Portugal: cash pooling arrangements and exemption from stamp duty
Mariana Gouveia de Oliveira
Abreu Advogados, Lisbon
Susana A Duarte
Abreu Advogados, Porto
Nuno Cunha Barnabé
Abreu Advogados, Lisbon
Cash pooling arrangements are not a novelty, and are often used by multinational enterprise (MNE) groups as a treasury management arrangement, aimed at balancing (physically or notionally) the accounts of the group’s subsidiaries, thus achieving significant savings in financing costs. According to the previous stamp duty rules in Portugal, these arrangements were treated as short term financing agreements. Due to the limited scope of application of the exemption, only the inbound flows (ie, the transfer of funds from the pool to the Portuguese entity) were exempt. This was quite detrimental to the Portuguese subsidiaries, which were often banned from the arrangement (which in many cases imposes as a condition the exemption of the loans granted under such facility). Where not banned, the Portuguese entities would have to charge stamp duty when borrowing funds from the cash pool. Besides the tax costs, this regime also represented a burden in terms of tax compliance.
As a result, taxpayers challenged the legality of the domestic rule limiting the scope of application of the exemption (Article 7.2 of the Stamp Duty Code) on the grounds that it breaches EU law in respect to cross-border upstream flows.
In 2020, the Portuguese Stamp Duty Code was amended to include a specific exemption applicable to cash pooling arrangements. This amendment was received with enthusiasm as it would finally allow the Portuguese subsidiaries of MNE groups to access the group’s cash pooling arrangements, making them more competitive in a particularly difficult time in history. However, taking a closer look at the letter of the law, one realises that the scope of territorial application of the exemption is not clear, as the lawmaker did not also amend the rule limiting the territorial scope of application of the exemption – a rule that was already problematic.
Fortunately, recently – and after years of legal battles (which are not yet finished) – one of the cases where taxpayers have challenged the territorial scope of the application of the stamp duty exemptions came into the spotlight as a tax arbitration court in Portugal deemed the Portuguese stamp duty provisions applicable to the outbound leg of cross-border cash pooling arrangements as illegal. For such purpose, the Court concluded that the aforementioned Article 7.2 breached EU Law, being discriminatory and contrary to the EU free movement of capital principle.
Introduction to the Portuguese stamp duty rules
As an introductory remark it is worth pointing out that stamp duty is one of Portugal’s oldest taxes and has, over the decades, functioned as a catch-all tax. Nowadays, stamp duty is a more of a patchwork of several taxes comprising, on the one hand, a component of gift, inheritance tax and real estate transfers tax, and, on the other hand, the most common type of stamp duties levied on specific listed transactions, documents and acts. The taxable facts are listed in the table annexed to the Stamp Duty Code, which includes financial operations/use of credit. The tax is applied over the respective values and depends on the deadline agreed upon. In case of cash pooling arrangements, it corresponds to 0.04 per cent, which is levied over the monthly average debt, calculated by adding up the daily negative balances and dividing them by 30.
Another relevant remark – as mentioned before – is that stamp duty is due on a territorial basis, ie, only the acts and facts deemed located in Portugal, under Article 4 of the Stamp Duty Code, are subject to this tax. Under the said article, funding arrangements are subject to stamp duty if they ‘take place’ in Portugal, or in any case, if the borrower is tax resident (or has a permanent establishment) in Portugal. In this respect, as a side note, we stress that in our view (1) the interpretation of the territorial scope of stamp duty rules that is currently adopted (including by the Portuguese courts) does not seem to be in line with the wording of the law, nor with its underlying rationale. The official interpretation is that the ‘loan’ is located in Portugal whenever the lender is a Portuguese resident, irrespective of the location of the borrower or of the funds. We disagree, considering that the taxable event defined by law is the use of credit (not the granting) which takes place at the location where the funds are made available to the borrower (typically the borrower’s jurisdiction). Unfortunately, the case law on the matter has taken the stance (2) that provided the lender is located in Portugal, stamp duty should apply because the funds are made available in Portugal.
The domestic stamp duty provisions and the breach of EU law
Notwithstanding our position on the application of the territorial principle, mentioned above, to financing agreements, the issue of the breach of EU law is raised in respect to the provisions that set forth the scope of territorial application of the relevant stamp duty exemptions.
Such exemptions apply to:
- short term (less than one year) treasury operations (loans and interest payments) exclusively destined to cover cash flow needs; and
- loans, including the respective interest, granted under a cash pooling agreement for a term not exceeding one year and for the benefit of companies linked under a control or group relationship (direct or indirect holding, for more than one year, of at least 75 per cent equity).
As mentioned, this second exemption was only introduced in 2020, with the State Budget Law, and it was aimed at favouring cash pooling arrangements. The problem is that the said exemption seems to be hollow without a corresponding amendment to Article 7.2 of the Stamp Duty Code that (according to the tax authorities’ interpretation) excludes outbound transactions from the exemption (ie, the cash pool would be exempt in what concerns the amounts borrowed by the Portuguese entity but not on the amounts lent by such entity to the pool). In fact, in 2020, when the law was amended, it was already established that cash pooling arrangements could benefit from an exemption subject to the territorial limitations mentioned above. The problem was confirming that the exemption would apply to both the inbound and outbound legs of the cash pooling.
In our view, this rule is clearly illegal as the tax treatment differs whether the creditor is in Portugal or not, which leads to a discriminatory situation where inbound transfers benefit from a more favourable regime than the one applicable to outbound transfers. This, in our opinion, is clearly in violation of the free movement of capitals. Furthermore, there are no overriding requirements of general interest that justify this difference in the treatment of resident and non-resident entities.
On 6 October 2020, the Arbitration Court issued a ruling on the Case 277/2020, acknowledging that Article 7.2 was indeed in breach of EU Law as it resulted in an unjustified restriction of the freedom of capital, given there were no objective differences in this case that could justify the difference in treatment.
Although this decision is a milestone, Portugal is still far from settling this matter. For example, the law has not yet been amended (nor is any proposal to amend the law under discussion). Secondly, the tax authorities continue to maintain that there is no breach of EU law. Lastly, and more importantly, there is no consensus on this topic amongst the tax courts (including the tax arbitration courts). In fact, shortly after this decision was published, another judgment was issued concerning the same taxpayer, in which the Arbitration Court concluded that there was no breach of EU law (the decision has not yet been published). After these contradictory decisions, the taxpayer filed an appeal to the Supreme Court to resolve the dissent and, hopefully, remit the question to the Court of Justice of the European Union.
 Vd. Miguel Teixeira de Abreu and Mariana Gouveia de Oliveira, 'O princípio da territorialidade nas Operações Financeiras com Não Residentes, em sede de Imposto do Selo', in Coleção Estudos N.º1 - IAB - Instituto do Conhecimento AB, 2013.
 Vd. the Arbitration Court Decision issued in Case 277/2020-T and the Decision from the Supreme Court issued in Case 06/11.4BESNT 0436/16.