In Brisal – Auto Estradas do Litoral SA, KBC Finance Ireland v Fazenda Publica (Case C-18/15) (13 July 2016), the CJEU found that imposing withholding tax on interest paid to EU financial institutions was contrary to TFEU Art 56 (freedom to provide services), unless the financial institutions could claim a deduction for their financing costs and other expenses.
Brisal, a Portuguese company, had entered into an external financing agreement with a syndicate of Portuguese banks, which had been extended to KBC, an Irish bank, by a transfer of contract. Brisal had withheld tax at source on interest accrued in favour of KBC and Brisal and KBC claimed that this taxation contravened the principle of freedom to provide services.
The CJEU observed that the application of withholding tax to non-resident service providers, whilst constituting a restriction on the freedom to provide services, may be justified by overriding reasons in the general interest, such as the need to ensure the effective collection of tax. However, the fact that non-resident institutions were not given the opportunity to deduct business expenses directly related to their activity, whereas such an opportunity was given to resident financial institutions, constituted a prohibited restriction on the freedom to provide services.
Why it matters: This decision may mean that some businesses which are currently incurring withholding tax in the EU, will be able to obtain a refund. In this respect, the CJEU roundly rejected the contention that banking services should be treated differently from other services due to the fact that it is difficult to establish a link between costs incurred and interest income received.
Also reported this week:
A Hardy v HMRC Was a forfeited deposit an allowable loss?
In Brisal – Auto Estradas do Litoral SA, KBC Finance Ireland v Fazenda Publica (Case C-18/15) (13 July 2016), the CJEU found that imposing withholding tax on interest paid to EU financial institutions was contrary to TFEU Art 56 (freedom to provide services), unless the financial institutions could claim a deduction for their financing costs and other expenses.
Brisal, a Portuguese company, had entered into an external financing agreement with a syndicate of Portuguese banks, which had been extended to KBC, an Irish bank, by a transfer of contract. Brisal had withheld tax at source on interest accrued in favour of KBC and Brisal and KBC claimed that this taxation contravened the principle of freedom to provide services.
The CJEU observed that the application of withholding tax to non-resident service providers, whilst constituting a restriction on the freedom to provide services, may be justified by overriding reasons in the general interest, such as the need to ensure the effective collection of tax. However, the fact that non-resident institutions were not given the opportunity to deduct business expenses directly related to their activity, whereas such an opportunity was given to resident financial institutions, constituted a prohibited restriction on the freedom to provide services.
Why it matters: This decision may mean that some businesses which are currently incurring withholding tax in the EU, will be able to obtain a refund. In this respect, the CJEU roundly rejected the contention that banking services should be treated differently from other services due to the fact that it is difficult to establish a link between costs incurred and interest income received.
Also reported this week:
A Hardy v HMRC Was a forfeited deposit an allowable loss?
