1. Background
The goal of international double taxation relief measures is to eliminate barriers to cross-border investment and international trade, which are crucial in today’s global economic landscape, particularly with the digital economy, technological advancement, increased globalization, and the free movement of people and goods within the European Union (EU). These measures play a critical role in preventing tax evasion and capital flight, while attracting investment and strengthening economic ties between countries.
Countries like Portugal have implemented unilateral measures to alleviate international double taxation. Additionally, conventional measures, derived from double taxation treaties, as well as harmonized rules under EU law, also contribute to this effort.
The combination of unilateral and conventional measures, along with Portugal’s extensive network of double taxation treaties (DTTs), makes the country a significant international investment platform.
2. Double Taxation Treaties (DTTs)
As a founding member of the Organisation for Economic Co-operation and Development (OECD), Portugal has a long history of signing DTTs, largely based on the OECD Model Convention. This extensive network of treaties is key to preventing double taxation of income and assets and ensuring equitable treatment for cross-border transactions. An updated practical table of DTTs signed by Portugal is available, highlighting key aspects of these treaties.
3. Multilateral Instrument (MLI)
The Multilateral Instrument (MLI) is an international agreement developed under the OECD’s Base Erosion and Profit Shifting (BEPS) initiative to address aggressive tax planning strategies that exploit gaps in tax rules. The MLI is designed to modify existing tax treaties and includes provisions to prevent profit shifting and tax base erosion.
The MLI allows jurisdictions to:
- Specify which DTTs the MLI applies to
- Choose from minimum standard provisions
- Adopt optional, supplemental, or alternative provisions
- Reserve the right to exclude specific provisions
Portugal has opted to implement the Principal Purpose Test (PPT) as an anti-abuse rule in most of its DTTs. The impact of the MLI depends on how each jurisdiction applies it, with changes being made to DTTs based on matching positions and reservations between signatories.
4. European Union Directives
Several aspects of direct taxation within the EU have been harmonized through a range of directives, including:
- Parent-Subsidiary Directive: Eliminates double taxation of non-portfolio investments.
- Interest and Royalties Directive: Eliminates double taxation on interest and royalty payments between associated companies.
- Mergers Directive: Removes tax obstacles in cross-border corporate restructurings, including mergers and asset transfers.
- Anti-Tax Avoidance Directives (ATAD 1 and ATAD 2): Harmonizes rules to prevent tax avoidance and base erosion.
- Dispute Resolution Directive: Enhances the resolution of tax disputes between EU member states.
- FASTER Directive: Currently under review, this directive aims to streamline tax withholding procedures with the introduction of a digital tax residence certificate (eTRC) within the EU.
5. EU Fundamental Freedoms
The fundamental freedoms enshrined in the EU treaties underpin the internal market. Where direct tax harmonization has not been achieved, the freedoms of movement and establishment, as interpreted by the European Court of Justice, help protect taxpayers from unjustified barriers in international taxation.
6. Unilateral Measures for Eliminating Double Taxation
In the absence of a specific treaty, Portugal provides unilateral relief to residents, granting a foreign tax credit for taxes paid abroad. This credit is capped at the lesser of the Portuguese tax due or the foreign tax paid. For non-residents, exemptions may apply to certain types of income, such as capital gains on securities or interest on bonds, depending on specific criteria.
For individuals, regimes such as the Non-Habitual Resident (NHR) program or incentives for scientific research and development may also offer tax exemptions on foreign income.
7. Transparency, Information Exchange, and Tax Havens
Significant strides have been made in tax transparency and information exchange, both within Europe—through directives like the DAC—and internationally, with initiatives by the OECD and UN. Portugal also maintains a list of jurisdictions deemed to have preferential tax regimes (commonly referred to as tax havens), which are subject to enhanced scrutiny and specific anti-avoidance measures.
An updated table of the DTTs signed by Portugal, including key points, is available for reference.
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