A recent decision of the CJEU's has raised the possibility of refund claims for tax withheld from interest or royalty payments from other EU Member States.


In the recent case of Brisal (C-18/15), a Portuguese-resident company paid interest to a finance company resident in Ireland. The normal rate of withholding tax on interest paid to non-residents, under Portuguese domestic law, is 20 percent (in cases where the Interest and Royalties Directive doesn't apply). The rate under the Portugal-Ireland double tax treaty is 15 percent. Portuguese-resident lenders would be taxed on interest received at the rate of 25 percent, but on the net amount after deducting relevant expenses. In contrast, withholding tax is applied to the gross amount of payments to non-Portuguese resident lenders, with no opportunity to deduct expenses.


The Court of Justice of the European Union (CJEU) ruled that non-residents must be allowed to deduct the same expenses as residents are allowed to deduct. Not allowing a deduction constitutes indirect discrimination on the grounds of nationality and is thus a restriction on the freedom to provide services (now in Article 56 of the TFEU). CJEU case law has established that deducting tax at source from payments to non-residents, but not to residents, is not discriminatory (Truck Center 2008). provided it is simply a different method of collecting the same quantum of income (FKP Scorpio 2006). The 2003 decision in Gerritse established that taxing non-residents on gross income without deducting business expenses, while taxing residents on net income, is contrary to Article 56. The CJEU confirmed in Brisal that such a restriction on the freedom to provide services could not be justified on the grounds that the rate of withholding on payments to non-resident financial institutions was lower than the rate of tax for Portuguese-resident institutions.

The Brisal decision has established that the potential difficulty (as argued by the Portuguese Government) of establishing a link between costs incurred and interest income received is not sufficient to justify a difference of treatment between services provided by a financial institution and services in other areas. In any event, such a difficulty would only arise if a deduction had to be made before withholding tax is applied and not if the excess tax deducted can be reclaimed by way of reimbursement. In a financial transaction, the expenses must be directly related to the lending, for example, travel and accommodation expenses, and fees for legal or tax advice, for which it is relatively easy both to establish a direct link with the loan in question and to prove the actual amount involved.

A chance to claim refunds?

In many cases, there is no withholding tax on interest payments by EU borrowers to EU financial institutions, either as a matter of domestic law or under a double tax treaty. However the Brisal decision means that where withholding tax has been applied to the gross rather than the net payment, refunds could be due if borrowers can demonstrate that they had expenses directly related to the lending.

Although not mentioned in the Brisal decision, the same principle arguably applies to royalties, where withholding taxes are more common than on interest payments. The Advocate-General, giving her opinion in the Brisal case, drew a distinction between costs directly related to dividend payments, which, in the recent Miljoen decision, were interpreted narrowly by the CJEU on the basis that dividends were merely the result of holding shares. In contrast, interest was income from an economic activity. In other words, the judgment in Miljoen does not mean that the financing costs relating to a source of income generally cannot have any link to it.

On this basis, UK-resident IP licensors in receipt of EU-source royalties from which tax has been withheld might be able to reclaim a significant portion of that tax if they can demonstrate that they had expenses directly related to the IP licence, so that the withholding should only have applied to the royalty net of expenses.

UK perspective

As far as UK outbound payments are concerned, there is a specific statutory provision (section 582 ITTOIA 2005) that permits the deduction of expenses incurred wholly and exclusively for the purposes of generating a royalty or other income from IP. However there is no equivalent provision for interest, so tax withheld on a gross basis on payments to EU-resident lenders is potentially discriminatory.

This judgment also highlights another potential instance of discrimination that arises as a result of the recently extended scope of UK withholding tax on royalties. Under those provisions royalties are deemed to have a UK source (and are thus subject to withholding tax) where the payer is a non-UK resident carrying on business through a UK permanent establishment (PE) or a deemed UK PE under the diverted profits tax regime (DPT). Where there is a deemed PE for DPT purposes, there is no ability to offset any expenses incurred for the purposes of generating the royalty income (and a higher rate of tax, 25 percent).

Impact of Brexit?

The UK is of course now in the early stages of negotiating its exit from the EU. It will not become clear for a long time yet what the UK's future relationship with the EU will be and the extent to which the UK can benefit from, or be bound by, the fundamental freedoms.

The other question is how Brexit would affect referrals to the CJEU by the UK courts. It is likely that claims in existence pre-Brexit and covering all periods up to Brexit could still be referred. However, post-Brexit claims will initially be dealt with by the UK courts and may not be referred. In such circumstance it is likely that the UK courts will be required to answer questions of discrimination, as compatibility with the fundamental freedoms will remain relevant when interpreting law up to the point of Brexit (unless the terms of exit remove any relevance with retrospective effect). With this in mind, UK resident businesses who might be entitled to tax refunds following the Brisal decision should consider making claims sooner rather than later.