The agreements to avoid double taxation constitute an important instrument of international tax law.
In the absence of an international harmonization of legislation in order to establish the income gained in Portugal by foreign entities, all income earned by residents of third countries would be subject to taxation in this country and in their origin country, giving rise to double taxation. This situation can only be remedied through agreements between states with the main purpose of avoiding the double taxation. Thus, these agreements allow the income obtained in Portugal by a foreign citizen coming from a country that has signed a tax agreement with Portugal benefit from lower retention rates.
International double taxation occurs when one and the same taxable item is taxed in two or more states, for the same period of time.
In international practice, there are three basic methods for the elimination of double taxation:
1) exemption from taxes - exclusion from the taxable base of the income derived from sources abroad,
2) tax credit - transfer in account the tax paid abroad (foreign tax credit),
3) the deduction of tax expense - shift tax liabilities paid abroad on account of expenses incurred by the entity (tax deduction).
Currently, the appliance of double taxation and the ways to avoid the legal and economic disadvantage is regulated by the Fiscal Code Norms and through its implementation.
Thus, there can be considered two sets of legal rules aimed to avoid double taxation: on the one hand the national legislation and on the other hand - the international treaties ratified by Portugal.
From the point of view of domestic tax law in parallel with the international tax, it must be stated that the agreed provisions from the bilateral tax conventions prevail over the provisions of domestic law in case of conflict.
Convention for the avoidance of double taxation will apply with priority over national law, whenever non-resident taxpayer fulfills the application of the convention. In this situation the state of residence will have exclusive jurisdiction to tax the income of the resident, including the income generated in the state in whose territory the taxpayer operates as non-resident.
In opposite, the exception to this imperative rule is the situation where the non-resident does not meet the conditions stipulated by bilateral agreement or when such agreement does not exist, so only the source state (in whose territory the income realized is subject to taxation) applies the internal fiscal policy on the income earned by non-residents who operate on its territory.
Portugal has signed so far double tax agreements with the following states: South Africa, Germany, Algeria, Austria, Barbados, Belgium, Brazil, Bulgaria, Cape Verde, Canada, Chile, China, Cyprus, Colombia, Korea, Cuba, Denmark, United Arab Emirates, Slovenia, Spain, United States of America, Estonia, Finland, France, Greece, Guinea-Bissau, Netherlands, Hong Kong, Hungary, India, Indonesia, Ireland, Iceland, Israel, Italy, Japan, Kuwait, Latvia, Lithuania, Luxembourg, Macau, Malta, Morocco, Mexico, Mozambique, Norway, Panama, Pakistan, Peru, Poland, Qatar, UK, Czech Republic, Republic of Moldova, Slovak Republic, Republic of Uruguay, Romania, Russia, Singapore, Sweden, Switzerland, Timor –Leste, Tunisia, Turkey, Ukraine, Venezuela.
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