CELEX: 62009CJ0493
Language: en
Date: 2011-10-06 00:00:00
Title: Judgment of the Court (First Chamber) of 6 October 2011. # European Commission v Portuguese Republic. # Failure of a Member State to fulfil obligations - Article 63 TFEU and Article 40 of the EEA Agreement - Free movement of capital - Foreign and national pension funds - Corporation tax - Dividends - Exemption - Difference in treatment. # Case C-493/09.

JUDGMENT OF THE COURT (First Chamber)
      6 October 2011 (*)
      
      (Failure of a Member State to fulfil obligations – Article 63 TFEU and Article 40 of the EEA Agreement – Free movement of capital – Foreign and national pension funds – Corporation tax – Dividends – Exemption – Difference in treatment)
      In Case C‑493/09,
      ACTION under Article 258 TFEU for failure to fulfil obligations, brought on 1 December 2009,
      European Commission, represented by R. Lyal and M. Afonso, acting as Agents, with an address for service in Luxembourg,
      
      applicant,
      v
      Portuguese Republic, represented by L. Inez Fernandes and H. Ferreira, acting as Agents,
      
      defendant,
      THE COURT (First Chamber),
      composed of A. Tizzano, President of the Chamber, J.-J. Kasel, A. Borg Barthet, E. Levits (Rapporteur) and M. Safjan, Judges,
      Advocate General: P. Mengozzi,
      Registrar: M. Ferreira, Principal Administrator,
      having regard to the written procedure and further to the hearing on 24 March 2011,
      after hearing the Opinion of the Advocate General at the sitting on 25 May 2011,
      gives the following
      Judgment
      1        By its action the European Commission seeks a declaration from the Court that, by taxing dividends received by non-resident
         pension funds at a higher rate than dividends received by pension funds resident in Portuguese territory, the Portuguese Republic
         has failed to fulfil its obligations under Article 63 TFEU and Article 40 of the Agreement on the European Economic Area of
         2 May 1992 (OJ 1994 L 1, p. 3, ‘the EEA Agreement’).
      
       Legal context
      2        Under Article 16(1) of the scheme applicable to tax advantages (Estatuto dos Beneficios Fiscais, ‘the EBF’), income earned
         by those pension funds and entities assimilated to them that are established and operate in accordance with Portuguese law
         are exempt from corporation tax (Imposto sobre o Rendimento das Pessoas Colectivas, ‘the IRC’).
      
      3        Article 16(4) of the EBF provides that, in the event of non-compliance with the conditions laid down in Article 16(1), enjoyment
         of the advantage provided for in Article 16(1) is not to apply in respect of the year concerned, the companies managing the
         pension fund and assimilated entities, including mutual associations, being liable as principals for taxes owed on the funds
         or assets for whose management they are responsible and being liable to pay the tax due within the period provided for in
         Article 120(1) of Code on Corporation Tax (Código do Imposto sobre o Rendimento das Pessoas Colectivas, the ‘CIRC’).
      
      4        Article 4(2) of the CIRC provides that legal persons and other entities that have neither their headquarters nor their actual
         management in Portuguese territory remain subject to the IRC only in respect of income obtained in Portuguese territory. Article
         80(4)(c) of the CIRC specifies that the rate of the IRC is 20%, without prejudice to the provisions of double taxation agreements.
      
      5        Under Article 4(3)(c), paragraph 3, of the CIRC, income from the investment of capital owed by a person having its domicile,
         headquarters or actual management on Portuguese territory, or payment of which is attributable to a permanent establishment
         situated on Portuguese territory, forms part of the income of non-residents that is taxable in Portugal.
      
      6        Under Article 88(1)(c), (3)(b) and (5) of the CIRC, the IRC is levied at source as definitive tax.
      
      7        Article 88(11) of the CIRC states:
      
      ‘A tax rate of 20% shall be imposed on profits distributed by entities subject to the IRC to entities qualifying for total
         or partial exemption, including, in this case, income on capital, where the securities giving entitlement to the profits have
         not remained in the continuous ownership of the same taxable person throughout the year preceding the date of acquisition
         have not been retained for the time necessary to complete that period.’
      
