Introduction
In a recent legal conundrum concerning the imposition of stamp duty on short-term treasury operations, the Court of Justice of the European Union (CJEU) has rendered a landmark verdict[1] that underscores the importance of enabling the unhindered free movement of capital within the European Union.
The CJEU’s ruling found that the Portuguese stamp duty provisions, while granting exemptions to domestic short-term loans, unjustly disregarded cross-border short-term loans, contravening this crucial principle.
This ruling underscores the need for Member States to harmonize their tax laws with EU principles. It accentuates the importance of upholding non-discrimination and the free movement of capital within the EU framework.
Relevant Portuguese Law
Article 1(1) of the Código do Imposto do Selo (Stamp Duty Code; ‘the CIS’), in the version applicable to the dispute in the main proceedings[2], is worded as follows:
‘Stamp duty shall be charged on all transactions, contracts, documents, securities, papers and other legal matters or situations provided for in the [Tabela Geral do Imposto do Selo (Schedule of Stamp Duties)], including transfers of goods free of charge.’
Under Article 7(1) and (2) of the CIS:
‘1. The following shall also be exempt from stamp duty:
…
(g) financial transactions, including interest thereon, for a period not exceeding one year, provided that they are exclusively intended to cover cash-flow shortages and are carried out by venture capital companies (VCCs) in favour of companies in which they have holdings, financial transactions carried out by other companies in favour of companies controlled by them or companies in which they hold at least 10% of the voting capital or whose acquisition value is not less than EUR 5 000 000, in accordance with the last approved balance sheet, and financial transactions carried out for the benefit of a company with which there is a controlling or group relationship;
…
2. Article 7(1)(g) and (h) shall not apply if one of the parties does not have its head office or effective management in national territory, except in situations where the creditor has its head office or effective management in another Member State of the European Union or in a State in respect of which an agreement for the avoidance of double taxation on income and wealth concluded with the Portuguese Republic applies, in which case entitlement to the exemption shall subsist, unless the creditor has previously provided the financing envisaged in Article 7(1)(g) and (h) by means of transactions carried out with credit institutions or financial companies established abroad or with foreign subsidiaries or branches of credit institutions or financial companies established in national territory.’
Paragraph 17 of the Schedule of Stamp Duties, entitled ‘Financial transactions’, is worded as follows:
‘17.1. For the use of credit, in the form of funds, assets and other securities, pursuant to the grant of credit for whatever purpose, including the assignment of claims, factoring and cash transactions involving any type of financing of the assignee, member or debtor, whereby the extension of the duration of the contract shall always be regarded as a new grant of credit – up to its respective value, based on the duration:
…
17.1.4. Credit used in the form of a current account, bank overdraft or any other form for which the period of use is neither fixed nor ascertainable, on the monthly average obtained by the addition of the balances payable recorded daily, over one month, divided by 30 – 0.04%.’
Case Background
The legal dispute between Faurécia—Assentos de Automóvel and the Tax and Customs Authority (AT) revolves around stamp duty on short-term treasury operations. Faurécia, a company headquartered in Portugal and involved in subcontracting activities in the automotive sector, is owned by Faurécia Investments SA (99.99%) and Financière Faurécia SA (0.01%), both based in France as part of the Faurécia group.
To efficiently manage cash within the Faurécia group, a centralized cash management agreement was established in 2000, employing a financial strategy called ‘cash pooling’. This strategy involves consolidating the cash balances of all group entities into a single account. Following this, a loan agreement was made between Faurécia as the lender and Faurécia Investments as the borrower, with the former granting the latter a revolving credit loan for one year, with a maximum amount of 65 million euros.
At the heart of the matter lies the Stamp Duty Code (CIS) interpretation. Stamp duty is imposed on specific listed transactions, documents, and acts, with the taxable events outlined in the annexed table, including financial operations and the use of credit. The tax amount depends on the agreed-upon deadline. It is applied territorially only to acts and facts deemed to be located in Portugal under Article 4 of the Stamp Duty Code.
Furthermore, according to Article 1 (1) of the CIS, funding arrangements are subject to stamp duty if they ‘take place’ in Portugal or if the borrower is a tax resident in Portugal.
