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| EU Sues Portugal For Biased Tax Policy |
by Ulrika Lomas, for LawAndTax-News.com, Brussels
Monday, September 22, 2008
The European Commission has referred Portugal to the European Court of Justice (ECJ) for its discriminatory tax rules against non-Portuguese service providers.
The Commission has pointed out that currently, non-resident entities providing
services in Portugal are subject to a withholding tax based on the gross amount
of their income, whereas domestic providers are taxed only on their net profits.
The Commission considers that these rules are incompatible with the EC Treaty,
which guarantees the free provision of services.
According to Portuguese rules non-resident services providers are subject to
a final Portuguese withholding tax on the gross amount of their income, whereas
domestic providers would be taxed only on their net profits, i.e. after deduction
of related costs.
In the view of the Commission this legislation is likely to dissuade foreign
services providers from providing services in Portugal, and might dissuade Portuguese
clients from buying services from foreign providers, and therefore constitutes
an infringement of Article 49 of the EC Treaty (freedom to provide services).
Portugal notes that taxation on the basis of gross income does not apply to
service providers resident in member states with whom Portugal has signed a
Double Tax Convention (all member states except Cyprus).
In addition, Portugal remarks that in the case of taxation on the gross income
the difference in the tax base might be offset by the difference between the
rate applicable to resident entities 25% and the final withholding tax rate
of 15% applied to non-resident entities. The Portuguese Government also claims
that the measures are necessary to combat tax fraud.
However, the Commission considers that there is discrimination to foreign services
providers established in Cyprus which has not signed a Double Tax Convention
with Portugal. The Commission is of the view that discrimination exists when
it cannot be ensured that differences in the level of taxation due to the differences
in the tax bases are always offset by the differences in the tax rates.
It also regards the chosen measures as disproportionate since there are other
methods of preventing fraud, for example by requiring the service provider to
give information or by mutual assistance and information exchange with other
EU Member States under EU Directive 77/799/EEC and by mutual assistance in the
recovery of claims under EU Directive 2001/44/EC.
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