ECJ finds Portugal's Fiscal Representative requirement violates EU rules

13-May-2011
The European Court of Justice held, on 5 May 2011, that Portuguese provisions that oblige non-resident taxpayers who receive Portuguese-source income to appoint a Portuguese fiscal representative are in violation of the EC Treaty's free movement of capital rules, but not those required by the European Economic Area Agreement.

In European Commission v Portugal (C-267/09), the Commission asserted that the provisions under Article 130 of Portugal's personal income tax code constituted a restriction on the free movement of capital obligations under article 56 of the EC Treaty and article 40 of the EEA Agreement. It argued that the requirement was effectively a new charge on non-residents, who must pay representatives. Portugal argued that the provisions were necessary to ensure the effectiveness of fiscal supervision and the prevention of tax avoidance.

The ECJ held that the obligation to appoint a tax representative was an unjustified restriction on the free movement of capital in some circumstances but not in others. For taxpayers residing in other EU countries who receive Portuguese-source income requiring the submission of a tax return, the obligation to appoint a fiscal representative went beyond what was necessary to prevent tax evasion because the mutual assistance mechanism provided by Directive 77/799 was sufficient for achieving that objective. The Court found that, in such circumstances, the Portuguese provisions constituted an unjustified restriction of article 56 of the EC Treaty on the free movement of capital.

But for taxpayers residing in countries that are within the EEA but not the EU, the obligation to appoint a Portuguese fiscal representative was a justified restriction of article 40 of the EEA Agreement on the free movement of capital because the framework of cooperation between EU member states did not exist between member states and a non-member that had not entered into any undertaking of mutual assistance.

The Court found that the Commission had failed to establish that such agreements actually included sufficient mechanisms for the exchange of information to verify and monitor the returns submitted by taxable persons residing in those countries. It therefore held that, for taxpayers residing in countries that are a party to the EEA Agreement but are not a member of the EU, the obligation to appoint a fiscal representative did not go beyond what was necessary to achieve the objective of ensuring the effectiveness of fiscal supervision and preventing tax avoidance