Double Tax Treaties in Portugal - We Assist Foreign Investors
Double Tax Treaties in PortugalUpdated on Tuesday 13th July 2021
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The agreements to avoid double taxation constitute an important instrument of international tax laws. In the absence of an international harmonization of legislation in order to establish the taxation of the incomes gained in Portugal by foreign entities, all the gains earned by residents of other 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 double taxation. Thus, these agreements allow the incomes obtained in Portugal by a foreign citizen coming from a country that has signed a tax agreement with Portugal to be taxed at lower rates. International double taxation occurs when an income is taxed in two or more states for the same period of time. If you would like to know the legal aspects of the double taxation treaties in Portugal, we invite you to talk to our lawyers in Portugal.
How is the double taxation eliminated for companies in Portugal?
In international practice, there are three basic methods for the elimination of double taxation:
- exemption from taxes - exclusion from the taxable base of the income derived from sources abroad;
- tax credit - transfer in account the tax paid abroad (foreign tax credit);
- the deduction of tax expense - shift tax liabilities paid abroad because of the expenses incurred by the entity (tax deduction).
Currently, the appliance of the double taxation and the ways to avoid the legal and economic disadvantages is regulated by the Fiscal Code Norms. Thus, there can be considered two sets of legal rules aimed to avoid the double taxation: first, the national legislation and second, the international treaties ratified by Portugal. It is advisable to talk to our attorneys in Portugal and solicit legal support when starting a business in Portugal or for knowing better the tax structure in this country.
International regulations related to double taxation
From the point of view of domestic tax law in parallel with the international tax regulations, it must be stated that the agreed provisions from the bilateral tax conventions prevail over the provisions of domestic law in case of conflict. The convention for the avoidance of double taxation will apply with priority over national law, whenever a 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 an 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.
What are the countries that signed double tax treaties with Portugal?
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.
Who can benefit from the double tax treaties signed by Portugal?
Companies from abroad that have permanent establishments in Portugal can take advantage of the double taxation agreements if their country of origin signed such treaty with Portugal. The profits of a foreign company in Portugal can be protected by the provisions of double taxation conventions, and, more than that, entrepreneurs can consider a series of investment plans in this direction.
Do I need to prove that the taxes have been paid in the country of origin?
Yes, companies with establishments in Portugal that paid the taxes in the country of origin should prove these payments in order to benefit from the double taxation treaty signed by Portugal.
Double tax treaty Portugal – UK
As it is known, the double taxation treaty is meant to help you understand better the taxes on incomes you need to pay, without having to be levied twice on the same earnings. This means that UK companies generating incomes in Portugal will pay taxes only in this country. Tie-breaker divisions are mentioned by the double taxation agreement signed by Portugal and UK, referring to residents who need to respect the applicable laws in UK and Portugal. Here is what you need to know about the double taxation treaties signed between Portugal and UK:
- The incomes are levied in one of the countries, whether in UK or in Portugal.
- In case the earnings are taxed in UK and Portugal, a credit is applicable.
- In the case the tax payable in the country of residence of the company is higher than that payable in the source country, a company will pay the taxes in the source country and formerly pay the difference in the other state.
- Some gains are taxable in one of the states, or in both.
- In case of occupational and private pensions and allowances, these are normally levied in the country of residence.
- The government service pensions are normally levied in the country where they are registered.
According to the double taxation treaty signed by Portugal and UK, the immovable property gains are taxed in the country where the property is placed. Though, capital gains on shares are only levied in the state of residence, meaning that the gains on UK shares are not exempted in Portugal. It is essential to have the legal support of a lawyer in Portugal when it comes to the double taxation treaty signed with UK because he or she can explain all the requirements in this matter. Also, tax minimization methods are available for UK companies in Portugal, so you can also ask for legal advice from our Portuguese team of lawyers. We can also put you in touch with our foreign partners if you want to open companies in other countries, such as Spain, and register for VAT there.
Tax planning for residents in Portugal
There are many foreign citizens living in Portugal who believe they don’t have to pay other taxes in the home country. It is though recommended to pay attention to the support of a tax planning specialist and be aware of the taxes you need to pay, whether in Portugal or in the country of origin. This way, you can make sure you won’t pay extra taxes and understand the tax liabilities. Filing the correct tax declarations is the first step in this direction, followed by the way in which the finances can be structured in a tax-efficient manner. With our attorneys in Portugal, you can benefit from our complete legal advice and support in tax matters. Wealth management solutions are offered on request to foreign investors having companies established in Portugal. Moreover, advice for tax minimization methods applicable to business in Portugal can be provided at any time. Do not hesitate to get in touch with us and find out more details in this direction.
Short facts about taxation in Portugal
The tax system in Portugal is one of the most advantageous among European countries, for local and foreign residents. The non-habitual resident program involves taxes of 25% on incomes in Portugal and of 28% applicable to investment incomes and capital gains. Professionals like actors, dentists, engineers, architectures, and IT specialists are subject to a 20% tax rate on incomes generated in Portugal. Here are some facts about the taxes in Portugal:
- 21% is the standard corporate tax for companies in Portugal;
- an additional surtax is imposed for companies generating incomes over EUR 1.5 million;
- 17.5% corporate tax rate is available for companies established in the free trade zones of the Azores;
- 28% tax rate is applicable to investment incomes like dividends, interests, capital gains;
- 23% is the standard VAT rate in Portugal for most of the goods and services offered.
