International Double Taxation in Corporate Income Tax (IRC)

Rental Income from Portuguese Real Estate Earned by an Italian Company

When a non-resident company acquires real estate in Portugal for rental purposes, questions inevitably arise regarding taxing rights, corporate income tax (IRC) obligations, and the application of double tax treaties.

This article analyses a common cross-border scenario: an Italian company, with no permanent establishment in Portugal, that acquires residential property in Portugal and derives rental income from third parties.

Residence Principle vs. Source Principle

International taxation is generally governed by two fundamental principles:

1. Residence Principle (Worldwide Income)

Under this principle, a State taxes its residents on their global income, regardless of where that income is generated. Resident entities are subject to unlimited tax liability in their country of residence.

2. Source Principle (Territoriality)

Conversely, the source principle allows a State to tax income generated within its territory, irrespective of the taxpayer’s residence. Non-residents are therefore subject to limited tax liability, restricted to income sourced in that jurisdiction.

In cross-border situations, both principles may apply simultaneously, creating international double taxation, which may be:

Legal double taxation (same taxpayer, same income, two States), or
Economic double taxation (same income, different taxpayers).

Permanent Establishment: Is Portuguese Real Estate One?

Under Article 5 of the Portuguese Corporate Income Tax Code (CIRC), a permanent establishment (PE) requires a fixed place of business through which an economic activity is carried out (e.g. branch, office, factory).

Portuguese arbitration case law has consistently clarified that:

Ownership of real estate alone does not constitute a permanent establishment, and
Rental income or capital gains from property, by themselves, do not imply the existence of a business structure in Portugal.

Accordingly, an Italian company merely holding and renting out Portuguese property does not create a PE in Portugal.

Taxation of Rental Income from Portuguese Property

Despite the absence of a permanent establishment, Portuguese law is clear:

Income derived from real estate located in Portugal is considered Portuguese-source income
This includes rental income and capital gains, even when earned by a non-resident entity

As such, under Article 4(3)(a) of the CIRC, the Italian company is subject to IRC in Portugal on that income.

Compliance Obligations for Non-Resident Companies

A non-resident company without a permanent establishment that earns rental income from Portuguese property must:

Submit a declaration of commencement of activity in Portugal
File an annual IRC return (Modelo 22)
Submit the Simplified Corporate Information (IES), specifically Annex E, where:
- Taxable income is calculated under IRS Category F rules
- Deductible expenses include:
  - Municipal Property Tax (IMI)
  - Maintenance and conservation costs
  - Other legally deductible charges

These obligations apply even if withholding tax has already been applied.

Applicable Tax Rate

IRC rate: 25%
The tax base is the net rental income, after deductible expenses
Withholding tax (if applied) is credited against the final tax due

Interaction with the Portugal–Italy Double Tax Treaty

The Double Tax Treaty between Portugal and Italy plays a decisive role.

Article 6 – Income from Immovable Property

This provision grants taxing rights to the State where the property is located. Therefore:

Portugal is fully entitled to tax rental income derived from Portuguese real estate
Italy must provide relief from double taxation, typically through a foreign tax credit

Capital Gains

Article 13 of the Treaty confirms that capital gains from the disposal of Portuguese property may also be taxed in Portugal.

Final Remarks

In summary:

Rental income from Portuguese real estate earned by an Italian company is taxable in Portugal, even without a permanent establishment
The applicable regime is IRC for non-resident entities
Full compliance with Portuguese filing and reporting obligations is mandatory
The Portugal–Italy Double Tax Treaty does not exempt the income, but ensures relief from double taxation at the level of the Italian company

Cross-border real estate investments require careful structuring and ongoing compliance. In practice, errors frequently arise not from taxation itself, but from missed declarations, incorrect filings, or failure to apply treaty relief properly.