Global Daily Tax News, ECJ Rules Against Portugal In Swiss Bank Interest Tax Dispute, (Oct 17, 2023)

The European Court of Justice has issued a preliminary judgment in favor of a taxpayer in a dispute involving authorities in Portugal and the taxation of interest income on bonds and debt instruments paid by institutions in Switzerland.

The case centers on whether Portuguese authorities are required to apply the same tax rates as those applies to similar domestic income, based on the agreement between the European Community and the Swiss Confederation providing for measures equivalent to those laid down in Directive 2003/48/EC on taxation of savings income in the form of interest payments.

  In 2005, the taxpayer received interest income from bonds and debt instruments paid by a Swiss bank.

In May 2006, the taxpayer submitted an income declaration relating to that interest income. By a tax notice for 2005, the interest income was aggregated with the taxpayer's other income and made subject to personal income tax at the maximum progressive rate of 40 percent. In July 2008, the taxpayer lodged an application for an ex officio review of that tax notice, which was rejected. In January 2010, the taxpayer brought an action before the Administrative and Tax Court, Sintra, Portugal, against the tax notice, which was dismissed entirely by a judgment of November 1, 2020.

The taxpayer brought an appeal against that judgment before the referring court, the Supreme Administrative Court, Portugal.

The taxpayer argued that, first of all, the applicable Portuguese legislation infringes the free movement of capital and the freedom to provide services, in that it treats persons resident in Portugal differently according to whether the interest income which they receive derives from bonds and term deposits issued by entities established in Portugal or is paid by such entities, or whether that interest income derives from bonds and term deposits issued by entities established in third countries and is paid by such entities.

Under Portuguese law, the interest income received from the former entities is taxed at the definitive rate of 20 percent, while that received from the latter is subject to compulsory aggregation of income and taxed at a progressive rate of up to 40 percent.

The taxpayer argued that the Portuguese legislation infringes the provisions of Directive 2003/48 and those of the Agreement which provides for equivalent measures, in that that legislation taxes income paid to it him by Swiss banks more heavily than if that income had been paid by Portuguese banks, even though he has correctly fulfilled his tax obligations in Portugal and allowed information to be exchanged between that Member State and the Swiss authorities.

In its October 12, 2023, judgment, the ECJ ruled: "Article 56 EC must be interpreted as precluding legislation of a Member State which subjects interest income received by taxpayers of that Member State to a progressive tax rate of up to 40 percent where that interest income is derived from bonds and debt instruments issued by an entity of another member state or of a third state such as the Swiss Confederation and paid by such an entity, whereas, where such interest income derives from bonds and debt instruments issued and paid by an entity in their member state of residence, it is taxed at a lower definitive rate of 20 percent."

It said: "Article 2(4) of the Agreement between the European Community and the Swiss Confederation providing for measures equivalent to those laid down in Council Directive 2003/48/EC on taxation of savings income in the form of interest payments, read in conjunction with Article 1(2) thereof, must be interpreted as precluding legislation of a member state subjecting interest income received, from July 1, 2005, by taxpayers of that Member State who have opted for the voluntary disclosure procedure or otherwise declared that interest income to the tax authorities of their Member State of residence, in so far as it is not excluded from the retention under Article 1(2), to a progressive tax rate of up to 40 percent where that interest income is derived from bonds and debt instruments paid by a Swiss paying agent, whereas, where the same interest income is paid by a resident paying agent, it is taxed at a lower definitive rate of 20 percent."

The ruling was released in FL v. Autoridade Tributaria e Aduaneira (Case C-312/22), released on October 12, 2023.