Introduction
In international taxation, one of the most underestimated yet technically critical concepts is the definition of a “person” under double tax treaties.
Under the OECD Model Tax Convention, treaties apply to “persons” who are residents of one or both contracting states. However, when dealing with transparent entities such as partnerships or LLPs, the practical application becomes significantly more complex.
This issue is particularly relevant for US-connected structures (LLCs, LLPs) with income sourced in Portugal — a recurring scenario for expatriates and international freelancers.
What Is a “Person” Under a Tax Treaty?
According to Article 1 of the OECD Model Tax Convention:
- A “person” includes:
- Individuals
- Companies
- Any other body of persons
At first glance, this appears straightforward. However, complications arise due to different domestic tax treatments across jurisdictions.
The Core Issue: Opaque vs Transparent Entities
Countries adopt fundamentally different approaches to partnerships:
1. Opaque (Taxable Entity Approach)
- The partnership is treated as a separate taxable entity
- It is considered a tax resident
- It may directly benefit from a tax treaty
2. Transparent (Look-Through Approach)
- The entity is disregarded for tax purposes
- Income is taxed directly at the level of the partners
- The entity itself is not considered a tax resident
This distinction is decisive when applying tax treaties.
Treaty Access: Why Transparent Entities Often Fail
If an entity is treated as fiscally transparent in its country of formation (e.g., a US LLP):
- It is not subject to tax
- Therefore, it is not considered a resident under Article 4 of the treaty
- As a result, the treaty does not apply at entity level
This leads to a critical consequence:
The entity itself cannot claim treaty benefits (e.g., reduced withholding tax in Portugal).
Can the Partners Claim Treaty Benefits?
Yes — but only under strict conditions.
The OECD Model (Article 1(2)) introduces the “look-through” principle:
- Income derived through a transparent entity
- Is treated as income of a resident
- Only to the extent that the income is taxed in that resident’s jurisdiction
In practical terms:
- The partners must be:
- Identifiable
- Tax resident in a treaty country
- Subject to tax on that income
Portuguese Tax Authority Position (Practical Application)
In a recent administrative interpretation, the Portuguese Tax Authority clarified the treatment of income paid to a US LLP.
Key conclusions:
- A US LLP classified as fiscally transparent:
- Is not eligible for the Portugal–US tax treaty
- However, its partners may access treaty benefits, provided that specific conditions are met
Required Documentation to Apply Treaty Benefits
To apply treaty relief (e.g., exemption or reduced withholding tax in Portugal), the following must be provided:
1. Identification of Beneficial Owners
- Full list of partners receiving the income
2. Ownership Structure Declaration
- Confirmation that:
- The partners are the beneficial owners
- Their respective ownership percentages
3. Entity Status Confirmation
- Official statement confirming that:
- The LLP is not treated as a tax resident in the US for treaty purposes
4. Tax Residency Certificates (CRFs)
- Issued by US tax authorities
- Confirming that partners:
- Are US tax residents
- Are subject to tax on the income
Key Risk Areas
From a compliance and planning perspective, several risks arise:
- Incorrect withholding tax treatment in Portugal
- Denial of treaty benefits due to insufficient documentation
- Mismatch between US and Portuguese tax classification
- Exposure to double taxation
Particular attention should be given to:
- US LLCs with multiple members
- LLP structures used for consulting or freelance income
- Hybrid entity mismatches
Strategic Implications for Expatriates and Freelancers
For individuals operating through US entities while resident in Portugal:
- The legal form of the entity is not determinative
- The tax classification in the source country is critical
- Treaty access depends on:
- Who is taxed, not just who receives the income
This is especially relevant under:
- The former NHR regime
- The current IFICI framework
- Cross-border freelance structures
Final Takeaway
The concept of “person” in tax treaties is not merely definitional — it directly determines access to treaty protection.
For transparent entities:
- The entity itself is often excluded
- The analysis must shift to the partner level
- Proper documentation is essential to secure treaty benefits
How GoalSeek Supports You
At GoalSeek, we regularly assist clients with:
- Structuring US–Portugal income flows (LLCs, LLPs, freelancers)
- Applying treaty benefits correctly
- Preparing compliant documentation for withholding tax relief
- Coordinating US and Portuguese tax positions
If you are receiving income through a foreign entity and want to ensure correct tax treatment in Portugal, a structured review is essential.
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