      8        Article 88(12) of the CIRC provides:
      
      ‘Any tax deducted at source shall be deducted from the amount of the tax determined in accordance with the provisions of paragraph
         11. Tax deducted at source may not then be deducted under Article 90(2).’
      
       Pre-litigation procedure
      9        On 23 March 2007 the Commission sent a letter of formal notice to the Portuguese Republic, in which it claimed that Portuguese
         tax provisions relating to the treatment of dividends and interest received by pension funds not resident in Portuguese territory
         were incompatible with Article 63 TFEU and Article 40 of the EEA Agreement.
      
      10      As it was not satisfied with the Portuguese Republic’s response of 18 June 2007, on 8 May 2008 the Commission sent a reasoned
         opinion to that Member State, calling upon it to adopt the measures necessary to comply therewith within two months of receipt.
      
      11      In its reply of 14 August 2008, the Portuguese Republic acknowledged that the tax scheme in question constituted a restriction
         on the free movement of capital but submitted that such a restriction was justified under European Union (‘EU’) law. In particular,
         it submitted that the more favourable tax scheme reserved for pension funds resident in Portugal offsets the specific statutory
         duties imposed on them.
      
      12      Since it was not satisfied by those explanations, the Commission decided to bring these proceedings for failure to fulfil
         obligations.
      
       Procedure before the Court
      13      By application lodged at the Registry of the Court on 8 April 2010 under the third subparagraph of Article 40 of the Statute
         of the Court of Justice of the European Union and Article 93 of the latter’s Rules of Procedure, the EFTA Surveillance Authority
         applied to intervene in this case in support of the form of order sought by the Commission.
      
      14      By order of 15 July 2010, the President of the Court rejected that request.
      
       The action
       Arguments of the parties
      15      The Commission submits that the Portuguese tax system applicable to pension funds establishes a difference in treatment on
         the basis of the place of residence of those funds. Thus, dividends paid to pension funds established and operating in accordance
         with Portuguese law are entirely exempt from the IRC, whereas similar dividends paid to non-resident pension funds are subject
         to it.
      
      16      The Commission considers that that difference in treatment constitutes a restriction on the free movement of capital, insofar
         as investment by non-resident pension funds in Portuguese companies is made less attractive.
      
      17      At the outset, the Portuguese Republic states that, according to Article 88(11) of the CIRC, there is no difference in treatment
         between resident and non-resident pension funds where the distributed dividends arise from shares held by the beneficiary
         fund for a period of less than a year, as those profits are, in both cases, liable to the IRC.
      
      18      In other cases, the Portuguese Republic acknowledges the existence of a restriction on the free movement of capital but submits
         that it is justified in two respects.
      
      19      Firstly, the tax scheme applicable to pension funds is justified for the purpose of preserving the coherence of the tax system.
         Thus, the exemption from tax of the income of resident pension funds is offset by the taxing of pensions paid to beneficiaries
         resident in Portugal by means of tax on the income of natural persons. In the context of pensions, a broad interpretation
         of that overriding reason relating to the public interest is necessary in order to eliminate any risk of interference with
         the financial balance of the social security system.
      
      20      Secondly, the Portuguese Republic submits that the limitation of the IRC exemption to resident pension funds is based on requirements
         linked to effective fiscal supervision. Thus, the statutory requirements giving rise to the entitlement to benefit from the
         IRC exemption require it to be possible for the funds wishing to avail themselves of that exemption to be directly supervised
         by the Portuguese tax authorities.
      
      21      Thus, pension funds resident in Portugal are subject not only to prudential requirements and particularly strict investor
         protection arising from Directive 2003/41/EC of the European Parliament and of the Council of 3 June 2003 on the activities
         and supervision of institutions for occupational retirement provision (OJ 2003 L 235, p. 10), but also to additional conditions
         specific to Portuguese law, in particular with regard to financial responsibility. Thus, Article 16(4) of the EBF provides,
         inter alia, that pension fund management companies are primarily responsible for tax debts of the funds or assets they are
         responsible for managing.
      
