Case Note on Cofidis (Portugal) (Case C-340/22)
Reference for a preliminary ruling - Direct taxation - Article 49 TFEU - Freedom of establishment - branches of financial institutions resident in another Member State - additionalsolidarity tax on the banking sector - Directive 2014/59/EU
A. Facts and Involved Legal Issues
Involved parties:
• Cofidis, the Portuguese branch of Cofidis SA, a credit institution the registered office of which is in France
• Autoridade Tributária e Aduaneira (Tax and Customs Authority, Portugal)
In 2020, Cofidis paid a lump-sum adicional de solidariedadesobre o sector bancário (additional solidarity tax on the banking sector; “the ASSB”) in Portugal, and later on applied for a repayment but was rejected. Cofidis then sued in Tribunal Arbitral Tributário (Tax Arbitration Tribunal, Portugal) in 2021, claiming that:
• Question 1 - the ASSB was contrary to Directive 2014/59, which harmonizes contributions for the resolution of credit institutions.
• Question 2 - the ASSB contravened Art. 49 of the TFEUfor the discrimination against branches of foreign credit institutions.
B. Legal framework
EU primary Law – Art. 49 TFEU – freedom of establishment
EU secondary Law – Art. 1, 5 and 103 Directive 2014/59 - the recovery and resolution of credit institutions
Portuguese law – Art. 18 Law No 27-A/2020, and Annex VIof the law on the 2020 supplementary budget (referred to as “the legislation at issue”) – establish the ASSB
Annex VI to the law on the 2020 supplementary budget
• Article 2(1) – taxpayer of the ASSB
• Article 3 – material scope of the ASSB
• Article 4 - quantification of the basis of assessment for the ASSB
C. Court’s Holding
Question 1
Admissibility
Question 1 is admissible as the compatibility of the ASSB with Directive 2014/59 is relevant to the resolution of the dispute in the main proceedings.
Substance
Directive 2014/59 must be interpreted as not precluding a national law introducing a tax on the liabilities of credit institutions as the contributions paid by institutions pursuant to Directive 2014/59 are based on an insurance-based logicrather than taxation, with the risks borne by shareholders and creditors instead of taxpayers.
Question 2
Admissibility
The Court determined that question 2 is admissible, as the referring court outlined that non-resident branches cannot deduct own funds due to lacking legal personality, which is not hypothetical in the light of the factual and regulatory context defined by the order for reference.
Substance
1.Fundamental freedom involved
The fundamental freedom at issue is mainly the freemovement of establishment under Arts. 49 and 54 of the TFEU, guaranteeing the right for companies or firms formed in an EU Member State to operate in another Member State through branches, subsidiaries, or agencies without discrimination.
2. Discrimination or Restriction to exercise fundamental freedoms
The comparability of cross-border and domestic situations must be assessed in light of the objective, purpose, and content of the national provisions at issue.
In the present case, the objective of the ASSB is to financially support the national social security system and to restore the balance between the tax burden borne by that sector.However, the provisions make no distinction based on the residency of credit institutions or their legal structure.
From the host country perspective, branches of non-resident credit institutions are unable to deduct own funds and debt instruments from their ASSB tax base due to lacking legal personality while resident credit institutions and subsidiaries of non-resident credit institutions can.
Such national legislation makes a branch less attractive for companies that have their registered office in another Member State, which is a difference in treatment capable of restricting the freedom to choose the appropriate legal form for the pursuit of an activity in another Member State and is liable to constitute a restriction on the freedom of establishment guaranteed by Articles 49 and 54 TFEU.
3. Justifications
Cohesion of the national tax system: rejected. There is no direct link between the tax advantage given to resident entities and subsidiaries and any offsetting levy borne by them, making this justification inapplicable.
Balanced allocation of taxing rights among Member States:rejected. The Portugal’s decision not to tax resident entities or subsidiaries on comparable debt instruments invalidates its argument for preserving balance in taxing rights, fail to meet the objective to safeguard symmetry between the right to tax profits and the entitlement to deduct losses of a PE.
Therefore, the restriction of freedom of establishment constituted by the legislation at issue is not justified.
4. Proportionality
Since no valid justification is established, the Court did not proceed to a proportionality test.
5. Conclusion
The freedom of establishment guaranteed by Articles 49 and 54 TFEU must be interpreted as precluding legislation of a Member State introducing a tax the basis of assessment for which is the liabilities of resident credit institutions, and of subsidiaries and branches of non-resident credit institutions, in so far as that legislation makes it possible to deduct own funds and debt instruments that are comparable to own funds, which cannot be issued by entities without legal personality, such as branches.
Comments