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Wednesday, 13 July 2016

The end of withholding tax on gross basis! : ECJ decision in Brisal Case

On July 13, 2016 the European Court of Justice rendered a milestone decision on withholding tax on interest payments within the EU (case C-18/15, Brisal – KBC Finance Ireland).

The case concerns the question whether the Portuguese law withholding tax on interest paid to non-resident financial institutions is contrary to EU law as it is imposed on the gross amount of the interest paid, whereas resident financial institutions are (only) taxed on their net income. Although the case only concerns the Portuguese rules, this ruling of the Court will have an immediate effect on the EU as a whole, as almost all EU member states have similar withholding tax rules as Portugal, including Belgium. In addition this case is not only relevant for the banking industry but for all companies involved in cross-border financing. It is therefore without any doubt one of the most important decisions the Court issued in the field of direct taxation in the last years.


Under its domestic law, Portugal levies a 20% withholding tax on interest paid to non-residents, which in this case was reduced to 15% under the double tax treaty with Ireland. The tax is withheld from the gross amount, without any deduction for costs. Portuguese resident companies, on the other hand, are subject to 25% corporate income tax on their net income, i.e. after deduction of business expenses, such as financing costs. 

KBC Ireland granted a loan to the Portuguese company Brisal. On the gross interest paid, the latter withheld 15% withholding tax as provided under Portuguese law and the double tax treaty between Portugal and Ireland.  KBC argued that the Portuguese withholding tax rules unjustifiably infringe the free movement to provide services and that it should be allowed to deduct from the withholding tax base its business expenses, including the financing cost relating to the loan, in the same way as Portuguese financial institutions.

The Court

In this milestone case, the Court ruled in favour of KBC’s reasoning by deciding that EU law indeed precludes national legislation which, as a general rule, taxes non-resident financial institutions on the interest income received within the Member State concerned without giving them the opportunity to deduct business expenses directly related to the activity in question, whereas such an opportunity is given to resident financial institutions.

According to the Court ‘directly related business expenses’ must be understood as expenses occasioned by the activity in question, and therefore necessary for pursuing that activity. These costs include for example, travel and accommodation expenses, and legal or tax advice, for which it is relatively easy to establish the direct link with the loan in question and to prove the actual amount involved. However, these costs also include financing costs and even a fraction of the general expenses of the financial institution which may be regarded as necessary for the granting of a particular loan.

Hence, the tax basis for withholding taxes on interest paid to EU banks should (at least) be limited to the spread between the inbound interest the bank receives and the outbound interest it has to pay to finance the loan. The Court’s ruling in the Brisal case will consequently have a substantial impact on the tax cost relating to debt financing. This should not only benefit the bank concerned but also its clients as the financing cost relating to loan is equally lowered.

Our recommendation

We recommend that taxpayers examine whether any tax advantage has been unavailable to them in the past because of a withholding on gross basis and, where necessary, file an objection to preserve rights. In addition, taxpayers should also verify whether this case may create opportunities to lower their financing costs in the future.

Please contact your trusted adviser at Tiberghien in case you have any queries.


Koen Morbée

13 July 2016

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