Clifford Chance reports that “The Court of Justice of the European Union (CJEU) yesterday ruled that the EU fundamental freedoms preclude Member States from imposing withholding tax on interest paid to EU financial institutions, unless the financial institutions can claim a deduction for their financing costs and other expenses.”
Brisal — Auto Estradas do Litoral SA, KBC Finance Ireland v Fazenda Pública (ECJ, 5th Chamber, 13 July 2016)
The request has been made in proceedings between, on the one hand, Brisal ‒ Auto Estradas do Litoral SA (‘Brisal’), established in Portugal, and KBC Finance Ireland (‘KBC’), a bank established in Ireland, and, on the other, the Fazenda Pública (State Treasury, Portugal), concerning the calculation of corporation tax (‘IRC’) on interest received by KBC and the collection of that tax at source.
Article 49 EC does not preclude national legislation under which a procedure for withholding tax at source is applied to the income of financial institutions that are not resident in the Member State in which the services are provided, whereas the income received by financial institutions that are resident in that Member State is not subject to such withholding tax, provided that the application of the withholding tax to the non-resident financial institutions is justified by an overriding reason in the general interest and does not go beyond what is necessary to attain the objective pursued.
Article 49 EC precludes national legislation, such as that at issue in the main proceedings, which, as a general rule, taxes non-resident financial institutions on the interest income received within the Member State concerned without giving them the opportunity to deduct business expenses directly related to the activity in question, whereas such an opportunity is given to resident financial institutions.
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