Seeking clarification on whether the imposition of stamp duty on guarantees provided to secure a series of debentures aligns with or opposes Council Directive 2008/7/EC of 12 February 2008 concerning indirect taxes on the raising of capital (the Capital Duties Directive), the Portuguese Arbitral Court (CAAD) has referred the matter to the Court of Justice of the European Union (CJEU) and judgment is pending at the time of writing.
Factual background
The dispute brought before the CAAD emerged after a Portuguese company (PTCo) challenged the Portuguese tax authorities over the assessment of stamp duty levied on the guarantees provided for a series of debentures.
PTCo, owned by a Luxembourg-based company (LuxCo), entered into a facilities agreement to issue debentures, which were fully subscribed by a Portuguese bank. This decision followed LuxCo's acquisition of two Portuguese companies (OpCos), with the agreement’s objective being to finance the purchase of OpCos’ shares and to restructure their debt. To fulfil the facilities agreement's obligations and liabilities, PTCo, LuxCo, and the OpCos, acting as guarantors, offered security interests or personal guarantees under a security agreement to the Portuguese bank, which took the role of both the beneficiary and the security agent.
Despite PTCo's claim that establishing the security agreement and issuing the necessary guarantees were crucial for concluding the facilities agreement – which, in turn, allowed for the debenture series to be issued – the notary imposed stamp duty on the guarantees provided, under item 10.3 of the Stamp Duty General Table, at a rate of 0.6%, resulting in a tax liability of approximately €2 million.
Understanding the legal basis of the case
Generally, guarantees – including bill guarantees, securities, autonomous bank guarantees, collateral securities, mortgages, pledges, and contingency insurance, regardless of their nature or form – are subject to stamp duty, except for those that are incidental to contracts already subject to stamp duty.
Nevertheless, certain transactions are shielded from stamp duty, in line with exemptions provided by the Capital Duties Directive, which aims to remove double taxation, discrimination, and obstacles to the free movement of capital, while also neutralising distortions in the capital market, specifically stating in its preamble that “[i]n particular, no stamp duty should be levied on securities, regardless of the origin of such securities, and regardless of whether they represent a company’s own capital or its loan capital.”
In the case under analysis, the PTCo challenges the stamp duty assessment as being in breach of EU law, as Article 5(2)(b) of the Capital Duties Directive prohibits member states from levying any form of indirect taxes on funds raised through the issuance of debentures or other marketable securities, regardless of the issuer, or any formalities relating to it. This ban extends to related processes such as creation, issuance, stock exchange admission, market distribution, or transactions involving these instruments.
Furthermore, although the guarantees were agreed upon voluntarily with the Portuguese bank, they were crucial for the debenture series' viability and success. Consequently, although the guarantees were technically separate transactions, their intrinsic connection to the debenture issuance suggests that taxing them via stamp duty would, in practice, be equivalent to taxing the whole capital-raising process, which is not compatible with European law.
On the other side, the Portuguese tax authorities argue that the issuance of debentures accompanied with the provision of guarantees essentially mirrors a secured bilateral loan arrangement, especially since the debentures were directly negotiated with a bank. They also consider that the guarantees provided are not a necessary requirement for the issuance of debentures.
The tax authorities further argue the exception provided under Article 6(1)(d) of the Capital Duties Directive is applicable, claiming that the concept of “other charges on land or other property” referred to in that provision includes the pledging of collateral, and the wording of the provision does not imply that it is confined to rights created over real estate property.
Preliminary questions sent to the CJEU
Considering the provided context, the Portuguese proceedings were stayed pending a reference to the CJEU for a preliminary ruling.
The four questions that the CAAD referred to the CJEU are designed to ascertain whether guarantees – intended to ensure performance and compliance with all the obligations and liabilities associated with a series of debentures – qualify as ‘related formalities’ within the context of Article 5(2)(b) of the Capital Duties Directive. This provision prohibits taxation on formalities closely linked to, and thus integral parts of, the broader operation of raising capital through the issuance of debentures.
The specific questions posed are as follows:
Does Article 5(2)(b) of the Capital Duties Directive preclude the imposition of stamp duty on guarantees – including financial pledges of shares, bank account balances, shareholder credits, and the assignment of claims as security – during a bond issuance?
Does the necessity or optional nature of such guarantees affect their qualification under Article 5(2)(b) of the directive?
Would the directive's interpretation alter if the guarantees were part of a bond issuance operation involving a private bank subscription, with the issuer having the discretion to alter the subscription under certain conditions and fees.
In bond issuances encompassed by Article 5(2)(b), does Article 6(1)(d) of the directive consider such guarantees, in the forms mentioned, as exempt from taxation?
Expected impact of the CJEU decision for taxpayers
The preliminary ruling proceedings in Case C-685/23 (Corner and Border), currently pending before the CJEU, are set to mark another milestone in the development of the EU’s case law when assessing the compatibility of Portuguese stamp duty with the restrictions set forth by the Capital Duties Directive.
Indeed, the CJEU has been at the helm of a series of critical rulings regarding the indirect taxation of the Portuguese financing sector.
Notably, on July 19 2023, in Case C-335/22 (in French), the CJEU ruled that Portuguese stamp duty levied on fees for issuing debt securities, such as bonds and commercial paper, violated the Capital Duties Directive.
Additionally, through decisions in Case C-656/21 on December 22 2022 and cases C-335/22 and C-416/22 (in French) on July 19 2023, the CJEU evaluated the compatibility of Portuguese stamp duty on commissions charged by financial institutions with EU law. These rulings collectively affirmed that stamp duty cannot be imposed on fees for services provided by banks in the context of securities issuance, placement, or public share subscription offers (underwriting fees), regardless of whether these services are obligatory or voluntary.
Considering the CJEU’s recent decisions, it is reasonable to anticipate that the forthcoming ruling will echo previous interpretations, potentially resulting in the refund of the contested stamp duty to the taxpayer. Therefore, the significance of this preliminary ruling cannot be overstated, as it highlights yet another avenue for taxpayers to dispute, and possibly recover, stamp duty levied on financial transactions, particularly those related to debentures.
The availability of both administrative and judicial channels enhances the basis for taxpayers to challenge stamp duty assessments that are not in harmony with the Capital Duties Directive. Furthermore, the recent and consistent case law from the CJEU provides a more transparent and straightforward approach for affected entities to address and rectify taxation that hinders the free movement of capital, as intended by the above-mentioned directive.
