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EU asks Portugal to end discrimination to non-resident service providers

The European Commission sent Portugal a formal request, on 9 January 2007, to end discrimination against non-Portuguese service providers. Portugal currently taxes non-resident service providers on gross income but taxes Portuguese service providers on net income after a deduction for costs.

The Commission considers that these rules are likely to dissuade foreign services providers from providing services in Portugal, and might dissuade Portuguese clients from buying services from foreign providers. They therefore constitute an infringement of Article 49 of the EC Treaty.

Portugal has argued that these rules do not apply to those service providers from the majority of EU and EEA Member States with whom it has tax treaties. For those cases where the rules are applicable, it further said that the difference in the tax base might be offset by the difference between the rate applicable to resident entities and the final withholding tax applied to non-resident entities.

But the Commission considers that discrimination exists when it cannot be ensured that differences in the level of taxation due to the differences in the tax bases are always offset by the differences in the tax rates. It has therefore issued a request in the form of a “reasoned opinion”. Should Portugal not respond satisfactorily within two months, it may refer the matter to the ECJ.

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