Case Note: Real Vida Seguros SA v Autoridade Tributária e Aduaneira (C-449/20)/Yang Shanshan

Case Note: Real Vida Seguros SA v Autoridade Tributária e Aduaneira (C-449/20)

Yang Shanshan

1. Case Summary

1.1 Facts

In 1999 and 2000, Real Vida Seguros, S.A. received dividends attached to shares listed on the Portuguese stock exchange and also on foreign stock exchanges, and deducted 50% of those dividends from its taxable base according to the Portuguese tax law.

However, following a tax audit, the tax authorities made adjustments to the taxable income for the corporate income tax calculations for the years 1999 and 2000. The adjustments were made due to the fact that the tax benefit of the 50% deduction was granted with the view to stimulate the Portuguese stock exchange and, therefore, it should exclusively apply to dividends received on shares listed on the Portuguese stock exchange.

After the tax adjustments were challenged in court without success, the case was escalated to the CJEU.

1.2 Legal background and issue

Article 31 of the EBF allowed for a 50% deduction on dividends received for personal or corporate income tax purposes. The Portuguese tax authority interpreted this to apply only to dividends from shares listed on the Portuguese stock exchange, not those from foreign exchanges. Furthermore, the Statute governing tax benefits defines tax benefits as exceptional measures adopted in order to protect non-fiscal public interests.

The core issue was whether the exclusion of dividends attached to shares listed on foreign stock exchanges from the 50% deduction from the corporate income tax base constituted a breach of the free movement of capital under article 63 of the TFEU.

1.3 CJEU Decision

The CJEU ruled that Portugal’s tax practice according to which, the dividends attached to shares listed on Portuguese stock exchange account for only 50% of their amount, whereas dividends attached to shares listed on the stock exchanges of the other Member States are taken into account in full, infringes the free movement of capital under Articles 63 and 65 TFEU. It held that the tax advantage conditional on the listing of shares on the national stock exchange results in a restriction that deters investments in non-resident companies.

2. Case Analysis

2.1 Fundamental Freedom Involved

The case involves the fundamental freedom of capital movement within the European Union.

2.2 Discrimination or Restriction to Cross-Border Activities

Measures that restrict the free movement of capital, as prohibited by Article 63(1) of the TFEU, include actions that discourage non-residents from investing in a Member State or residents from investing abroad. Specifically, measures that treat income from another Member State less favorably than domestic income can be problematic.

The CJEU noted that Article 31 of the Statute governing tax benefits does not explicitly differentiate between dividends from resident and non-resident companies. However, the Commission highlighted that the number of non-resident companies listed on the Portuguese stock exchange is limited compared to resident companies. The CJEU emphasized that legislation lacking a clear distinction between resident and non-resident companies may still indirectly restrict capital movement if it imposes conditions that only resident companies can meet.

Thus, a tax practice that grants favorable treatment exclusively to dividends from shares listed on the national stock exchange favors resident companies and disadvantages non-resident investments. The CJEUconcluded that disallowing a 50% deduction for dividends from foreign shares in corporate income tax calculations could deter investments in non-resident companies, constituting a restriction on the free movement of capital.

2.3 Justification(s)

Article 65(1) of the TFEU allows Member States to adopt provisions of their domestic tax systems that distinguish between taxpayers who are not in the same situation. However, the CJEU argued that this derogation is itself limited by article 65(3) of the TFEU, which prohibits national tax systems from applying provisions that introduce an arbitrary discrimination or a disguised restriction on the free movement of capital. Hence, for a national tax legislation to be regarded as compatible with the TFEU, the difference in tax treatment must concern situations that are not objectively comparable or be justified by an overriding reason in the public interest.

The CJEU took the view that the situation of a taxpayer investing in shares listed on the Portuguese stock exchange was considered comparable with that of a taxpayer who makes investments in shares listed on foreign stock exchanges, since both invest their capital in listed companies for the purpose of making profits.

Also, the CJEU considered that promotion of the Portuguese stock exchange cannot justify a restriction of the fundamental freedoms guaranteed by the TFEU, as there is no indication suggesting that the objective of promoting the Portuguese stock exchange would not have been achieved if the tax benefit provided under article 31 of the Statute governing tax benefits had also applied to foreign dividends.

2.4 Proportionality

The CJEU found that the tax advantage was not proportionate to the objective of promoting the national stock market. It observed that the tax practice could not be considered justifiable because it did not treat objectively comparable situations in a non-discriminatory manner. The Court emphasized that even if the objective of promoting the national stock market was permissible, there was no indication that extending the tax advantage to dividends from foreign listings would have undermined the achievement of this objective.

3. Conclusion

The case underscores the CJEU’s strict interpretation of the fundamental freedoms within the EU. If a provision constitutes a derogation from the fundamental principle of the free movement of capital, it must be interpreted strictly. The case reaffirms that Member States must exercise their fiscal autonomy in compliance with EU law, and that tax measures which discriminate against cross-border investments based on the location of the stock exchange are incompatible with the TFEU. The decision is a reminder to Member States that even measures aimed at promoting domestic financial markets must respect the non-discriminatory principles of the EU’s internal market. Meanwhile, having regard to the principles of the primacy of EU law and compatible interpretation, from which it can be seen that a reference for a preliminary ruling is an essential instrument for ensuring the uniform interpretation and application of EU law in all Member States.