ECJ Ruling Opens Door To Withholding Tax Refunds

by Dechert LLP
Contact

The European Court of Justice (ECJ), in the case of Brisal, has determined on 13 July 2016 that national law which prohibits a non-resident taxpayer from deducting financing/operating costs from interest withholding tax infringes the EU fundamental freedom to provide services where resident taxpayers are able to deduct such costs.

As such, there may now be opportunities for taxpayers to reclaim withholding taxes already paid, and to argue that the manner in which certain withholding taxes apply within EU member states are in breach of EU law. Although Brisal concerned withholding tax on interest paid to a financial institution, the scope of the reasoning of the ECJ applies more broadly than interest withholding taxes and could extend to other lending vehicles (such as debt funds) and to other withholding taxes (such as withholding under royalty payments).

Brisal Summary

On the facts of the case, the main issue in dispute was the charging of Portuguese withholding tax on interest arising in Portugal and paid to a financial institution resident in Ireland. Portuguese law denied the Irish financial institution the possibility of deducting operating costs, whereas Portuguese taxpayers were allowed to deduct such costs in calculating their tax liability. 

The ECJ determined that such law infringes the fundamental freedom to provide services in the EU (which prevents an EU Member State from discriminating against nationals of different EU Member States without a justifiable reason). The ECJ reiterated that non-residents must be treated in the same way as residents and must be able to deduct the same expenses as those which residents are allowed to deduct (unless a restriction is justified by an overriding reason in the public interest but only to the extent that it does not go beyond what is necessary for that purpose). This applies notwithstanding the fact that the rate of withholding tax may be lower than the rate of domestic tax.

Withholding in a post-Brisal world

In practice, most cross-border loans by financial institutions are structured to avoid potential withholding taxes. As a consequence, if restricted in application to financial institutions, the practical application of Brisal may be limited. If extended to other lenders (such as debt funds), which do not benefit so widely as financial institutions from domestic and tax treaty exemptions from withholding, the application of Brisal may be more significant.

The ruling in Brisal will only apply to withholding taxes where a deduction for costs is disallowed for a taxpayer resident in a different EU Member State, but such costs are allowed for a resident taxpayer in the EU Member State where the withholding is being made.

Brisal poses practical and administrative difficulties for tax authorities and borrowers. In particular, it remains unclear how a borrower will determine the appropriate rate of withholding once the lender’s deductible expenses are taken into account. One possibility is that the borrower will be required to identify the operating costs of the lender. The tax authorities will likely in turn demand sufficient evidence from the borrower/lender of such costs in order to work out whether the appropriate withholding tax has been paid. Alternatively, withholding taxes could be applied on a gross basis and the lender could claim its operating costs subsequently against the tax authority. This will no doubt give rise to more extensive administrative costs for all parties involved, including the tax authority. Different EU Member States may take different approaches in order to comply, balancing different confidentiality and administrative concerns.

Brexit

The UK is required to comply with all EU law until it formally secedes from the EU. Therefore, the Brisal decision will be relevant to the UK and UK taxpayers at least for the time being. Whether it will continue to be relevant post-Brexit remains to be seen as it would depend upon the nature of the UK’s subsequent arrangement with the EU.

Next Steps

Financial institutions who have suffered or are suffering withholding tax on EU cross-border interest or royalty payments should seek advice as to whether Brisal will reduce or remove the need for withholding on future payments or permit a reclaim to be made in respect of historic withholdings. This may include filing protective claims while the full practical impact of Brisal develops.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dechert LLP | Attorney Advertising

Written by:

Dechert LLP
Contact
more
less

Dechert LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.