      22      Supervision of those matters is particularly complex and requires the Portuguese tax authorities to be able to communicate
         directly with the pension fund qualifying for the IRC exemption. In particular, in the event of non-compliance with the requirements
         of Portuguese law relating to the IRC exemption, direct surveillance of the funds is essential to ensure repayment of the
         amounts due by way of IRC. Such control would be impossible with regard to pension funds resident in another Member State
         and, a fortiori, to those resident in a third State party to the EEA Agreement, since the provisions of EU law on cooperation
         in tax matters are not applicable in this context.
      
      23      In response to those arguments, the Commission submits, firstly, that the justification relating to the coherence of the tax
         system cannot be upheld in relation to the restriction on the free movement of capital caused by the Portuguese pension funds
         tax system. 
      
      24      Thus, on the one hand, the IRC levied on the income of non-resident pension funds does not constitute a direct source of finance
         for the social security system. On the other hand, the offsetting of the loss of tax revenue resulting from the IRC exemption
         by taxing pension funds is effective only in cases where the beneficiaries of those pensions reside in Portugal.
      
      25      Secondly, the Commission states that the restriction at issue is not justified by considerations linked to effective fiscal
         supervision either. 
      
      26      Indeed, on the one hand, the alleged competitive advantage, from which non-resident pension funds benefit in relation to the
         conditions to be fulfilled, cannot justify less favourable tax treatments being applied to them.
      
      27      On the other hand, the tax treatment reserved for non-resident pension funds cannot be regarded as seeking to protect the
         companies in which they invest as well as the individuals residing in Portugal. It simply restricts the benefit of the IRC
         exemption to resident pension funds, without allowing non-resident pension funds the chance to prove that they offer guarantees
         equivalent to those offered by resident funds. Therefore, to secure the attainment of the objectives set out by the Portuguese
         Republic, it would be sufficient to request non-resident pension funds to provide evidence of their status and of the statutory
         framework in which they operate, where the cooperation and mutual assistance mechanisms provided for by EU law, but also by
         multilateral and bilateral agreements with regard to third States party to the EEA Agreement, enable the Portuguese authorities
         to carry out the necessary checks and even to recover tax debts owed.
      
       Findings of the Court
       The existence of a restriction on the free movement of capital
      28      It follows from settled case-law that the measures prohibited by Article 63(1) TFEU, as restrictions on the movement of capital,
         include those that are such as to discourage non-residents from making investments in a Member State or to discourage that
         Member State’s residents from doing so in other States (Joined Cases C‑436/08 and C‑437/08 Haribo Lakritzen Hans Riegel and Österreichische Salinen [2011] ECR I‑0000, paragraph 50).
      
      29      In relation to whether the national law at issue constitutes a restriction on the free movement of capital, it must be noted
         that in order for them not to be liable to the IRC, dividends distributed to pension funds by companies established in Portuguese
         territory must fulfil two conditions. On the one hand, they must be paid to pension funds established and operating in accordance
         with Portuguese law. On the other hand, those dividends must be distributed in respect of shares that have been in the continuous
         ownership of the same pension fund for a minimum period corresponding to one year preceding the date of their availability
         and retained for the time necessary to complete that period.
      
      30      It follows that, due to the first condition provided for by the national law at issue, investment that may be made in a Portuguese
         company by a non-resident pension fund is less attractive than an investment that may be made by a resident pension fund.
         Indeed, in the first case only dividends distributed by the Portuguese company are subject to a rate of 20% in respect of
         the IRC even if they arise from shares that have been in the continuous ownership of that pension fund for a minimum period
         corresponding to one year preceding the date of their availability. That difference in treatment has the effect of dissuading
         non-resident pension funds from investing in Portuguese companies and savers resident in Portugal from investing in such pension
         funds.
      
      31      That difference in treatment however does not exist where the dividends paid by a resident company arise from shares that
         have not been in the continuous ownership of the same taxable person during the year preceding the date of their availability.
         Indeed, under Article 88(11) of the CIRC, the exemption provided for in Article 16(1) of the EBF is not applicable in those
         conditions, so that those dividends are subject to corporation tax whatever the place of residence of the pension fund to
         which they are paid.
      