It is important to know that small and medium companies are subject to lower taxes in Portugal for the first EUR 15,000 generated. If you are a foreign investor wanting to start a business in Portugal, you are invited to talk to one of our specialists in tax matters and find out more about the taxation for companies in this country. Moreover, you can solicit complete information about the double taxation agreements signed by Portugal with the above-mentioned countries. You might also be interested in debt collection services, company litigation, company incorporation, company liquidation, mergers and acquisitions, obtaining special licenses and permits for which comprehensive legal advice and support are necessary.
Other details about Portugal tax treaty
As a foreign investor, it is recommended to have an idea about the business climate in the country you wish to develop your economic activities, in this case, Portugal, and to consider a few aspects about the double taxation treaties signed in this matter and meant to avoid the taxation on incomes twice:
- the permanent establishment represents the office, the branch, the factory or the place of management of your company in Portugal;
- the revenues gained in the shipping and air transport sector are taxable only in Portugal;
- the incomes derived from the immovable properties in Portugal are levied in this country;
- the corporate and the personal income tax, plus the local surtax on corporate income tax are protected by the DTT signed between Portugal and India.
FAQ about DTTs in Portugal
1. Is deduction of tax expenses available in Portugal?
Yes, according to the tax rules imposed in Portugal, the deduction of tax expenses is applicable through the double taxation treaties signed with a series of countries. Tax credits are also available.
2. What kind of laws are applicable through Portugal tax treaty?
Besides the local legislation referring to taxation, the international laws apply too. The double taxation agreements signed by Portugal with states worldwide comprise a series of provisions, however, international law has priority in the case of foreign taxpayers.
3. What types of companies enjoy the advantages of a Portugal double tax treaty?
Foreign enterprises with permanent establishments in Portugal are subject to the double taxation agreements signed by Portugal. Such treaties aim to protect the profits of businesses in Portugal against double taxation and even fiscal evasion.
4. How is the tax credit applied for incomes in Portugal or abroad?
The taxation on incomes, according to a Portugal tax treaty, is made in one of the signatory countries, whether in Portugal or abroad. A credit applies if the taxes have been paid in both countries. Information on this topic can be offered by one of our lawyers in Portugal.
5. How are the immovable properties gains levied according to the Portugal double tax treaty?
The double taxation treaties signed by Portugal mention a series of provisions referring to gains derived from immovable properties. The taxation is made in the state where the immovable property is located. The legislation in this sense can be explained by our advisors.
6. How residents in Portugal pay taxes?
Depending on the incomes gained, the taxes are paid whether in Portugal or the country of origin. A tax specialist can explain the tax legislation to foreign citizens living in Portugal and also details about Portugal tax treaty.
7. What is the tax rate imposed for royalties, dividends, and interests, according to the DTT signed by Portugal with China?
Interests, dividends, and royalties are levied with a 10% tax rate, according to the double taxation agreement Portugal with China. The agreement between the two states entered into force in 2000.
8. Which entity is not subject to the withholding tax?
Non-resident entities (from EU or EEA countries) with at least 10% capital share are not subject to withholding tax for at least one year, or two in the case of companies from Switzerland. The same thing is available if the EU Interest & Royalty Directive 2003 provisions apply.
9. How are foreign investment funds levied in Portugal?
The withholding tax of 25% applies to foreign investment funds and incomes derived in Portugal, such as real estate incomes, dividends, treasury bonds, etc. If you get in touch with our attorneys in Portugal, you can discuss more details on this topic.
10. How is the permanent establishment defined by the double taxation treaties signed by Portugal?
A permanent establishment can be an office, a factory, a branch, or any other business place of a company in Portugal. More about a permanent establishment of a company in Portugal can be discussed with our advisors.
Investments in Portugal
Portugal is an ideal business destination for international players interested in generating profits in a stable environment from an economic and political point of view. Most of the investments from overseas are absorbed by prolific sectors like financial and insurance, wholesale and retail, real estate, and manufacturing. A beneficial tax system, a proper infrastructure, and an experienced workforce represent a few of the key advantages of Portugal in front of foreigners who want to make investments in this country in a safe climate. We present you a few facts and figures that highlight in large lines the economic direction of Portugal:
- Investments of at least EUR 350,000 grant entrance to the Golden Visa Programme in Portugal. Candidates can gain Portuguese citizenship in approximately 6 years.
- The 2020 Doing Business report issued by the World Bank ranked Portugal 39th out of 190 worldwide economies for simplified business formalities.
- Nearly USD 162 billion represented the total FDI stock for 2019 in Portugal.
- Many entrepreneurs from overseas directed the attention to the renewable energy sector, a field that continues to develop at a fast pace.
- Almost 33% of the total FDIs in Portugal in 2018 were absorbed by the financial and insurance activities.
For more details about how you can avoid double taxation, you may contact our law firm in Portugal.