“BO LDA” filed an appeal to annul an additional corporate tax assessment and associated compensatory interest imposed by the Portuguese Tax and Customs Authority. The case revolved around whether “BO LDA” was entitled to an exemption from withholding tax on interest payments under the Interest and Royalties Directive or, alternatively, under Double Taxation Conventions (DTCs) between Portugal and the UK or Hong Kong.
Decision
The arbitral tribunal ruled against “BO LDA” and upheld the assessment issued by the tax authorities.
The tribunal found that the exemption under the Interest and Royalties Directive required proof that the recipient of the interest was its beneficial owner. The recipient, UK3, along with UK2 and UK1, was part of a complex financial structure involving companies in Hong Kong and other offshore jurisdictions. These UK-based companies had no real economic activity, no employees, and no premises of their own. Their sole function was to pass interest payments up the corporate chain, ultimately reaching entities in Hong Kong.
The tribunal determined that the arrangement was a tax avoidance scheme aimed at benefiting from exemptions under EU law and the DTCs, without substantive economic justification. It ruled that UK3 was not the beneficial owner of the interest and that the claimant failed to meet its burden of proof in demonstrating otherwise. As a result, the exemption under the Interest and Royalties Directive did not apply.
The tribunal also rejected the claimant’s alternative argument for applying the Portugal-UK DTC, stating that the agreement implicitly required that the interest recipient be the beneficial owner, which UK3 was not. Furthermore, the claimant failed to provide sufficient evidence that UK3 had paid tax on the interest received in the UK, a requirement for the DTC’s application. The tribunal also declined to consider the applicability of the Portugal-Hong Kong DTC, as the tax authorities had not identified the Hong Kong companies as beneficial owners, and no evidence was presented to support such a claim.
Additionally, the tribunal found no violation of constitutional principles, including legal certainty, proportionality, and property rights, in holding the claimant responsible for the tax liability as a withholding agent. Since the claimant failed to withhold the tax as required, it was also liable for compensatory interest, with the tribunal rejecting its argument that a mere interpretative disagreement with the tax authorities justified exemption from these payments.
Consequently, the claimant’s challenge was dismissed in its entirety,
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