While certain short-term financial transactions are exempt from stamp duty under Article 7(1) (g) and (h) of the CIS when the entities involved are based in Portugal or, under specific conditions, in another EU Member State, Article 7(2) restricts this exemption, excluding cases where one of the entities is not based in Portugal, unless specific conditions are met. Case law has taken the position that if the lender is located in Portugal, stamp duty should apply because the funds are made available in Portugal.
This ruling arose from the Tax Authority imposing stamp duty on these credit-granting operations, viewing them as subject to the tax. Faurécia challenged the legality of the domestic rule governing the application of the exemption (Article 7.2 of the Stamp Duty Code), arguing that it violates EU law regarding cross-border upstream flows—namely, the free movement of capital.
In the Arbitral Decision issued regarding this case (case no. 279/2020-T[3]), the Court decided there was no EU law breach. However, in a previous ruling (case no. 277/2020-T[4]), the Arbitration Court acknowledged that Article 7.2 was indeed in breach of EU Law as it resulted in an unjustified restriction of the free movement of capital. Faced with these contradictory decisions, Faurécia appealed to the Supreme Court to resolve the dissent.
STA’s Referral
As the Aministrative Supreme Court (STA) states, considering that one of the participants involved in the cash pooling operation had its headquarters or effective management in France. As per Article 7(2) of the Stamp Duty Code (CIS), this would theoretically disqualify the transaction from stamp duty exemption, as the creditor was based in Portugal and the debtor resided in an EU Member State.
In the backdrop of the conflicting arbitral decisions (case no. 277/2020-T and case no. 279/2020-T) – one arbitration decision deemed a reference to the Court of Justice unnecessary and concluded that Article 7(2) of the CIS is incompatible with EU law another decision reached the opposite conclusion – the Supreme Administrative Court (STA) found it necessary to seek clarity on the interpretation of Article 7, paragraph 2, of the CIS, regarding non-discrimination and the free movement of capital within the European Union.
This conflicting stance prompted the STA to refer the matter to the Court of Justice for a decisive ruling on the following question:
“Is Article 7(2) of the Stamp Duty Code, which stipulates that the exemption from stamp duty for short-term treasury operations applies when both entities are resident in Portugal or when the borrower is resident in Portugal (with the creditor resident in the EU), but not when the borrower is resident in an EU Member State and the creditor is resident in Portugal, in compliance with the principles of non-discrimination and free movement of capital established in Articles 18, 63, and 65(3) TFEU?”
This intricate legal issue and the conflicting interpretations warranted the CJEU’s insights to bring clarity and ensure alignment with EU principles.
Related National Court Rulings
Decision no. 315/2022-T[5]
In Decision No. 315/2022-T, the Arbitral Court determined that the internal regulations concerning Stamp Duty may impede the free movement of capital by discouraging residents from engaging in loan agreements with entities established in other Member States. Arbitration courts have concluded that denying the exemption specified in Article 7(1)(h) of the Stamp Duty Code, in conjunction with Article 7(2), when the debtor has its head office or effective management in an EU Member State represents an unwarranted restriction on the free movement of capital protected by Article 63 of the TFEU.
The limitation on the scope of the exemption stipulated in Article 7(1)(h) of the Stamp Duty Code, as outlined in Article 7(2) in effect in 2020 and 2021, for situations where the debtor is located in France, and the creditor is situated in Portugal, constitutes an unjustified constraint on the free movement of capital guaranteed by Article 63 of the TFEU. Consequently, this restriction cannot be applied to the national tax system.
Decision no. 59/2022-T[6]
In Decision No. 59/2022-T, the Arbitral Court referred to the arbitral decision in process no. 277/2020-T, emphasizing the similarity of situations for residents and non-residents within cash pooling contracts. It was concluded that granting a tax advantage to residents in Portugal while denying it to non-residents constitutes unjustified discrimination under the Treaty, as there is no objective difference in their situations to justify such treatment. The decision also delved into the absence of overriding reasons of public interest to justify this discriminatory treatment, as highlighted by CJEU jurisprudence. The decision further emphasized that public interest reasons cannot justify the discriminatory treatment, particularly a hypothetical legislative intention to prevent fraud and abuse in short-term cash operations between companies of the same group. It was established that the general intention behind granting tax benefits should be to admit or even encourage behaviours rather than to prevent them, as stated in CJEU judgments. Therefore, the restriction on the scope of the exemption outlined in Article 7(2) of the Stamp Duty Code was deemed an unjustified restriction on the free movement of capital guaranteed by EU law.