      32      In those circumstances, it must be concluded that, in relation to the taxation of dividends distributed by companies established
         in Portuguese territory in respect of shares owned by a pension fund for longer than one year, the disputed law constitutes
         a restriction on the free movement of capital that is prohibited, in principle, by Article 63 TFEU.
      
       Reasons that may justify the law at issue
      33      As is apparent from settled case-law, national measures restricting the free movement of capital may be justified on the grounds
         set out in Article 63 TFEU or by overriding reasons relating to the public interest provided that they are appropriate to
         secure the attainment of the objective which they pursue and do not go beyond what is necessary in order to attain it (see
         Case C‑233/09 Dijkman and Dijkman-Lavaleije [2010] ECR I‑0000, paragraph 49 and the case-law cited).
      
      34      In the Portuguese Republic’s view, the law at issue is justified by reasons relating to the necessity of preserving, on the
         one hand, the coherence of the tax system and, on the other hand, the effective supervision of the requirements which pension
         funds must meet in order to benefit from the exemption from the corporation tax in dispute.
      
      –       The objective relating to the necessity of preserving the coherence of the tax system.
      35      It should be noted that the Court has already acknowledged that the need to maintain the coherence of a tax system can justify
         a restriction on the exercise of the fundamental freedoms guaranteed by the EC Treaty (see Case C‑418/07 Papillon [2008] ECR I‑8947, paragraph 43, and Dijkman and Dijkman-Lavaleije, paragraph 54).
      
      36      For an argument based on such a justification to succeed, the Court requires, however, a direct link to be established between
         the tax advantage concerned and the offsetting of that advantage by a particular tax levy, with the direct nature of that
         link falling to be examined in the light of the objective pursued by the rules in question (see Papillon, paragraph 44, and Dijkman and Dijkman-Lavaleije, paragraph 55).
      
      37      In that regard, the Portuguese Republic has not satisfactorily shown that such a link exists where it merely submits that
         the corporation tax exemption offsets the income tax payable by members of pension funds resident in Portugal in respect of
         the pensions that they receive and thus allows the double taxation of that income to be avoided.
      
      38      Moreover, it must be noted that, on the one hand, it does not follow from the law at issue that income paid to beneficiaries
         residing in Portugal by non-resident pension funds is not subject to income tax. Therefore, in such circumstances, dividends
         paid to non-resident funds are subject to corporation tax and the amount paid to resident beneficiaries by those funds is
         subject to income tax.
      
      39      On the other hand, where a resident fund pays income to a non-resident beneficiary, the dividends it receives are exempt from
         corporation tax, whatever the tax treatment reserved for the income that those funds pay in the State of residence of the
         beneficiary of those funds.
      
      40      Moreover, concerning the argument relating to the need to ensure the maintenance of the Portuguese pension system, the Portuguese
         Republic did not put forward any information making it possible to determine the extent to which not exempting dividends paid
         to non-resident funds from corporation tax affects the financing of that system.
      
      41      Therefore, having regard to the information it has put forward, the Portuguese Republic cannot rely on the need to preserve
         the coherence of the tax system in order to justify the restriction on the free movement of capital that arises from the legislation
         at issue.
      
      –       The objective relating to the need to guarantee effective supervision
      42      It is settled case-law that the need to guarantee the effectiveness of fiscal supervision constitutes an overriding reason
         in the public interest capable of justifying a restriction on the exercise of fundamental freedoms guaranteed by the Treaty
         (see Dijkman and Dijkman-Lavaleije, paragraph 58 and the case-law cited).
      
      43      In the Portuguese Republic’s view, the exemption from the IRC is consideration for pension funds’ satisfying the requirements
         laid down by Directive 2003/41 and Portuguese law.
      
      44      In particular, the conditions that resident pension funds must fulfil in order to avail themselves of the corporation tax
         exemption are intended to ensure the maintenance of the Portuguese pension system, by subjecting those funds to particularly
         strict requirements as concerns management, operation, capitalisation and financial responsibility. The supervision of those
         requirements is possible only insofar as those funds reside in Portugal.
      
