On 9 March 2020 a ruling by the European Court of Justice (ECJ) in a case on free movement of capital was published. The case State of Canada v Autoridade Tributaria e Aduaneira related to dividends paid to the Canada Pension Plan Investment Board by Portuguese companies. Canada argued that the withholding tax imposed on the dividends was contrary to the free movement of capital, one of the fundamental EU freedoms.

The freedom of movement of capital applies to cross-border flows between EU member states and to flows between EU member states and third countries.

The ECJ was requested to rule on whether it is in line with the principle of freedom of movement of capital between member states and third countries if there is an effective corporation tax rate that applies more disadvantageously to entities resident in a third country than to a similar entity resident in the national territory.

ECJ Decision

The ECJ held that Articles 63 and 65 of the Treaty on the Functioning of the EU (TFEU) preclude legislation providing that dividends distributed by a resident company are taxed at a higher rate if received by an entity resident in a third country that is not commercial, industrial or agricultural in nature than if received by a resident entity. The situation would differ if the double tax convention of 14 June 1999 between Canada and Portugal neutralized these effects. The ECJ noted that the latter point was for the referring court to decide.