Lending in Portugal is adversely impacted by a well-known tax impact: stamp duty (SD), which is levied on:
The use of (borrowed) funds and the granting of credit;
The security package; and
The fees and commissions charged in connection with the rendering of financial activities.
The granting of loans is generally subject to SD at a rate of up to 0.6% (the same rate being levied on the security package, unless it is ancillary and simultaneous to a lending transaction subject to SD), while fees and commissions are taxed at a rate of 4%.
The issuance of bonds/notes is not subject to SD, due to a restriction resulting from Council Directive 2008/7/EC of 12 February 2008 concerning indirect taxes on the raising of capital (the Capital Duties Directive). The directive aims to reduce any obstacles – namely, taxes – that hinder the free movement of capital.
While it is clear that no SD is levied on the lending segment (i.e., on the principal amount of the bond), the application of the Capital Duties Directive to its full extent should arguably lead to the same result (i.e., no SD) on every segment of a bond issuance.
ECJ rules on Portuguese stamp duty on financial institutions’ commissions
The European Court of Justice (ECJ) has been called to assess the compatibility of the Portuguese SD levied on commissions charged by financial institutions with the restrictions imposed by the Capital Duties Directive.
In the ruling, issued on December 22 2022 (Case C-656/21), the ECJ stated that Article 5(2)(a) of the Capital Duties Directive “must be interpreted as precluding national legislation which provides for the imposition of stamp duty on, first, the remuneration received by a financial institution from a common fund management company for the supply of marketing services for the purposes of new capital contributions aimed at the subscription of newly issued shares in funds and, second, the amounts which that management company receives from common funds in so far as those amounts include the remuneration which that management company has paid to financial institutions in respect of those marketing services”.
The ECJ held that, in light of the objectives of the Capital Duties Directive, a broad interpretation of Article 5 is required, so as to ensure the practical effects of the prohibitions it lays down are adequately achieved. This includes – the ECJ confirmed – a prohibition on levying taxes whenever taxation is imposed on a transaction forming part of an overall transaction that falls within the raising of capital that is safeguarded by the European framework.
This line of reasoning created leeway to challenge whether SD levied on other commissions that are part of transactions to raise capital fall within the scope of the Capital Duties Directive.
Against this background, the ECJ was twice called again to address these matters and two more rulings were published on July 19 2023 (Case C-335/22 and Case C‑416/22). The decisions confirmed that SD cannot be levied on fees for financial intermediation services provided by a bank in connection with the placement of securities (e.g., bonds and commercial paper) or a public offer for subscription of shares (commonly designated ‘underwriting fees’), regardless of whether the provision of such financial services is a legal requirement or merely optional.
These cases were brought before the Portuguese Arbitration Court on the ground that SD is considered to be an illegitimate limitation on the financing of Portuguese companies, breaching the Capital Duties Directive.
Despite the clarity of these rulings, in the absence of an amendment to the legal provisions, it is unlikely that the position of the ECJ will be immediately implemented by the Portuguese tax authorities. Thus, two approaches may be followed:
SD is/was paid according to the literal wording of the Stamp Duty Code and a refund procedure should be initiated to recover the amounts unduly paid; or
The financing parties agree not to levy SD over said commissions, accepting the potential risk of litigation with the Portuguese tax authorities, in the event of a tax inspection.
If SD is not levied upfront, it is important to review the contractual wording in such a way that there is adequate evidence of the link between the core transaction and the fees and commissions charged. Financing parties (especially non-resident ones) may also require this matter to fall within a tax indemnity, transferring the litigation risk to the relevant borrowers.
These decisions also create an opportunity for recovering SD levied on commissions charged by financial institutions on capital-raising operations over the past four years.
Guarantees in the context of the issuance of bonds
The recent ECJ case law may have a widespread impact on the taxation of security created to guarantee obligations arising from bond issuances and other capital-raising transactions.
The issue of SD on guarantees related to bond issuances has been brought before national courts. In a recent case, the Portuguese Arbitration Court referred to the ECJ the question of whether the prohibition on taxation set forth under the Capital Duties Directive also applies to such guarantees.
This issue remains unsettled, but it will be interesting to monitor developments as Portugal may be closer to nil taxation on overall capital-raising operations. This could significantly reduce the cost of capital raised in debt issuances, with a positive impact on the financing of Portuguese companies and on the dynamism of the financial market.