      45      In that regard, it must, however, be noted that the legislation in dispute excludes, in principle, non-resident pension funds
         from availing themselves of the IRC exemption, without giving them the chance to prove that they meet the requirements set
         by Portuguese law. Therefore, the Portuguese Republic cannot maintain that the difference noted between the treatment afforded
         to resident pension funds and that reserved for non-resident pension funds in respect of the IRC exemption is consideration
         for the first of those funds’ satisfying the requirements laid down by that legislation. Non-resident pension funds are in
         any event excluded from benefiting from that exemption, even if they fulfil the requirements needed to obtain that exemption.
      
      46      National law that absolutely prevents a pension fund from submitting evidence that it satisfies the requirements that would
         allow it to benefit from the IRC exemption, if it were resident in Portugal, is not justified in the name of the effectiveness
         of fiscal supervision. It cannot be excluded, a priori, that pension funds resident in a Member State other than the Portuguese
         Republic may be able to provide relevant documentary evidence enabling the Portuguese tax authorities to ascertain, clearly
         and precisely, that they meet equivalent requirements to those laid down by Portuguese law, in their State of residence.
      
      47      Such an assessment applies to EU Member States and Member States of the European Economic Area (‘EEA’) particularly because,
         as the Advocate General noted at points 57 and 58 of his Opinion, Decree-law No 12/2006 of 20 January 2006, put forward by
         the Portuguese Government in its defence, is intended to transpose Directive 2003/41, the application of which has been extended
         to EEA Member States.
      
      48      In any event, the fact that it is absolutely impossible for non-resident pension funds to benefit from the exemption granted
         to pension funds resident in Portugal cannot be considered to be proportionate with regard to the difficulties pleaded by
         the Portuguese Republic in relation to the collection of information and recovery of tax debts.
      
      49      Firstly, in relation to funds residing in a Member State other than the Portuguese Republic, Council Directive 77/799/EEC
         of 19 December 1977 concerning mutual assistance by the competent authorities of the Member States in the field of direct
         taxation (OJ 1977 L 336, p. 15), and also Council Directive 2008/55/EC of 26 May 2008 on mutual assistance for the recovery
         of claims relating to certain levies, duties, taxes and other measures (OJ 2008 L 150, p. 28) provide the Portuguese authorities
         with a cooperation and assistance framework enabling them to obtain the information required by national law, and also the
         means of recovering possible tax debts from non-resident pension funds.
      
      50      Secondly, in relation to pension funds residing in an EEA Member State, while it is true that the mechanisms described in
         the preceding paragraph of this judgment are not applicable as things stand, it must be noted, on the one hand, that the law
         at issue does not make the benefit of the exemption from corporation tax subject to a bilateral assistance agreement between
         the Portuguese Republic and the EEA Member States which enables cooperation and assistance equivalent to that put in place
         between the EU Member States. On the other hand, as the Advocate General noted at point 70 of his Opinion, measures less restrictive
         of the free movement of capital than those in the law at issue could be envisaged to ensure the recovery of tax debts, such
         as the obligation to provide, a priori, the necessary financial guarantees for the payment of those debts.
      
      51      It follows that the restriction on the free movement of capital arising from the law in dispute cannot be justified on the
         grounds relied upon by the Portuguese Republic.
      
      52      Accordingly, it must be held that, by reserving the benefit of the corporation tax exemption to pension funds resident in
         Portuguese territory alone, the Portuguese Republic has failed to fulfil its obligations under Article 63 TFEU and Article
         40 of the EEA Agreement.
      
       Costs
      53      Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs if they have been
         applied for in the successful party’s pleadings. As the Commission has applied for a costs order against the Portuguese Republic
         and the latter has been unsuccessful, the Portuguese Republic must be ordered to pay the costs.
      
      On those grounds, the Court (First Chamber) hereby:
      1.      Declares that, by reserving the benefit of the corporation tax exemption to pension funds resident in Portuguese territory
            alone, the Portuguese Republic has failed to fulfil its obligations under Article 63 TFEU and Article 40 of the Agreement
            on the European Economic Area of 2 May 1992;
      2.      Orders the Portuguese Republic to pay the costs.
      [Signatures]
      * Language of the case: Portuguese.