CJEU: Portuguese income tax for interest on bonds and securities received abroad violates the free movement of capital

Written By Manuel Poças

The Court of Justice of the European Union (CJEU) has stated that the Portuguese Personal Income Tax (IRS) for interest on bonds and securities received abroad violates the free movement of capital.

According to a decision made by the Court of Justice of the European Union, in response to a question posed by the Portuguese Supreme Administrative Court, the Portuguese legislation on the taxation of interest on bonds and securities received in another country violates one of the four fundamental freedoms of the European Union.

In agreement with the Single European Act, signed in 1986, EU membership means accepting the fundamental freedoms of goods, capital, services, and people. These freedoms, which have been legally guaranteed since the amending treaty came into effect, are considered inseparable, and are the cornerstone of the EU, the European Single Market, and the euro.

In accordance with the judgment of the CJEU, legislation such as the Portuguese does not respect the fundamental freedom of free movement of capital.

The current legislation subjects interest income earned by taxpayers to a progressive tax rate of up to 40% when such income comes from bonds and debt securities issued by an entity of another Member State or a third State such as the Swiss Confederation.

In contrast, when said interest income comes from bonds and securities issued by an entity of the respective Member State of residence and is paid by such entity, the tax rate is only 20%.

This discrepancy, according to the court, violates the free movement of capital.

When the CJEU rules that national legislation violates one of the fundamental freedoms, it typically means that it is incompatible with EU law. If this happens, the consequences can include:

1 – Invalidation of national law (if CJEU declares it invalid, the law cannot be enforced or applied);

2 – Affected individuals may have the right to claim damages or compensation;

3 – CJEU can order injunctions to stop violations or require the Member State to take the necessary actions to comply with EU law;

4 – Potential financial consequences (financial penalties are rare and exceptional);

5 – Ruling can exert legal and political pressure on the Member State to amend its legislation.

It is important to note that the CJEU’s decisions are binding to all Member States and that the national courts are obligated to follow the CJEU’s interpretation of EU law. Failure to do so may lead to infringement proceedings by the European Commission against the non-compliant Member State.

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