This case concerns the Portuguese rules of taxation of dividends paid to pension funds. Dividends paid by a Portuguese company to domestic pension funds are exempt from tax, whilst the dividends it pays to nonresident pension funds are subject to a withholding tax of between 10% and 20%, depending on the existence of double tax conventions.
The Commission initiated infringement proceedings against Portugal alleging that the Portuguese rules contravened the Treaty provisions establishing the free movement of capital. The Portuguese Government accepted that the rules contravened those rules but argued that such a brief was justified by the need to preserve the cohesion of its tax system and the need to preserve effective fiscal supervision. The Advocate General rejected Portugal’s argument and agreed with the Commission that the Portuguese rules breached the free movement of capital.