cases where procedural requirements are to be checked by the local tax authority, its ability to use mutual assistance mechanisms means that highly specific requirements that do not allow the non-resident taxpayer to present other forms of proof are likely to be seen as disproportionate.