Case C--18/15

Brisal — Auto Estradas do Litoral SA

and

KBC Finance Ireland

v

Fazenda Pública

(Request for a preliminary ruling

from the Supremo Tribunal Administrativo)

‛Reference for a preliminary ruling — Article 56 TFEU — Freedom to provide services — Restrictions — Tax legislation — Taxation of interest received — Difference in treatment between resident financial institutions and non-resident financial institutions)’

Summary — Judgment of the Court (Fifth Chamber), 13 July 2016

1. Freedom to provide services — Restrictions — Tax legislation — Income tax — Withholding tax applied to remuneration of non-resident service providers — Lawfulness — Conditions

   (Art. 49 EC)

2. Freedom to provide services — Restrictions — Tax legislation — Income tax — Taxation of interest received — Exclusion of non-residents from the right to deduct business expenses — Not permissible — Rate of taxation more favourable to that applied to residents — No effect — No justification — Business expenses directly related to interest income — Responsibility for assessment lies with the national court

   (Art. 49 EC)

1.  Article 49 EC does not preclude national legislation under which a procedure for withholding tax at source is applied to the income of financial institutions that are not resident in the Member State in which the services are provided, whereas the income received by financial institutions that are resident in that Member State is not subject to such withholding tax, provided that the application of the withholding tax to the non-resident financial institutions is justified by an overriding reason in the general interest and does not go beyond what is necessary to attain the objective pursued.

   (see paras 22, 55, operative part)

2.  Article 49 EC 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.

   With regard to taking account of business expenses which have a direct connection to the activity pursued, resident providers and non-resident providers are in a comparable situation. Thus, Article 49 EC precludes national legislation which, as a general rule, takes into account gross income when taxing non-residents, without deducting business expenses, whereas residents are taxed on their net income, after deduction of those expenses. In that respect, no distinction is made between the different categories of services, given that Article 49 EC, read in conjunction with Article 50 EC, refers, without distinction, to all the categories of services listed in the latter provision, notwithstanding the fact that it may be impossible for banking services to establish any characteristic link between costs incurred and interest income received. Consequently, the services provided by financial institutions cannot, in the light of the principle of the freedom to provide services referred to in Article 49 EC, as a matter of principle, be treated differently from the provision of services in other areas of activity. In that context, it is irrelevant that non-resident financial institutions might be subject to a more favourable tax rate than the one which is applied to resident financial institutions. Unfavourable tax treatment contrary to a fundamental freedom cannot be regarded as compatible with EU law because of the potential existence of other advantages.

   Furthermore, such a restriction cannot be justified either by the objective of preserving the balanced allocation of taxation powers between Member States, or by the desire to prevent the double taxation of business expenses or the need to ensure the effective collection of tax.

   In that respect, it is for the national court to assess, on the basis of its national law, which business expenses may be regarded as being directly related to the activity in question. It falls to that court also to determine what is the fraction of the general expenses which may be regarded as directly related to that activity. In that regard, it is appropriate to add that, unless national legislation authorises resident financial institutions to use, in the calculation of the financing costs incurred, average rates charged in the context of interbank financing, not corresponding to the financing costs actually incurred, that court cannot take those rates into account.

   (see paras 23, 24, 26, 27, 31, 32, 37, 38, 40, 52-55, operative part)