International double taxation is one of the main obstacles to cross-border trade and investment, as well as to the free movement of people, goods, services, and capital within the European Union. The need to eliminate or mitigate international double taxation has become increasingly critical and has even turned into a competitive advantage.

In order to eliminate or mitigate these obstacles, countries seek to regulate and define the allocation of taxing rights in situations involving cross-border transactions.

In this way, they are able to mitigate some of the capital flight and attract investment, while strengthening the ties—economic and otherwise—between the contracting states, thereby serving as a key pillar for consolidating Portugal’s position as an investment hub.

The principles of double taxation

Tax treaty

Portugal, as a founding member of the Organization for Economic Cooperation and Development («OECD»), already has a long history and extensive experience in establishing tax treaties. Portugal’s network of tax treaties has now expanded to include 80 countries,

These bilateral agreements are intended to eliminate or reduce double taxation internationally, not only through the imposition of restrictions on the rights and tax rates (such as dividends, interest, and royalties) by the contracting states themselves—that is, the country where the income is sourced—but also by requiring the country of residence to grant an exemption or a tax credit for taxes paid in the source country.

Multilateral Instruments (MLIs)«

The Multilateral Convention aims to prevent base erosion and profit shifting, one of the international responses under the Base Erosion and Profit Shifting (BEPS) project, and establishes a common mechanism to address certain practices that lead to tax base erosion and profit shifting, as well as abusive practices under tax treaties («TTs»).

94 states have signed or have already expressed their intention to be bound by tax treaties, and the possibility of new accessions is not ruled out. This allows the jurisdictions of the parties to:

• specify the CFs to which the MLI will apply;
• select one of the provisions regarding a minimum standard;
• apply optional, supplementary, or alternative provisions;
• to make reservations, that is, to exclude the application of some or all of the provisions of the MLI.
  

Furthermore, in some cases, the MLI modifies the terminology and even the title of the DCTs, or changes the way certain provisions are applied; in other cases, it replaces or adds provisions to the DCTs, and in still other cases, it even repeals certain provisions of the CF, as they are directly applicable alongside the CF.

European Union Directive

Certain aspects of direct taxation (on income) are harmonized within the EU, notably through a set of directives:

• the Parent-Subsidiary Directive, which aims to eliminate international double taxation in the context of non-portfolio investments.
• the Royalties Directive, which eliminates double taxation on the payment of interest and royalties between associated or dependent enterprises; 03 No. 64/20 International Double Taxation in Portugal (2020);
• the Merger Directive, which aims to remove tax barriers to cross-border restructuring, including mergers, demergers, transfers of assets, and the exchange or swap of shares;
• the Anti-Tax Avoidance Directive («ATAD 1» and «ATAD 2»), which harmonized certain rules regarding tax avoidance, base erosion, and the transfer of profits to other jurisdictions;

the directive on the resolution of tax disputes, which aims, in general terms, to broaden the scope of application and subjective resolution of such disputes and to make the mutual agreement procedure more dynamic, efficient, and expeditious; this is expected to be implemented by tax authorities within 2 to 3 years.

Fundamental Freedoms of the European Union

The fundamental freedoms enshrined in the EU Treaty are the cornerstone of the European internal market. In areas where harmonization of direct taxation has not been achieved, these freedoms confer, through the case law of the Court of Justice of the European Union, a broader range of rights within the European Union in the area of direct taxation, particularly with regard to international double taxation.

If the free movement of capital applies, third countries (non-EU/EEA members, among others) may also benefit from the decisions of the Court of Justice, which significantly broadens its scope.

Unilateral mechanism for the elimination of double taxation

In the absence of a specific agreement, such as a tax treaty, Portugal does not fail to unilaterally grant resident taxpayers relief from or elimination of international double taxation.

Individuals and corporations may be eligible for a tax credit related to international double taxation. In this context, Portugal grants resident taxpayers a credit equal to the lesser of the following amounts:

• tax owed to Portugal;
• the tax paid in the other country. For businesses, the amount of this credit is calculated by country of origin.
  

With regard to individuals, it is important to highlight the case non-permanent residents at Portugal, a special residency status that provides exemptions on income from non-Portuguese sources.

An exemption from withholding tax may also apply when a resident company distributes dividends to an associated company resident in an EU member state / EEA or in a country with which Portugal has concluded a double tax treaty or information exchange agreement, in addition to other requirements.

Portugal also offers the so-called “participation exemption” regime, which applies to companies resident in Portugal that receive dividends or realize capital gains from an associated company (minimum equity interest of 10%).

Transparency and Exchange of Tax Information

Transparency and the exchange of tax and financial information have undergone significant developments, not only at the European level, with the DAC Guidelines 1–6 and, thus, with the introduction of the central registry of beneficiaries, but also at the international level, specifically through the strengthening of the Multilateral Convention on Mutual Administrative Assistance and the peer review process, with a view to establishing high international standards.