On 17 October 2022, an Order of the Court of Justice of the European Union was published in the Official Journal of the EU concerning Portugal's participation exemption (deduction) for dividends received from a non-resident subsidiary. Subject to certain conditions, including 10% holding for at least one year, the exemption is generally provided where dividends are paid from other EU Member States, as well as EEA states that have a tax cooperation agreement with Portugal and third countries that have a tax treaty with Portugal providing for information exchange.
The case concerned a Portuguese company that received dividends in 2005 from a group subsidiary subject to the general tax regime in Angola, which did not have information exchange with Portugal at the time (2018 Angola-Portugal tax treaty applies from 2020). The Portuguese company did not claim any deduction for the dividends in its return for 2005, but in 2010 sought a reimbursement of the tax paid, arguing that denying a deduction violated Article 63 TFEU on the free movement of capital. The request was rejected, which was ultimately appealed to Portugal's Supreme Administrative Court. The Court decided to stay the proceedings and refer to the CJEU for a preliminary ruling on whether the lack of a contractual obligation for information exchange can justify the differing treatment of dividends received, even if a taxpayer proves that the conditions for the exemption are otherwise met.
In the Order, the CJEU found that differing treatment is justified given that, due to the absence of a contractual obligation with a third country, it is impossible to obtain the required information to prove that the conditions for the exemption are met. Further, a Member State is not required to allow a taxpayer the possibility of proving that the conditions are met since this cannot be verified through information exchange. The final conclusion is as follows:
Articles 63 and 65 TFEU must be interpreted as not precluding national legislation aimed at the elimination of the economic double taxation of dividends under which a resident company of the Member State concerned can deduct from its taxable profit dividends which had been distributed to it by another resident company, but cannot deduct dividends distributed by a company established in a third country, on the grounds that the latter is not linked to the Member State of taxation by any convention obligation on communicating tax information, where that deduction is subject to a condition relating to the tax liability of the distributing company in the third country and, due to the absence of a convention obligation of that third country on providing information, it is impossible to obtain that information from the third country. A Member State is not required to grant the taxpayer the possibility to produce for himself or herself the evidence to show that the necessary conditions to obtain the deduction are satisfied where, due to the absence of a convention obligation, that Member State cannot verify the veracity of that evidence.
Note, the order as published in the Official Journal only includes the operative part of the order. Click the following link for the full order (Portuguese language).