U.S. income tax treaty with Portugal

Treaty documents and protocols

The convention was signed at Washington on September 6, 1994, together with a Protocol that forms an integral part of the convention. The Protocol is where the saving clause sits, in paragraph 1(b), and it also carries understandings on scope, taxes covered and other articles.

IRS Table 3 shows a general effective date of January 1, 1996 for the convention and for the Protocol. Some rates also depend on dates set in the articles themselves, including the parent company dividend ceiling.^[5][2]

Convention structure

The convention's contents list 31 numbered articles, followed by the Protocol.

The opening articles are Personal Scope, Taxes Covered, and General Definitions, followed by Residence and Permanent Establishment. The income articles include Income from Immovable Property (Real Property), Business Profits, Shipping and Air Transport, Associated Enterprises, Dividends, Interest, Branch Tax, Royalties, and Capital Gains.^[2]

The remaining titles are Independent Personal Services, Dependent Personal Services, Limitation on Benefits, and Directors' Fees. They also include Artistes and Sportsmen, Child Support, Government Service, Teachers and Researchers, Students and Trainees, Other Income, Relief from Double Taxation, Non-Discrimination, Mutual Agreement Procedure, Exchange of Information, Diplomatic Agents and Consular Officers, Entry into Force, and Termination.

Dividends, interest, and royalties

Under Article 10, dividends may be taxed in the country where the recipient lives. The country where the dividends arise may also tax them under its own law, but that tax is capped at 15 percent of the gross amount when the beneficial owner is a resident of the other country.^[2]

A lower ceiling applies to dividends paid to a company that is a resident of the other country and has owned directly at least 25 percent of the payer's capital for an uninterrupted two years before the payment. For dividends paid after December 31, 1999, paragraph 3 sets it at the rate Portugal applies to residents of European Union member states, but not less than 5 percent. For dividends paid from 1997 through 1999 it was 10 percent. IRS Table 1 shows 5 percent for this parent company case and 15 percent for other dividends.^[2][6]

The lower parent company ceiling does not apply to dividends from a U.S. Regulated Investment Company or Real Estate Investment Trust. For regulated investment company dividends, the ordinary 15 percent ceiling applies. For real estate investment trust dividends, that ceiling applies if the beneficial owner is an individual with less than a 25 percent interest; otherwise the withholding rate under domestic law applies.^[2]

Article 11 sets a 10 percent ceiling on source-state tax on interest when the beneficial owner resides in the other state. It also exempts specified interest from source-state tax. This includes interest owed by a government or local authority, as well as qualifying long-term loans of at least five years from a bank or other financial institution resident in the other state.^[2]

The interest exemption also covers interest paid to the other state's government, a political or administrative subdivision, or a local authority. It covers interest paid to an institution or organization wholly owned by them as well.

Article 13 sets a 10 percent ceiling on source-state tax on royalties, calculated on the gross amount, if the beneficial owner resides in the other state. Royalties effectively connected with a permanent establishment or fixed base in the source state are handled under the referenced business profits or independent personal services article instead.^[2]

Residence and dual residence

Article 4 defines a resident as a person liable to tax in a state because of domicile, residence, place of management, place of incorporation, or a similar criterion. A person liable to tax there only on income from sources in that state is excluded from this definition.^[2]

For an individual who qualifies as resident in both countries, the convention applies a sequence of tests. The person is assigned to the state where a permanent home is available. If a home is available in both, the closer personal and economic relations determine residence. If that center of relations cannot be determined, or there is no permanent home in either state, habitual abode is considered.^[2]

If habitual abode exists in both countries or neither, nationality decides. If the individual is a national of both countries or neither, the competent authorities are to settle the question by mutual agreement. For a dual-resident person other than an individual, the authorities are to seek mutual agreement; absent a determination, that person is not treated as resident of either country for treaty benefits.^[2]

Limitation on benefits

The convention contains a Limitation on Benefits article, Article 17. It addresses which residents may receive convention benefits and lists categories that include individuals, governments, certain publicly traded companies, and qualifying organizations or arrangements. The article also addresses residents that conduct substantial active business connected with an item of income. It covers cases in which a competent authority may grant benefits.^[2]

The conditions for companies include substantial and regular trading of a principal share class on a recognized securities exchange, or specified ownership by qualifying companies or public bodies. For the active-business route, the resident must conduct an active trade or business in its state. The income item must connect with or be incidental to that activity, and the business must be substantial in relation to the activity in the other state that generated the income.^[2]

Saving clause and U.S. citizens

The protocol expressly preserves specified convention benefits as exceptions to the saving clause. The listed provisions include relief from double taxation and non-discrimination, as well as mutual agreement procedures and particular provisions in other articles. Treaty provisions may provide reduced rates or exemptions for certain items of foreign-source income received by U.S. residents or citizens.^[2]

Related reading

Related treaty summaries include U.S. income tax treaty with Spain, U.S. income tax treaty with France, U.S. income tax treaty with Switzerland, and U.S. income tax treaty with Finland.

Questions and answers

Related resources

Related glossary terms

• Limitation on benefits: A limitation on benefits article sets conditions for entities in a treaty country to qualify for certain treaty benefits under the applicable U.S. tax treaty.

Related articles and guides

• U.S. income tax treaty with Spain: The U.S. income tax treaty with Spain is the 1990 convention as amended by a 2013 Protocol, which replaced the articles on income from investments in full.
• U.S. income tax treaty with Kazakhstan: The U.S. treaty with Kazakhstan is the 1993 convention, with 5 and 15 percent dividend limits and 10 percent limits on source tax for interest and royalties.

Related pages

• Tax treaties: All treaty partners listed by the IRS.
• Treaty documents lookup: Find IRS-listed treaty documents by country.
• Portugal residence permits and U.S. reporting requirements: Portugal residence permits, investment conditions, trust classification and U.S. reporting duties explained for a U.S. citizen considering a move to Portugal.