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Taxation laws challenged by EC


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PORTUGUESE AUTHORITIES have come under fire from the European Commission (EC) for what is described by the EC as “discriminatory taxation” regarding foreign pension funds and restrictive exit taxes.

In a bid to improve the movement of assets and encourage foreign investors to hold Portuguese stocks, the EC have begun action against the Portuguese government for contravening various European laws.

Portugal and Spain have been referred to the European Court of Justice for their rules surrounding foreign pension taxation. 

Currently, interest payments on foreign pension funds are taxed more heavily than domestic pension funds, breaking rules under the EC Treaty as they restrict the free movement of capital within the EC.

In Portugal, dividends received by domestic pension funds are tax exempt but for foreign pension funds there is a withholding tax of 25 per cent paid on dividends on funds established elsewhere in the EU.  This means that there is a higher taxation on foreign pension funds.

Action against Portugal in relation to discriminatory taxation by the EC began in March 2007.  Other countries that were found to be restricting the free movement of capital, including Denmark, Lithuania and Sweden, have all rectified their taxation laws to adapt to the EC requests.

Formal request

Due to a lack of action by the Portuguese authorities, the EC have now referred the case to the European Court of Justice after the matter was brought to the attention of the EC by the European pension industry.

Meanwhile, a formal request has been made by the EC for Portugal to change tax provisions that impose immediate exit taxes on companies when they choose to move their tax residency to another EC country.

Under Portuguese law, if a company moves assets to another EC state, they will be liable to pay unrealised capital gains in contrast to companies that remain in Portugal who do not have to pay these taxes.

The EC has stated: “The Commission considers that immediate taxation penalises those companies that wish to leave Portugal or transfer assets abroad.”

The Portuguese government has two months to counter claims made by the EC that state that Portugal is not acting within the freedom of establishment European law.  If no action is taken then this case will also be referred to the European Court of Justice.

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