Decision No. 308/2022-T[7]
Decision No. 308/2022-T emphasizes the refusal to apply the exemption provided in Article 7(1)(g) of the Stamp Duty Code in cases where the debtor does not have its head office or effective management in Portugal but in an EU Member State, is deemed as an unjustified restriction on the free movement of capital guaranteed by Article 63 of the TFEU. Consequently, this restriction cannot be applied in accordance with Article 8(4) of the Portuguese Constitution.
CJEU’s Ruling on Faurécia
The momentous ruling by the Court of Justice on Faurécia’s Case, delivered on June 20, 2024, represents a crucial milestone in the ongoing quest for upholding the foundational principles of the free movement of capital within the European Union.
This ruling casts a piercing light on the intricate legal tapestry that underpins the Stamp Duty Code, revealing how it manifests differential tax treatment for loans granted by Portuguese residents based on the borrower’s location. The Court’s discerning eye notes that such disparate treatment can dampen the allure of international investments for Portuguese residents, thus placing an undue burden on non-resident borrowers seeking to raise capital within the Portuguese territory.
In a resolute declaration, the CJEU underscores that any diminishment in the attractiveness of exercising the free movement of capital on account of national tax regulations represents a weighty constraint. The Court pronounces that legislation applicable at the time of the facts engenders a prohibitive restriction on the free movement of capital, contravening the hallowed Article 63 of the Treaty on the Functioning of the European Union.
The Court also drew attention to the absence of a reasonable justification for the disparate treatment wrought by the national regulation, finding it untethered to any discernible objective dissimilarities. This lucid exposition leaves no room for doubt that the ruling stands as a sentinel, safeguarding the importance of the free movement of capital from arbitrary encroachments and unwarranted impediments.
Concluding Insights
The legal intricacies surrounding the imposition of stamp duty on short-term treasury operations have sparked a landmark verdict by the Court of Justice of the European Union (CJEU) that illuminates the imperative of facilitating the uninhibited free movement of capital within the European Union.
At the crux of the matter lies the interpretation of Article 7(2) of the Stamp Duty Code, which carries implications that transcend national borders and resonate within the realm of EU law. This provision triggers a significant legal conundrum regarding the discriminatory treatment of residents and non-residents in the context of tax liability for the movement of capital.
The constitutional framework, particularly Article 8, paragraph 4, of the Constitution of the Portuguese Republic and the relevant provisions of the Treaty on the Functioning of the European Union (TFEU), including Articles 63 and 65, underpin the analysis. These legal tenets underscore the primacy of European Union law and the fundamental principles of the democratic rule of law while delving into the prohibition of restrictions on the movement of capital between Member States and the considerations regarding arbitrary discrimination or disguised restrictions under tax law.
Drawing from the CJEU’s jurisprudence, the situation raises fundamental questions about the compatibility of Article 7(2) of the Stamp Duty Code with EU law.
As interpreted in the proceeding under analysis, the provisions result in unjustified restrictions on the free movement of capital and discriminatory treatment between residents and non-residents, contrary to the foundational principles enshrined in EU law.
Given these poignant legal observations, the CJEU’s ruling is a crucial assertion of the non-discrimination principle and the unfettered free movement of capital within the European Union.
Its implications resonate within the realms of legal harmonization and the overarching framework of EU law, amplifying the significance of aligning national tax laws with the guiding principles of the European Union.
Dalila Mendes Leal
July 2024
[1] https://eur-lex.europa.eu/legal-content/PT/TXT/HTML/?uri=CELEX:62023CJ0420
[2] It should be noted that Article 292 of Law No. 12/2022, of June 27 (State Budget Law for 2022), amended paragraph 2 of Article 7 of the CIS.
[3] https://caad.org.pt/tributario/decisoes/decisao.php?listPageSize=100&listPage=1&id=5093
[4] https://caad.org.pt/tributario/decisoes/decisao.php?listOrder=Sorter_data&listDir=DESC&id=4982
[5] https://caad.org.pt/tributario/decisoes/decisao.php?u=1&s_selo=1&listpage=12&listOrder=Sorter_data&listDir=ASC&id=7237
[6] https://caad.org.pt/tributario/decisoes/decisao.php?listpage=272&listPage=13&id=6704
[7] https://caad.org.pt/tributario/decisoes/decisao.php?s_selo=1&listpage=12&listPage=1&id=6971