Have you ever wondered what happens when you receive income from another country? Do you pay tax there and in Portugal too? To avoid the same income being taxed twice, Portugal has signed Double Tax Treaties (DTTs) with many countries.
These treaties are essential for expatriates, investors, and businesses with international activity, as they determine where and how income should be taxed.
In this article, you will learn:
- The meaning of terms such as “only in the country of residence” or “in both countries”.
- How taxation limits work for income such as interest, dividends, and royalties.
- The risks when the treaty is not applied correctly.
- The specific rules for the Non-Habitual Resident regime.
What the key terms mean in the Treaties
DTTs define in which country income can be taxed . Three key expressions make all the difference:
- “Only in the country of residence” – means that only the country where the taxpayer is resident can tax.
- “Only in the country of source” – only the country where the income was earned (or paid) can tax.
- “In both countries” – both countries may tax, but one must give a tax credit to avoid double taxation.
👉 Practical example: dividends paid by a foreign company may be taxed in the country of that company and also in Portugal, but the foreign taxation has a limit.
Income taxable in both countries: interest, dividends, and royalties
Not all types of income are exclusive to one country. Some, such as interest, dividends, and royalties, can be taxed in both, but with maximum limits defined in the treaty.
Imagine you receive dividends from a country with which Portugal has a treaty:
- In Portugal, the taxation is 28%.
- o If 15% was withheld abroad, Portugal only taxes the remaining 13%.
- If 30% was withheld abroad, Portugal only recognises the maximum limit set in the treaty (e.g. 15%). It then applies 13% here, and the extra 15% paid abroad is lost.
📌 Key takeaway: the treaty protects against double taxation, but only up to the agreed limit.
Income taxable only in Portugal
When the treaty states that income is taxable only in the country of residence, any tax paid abroad is lost.
Example:
Capital gains on shares – if the treaty allocates exclusive taxation rights to Portugal, and the other country also taxed it, that tax will not be credited in Portugal.
The importance of declaring non-residence
For treaties to apply correctly, it is essential to inform each country about your tax residency.
- Without this declaration, you may be taxed as a local resident and lose treaty benefits.
- Usually, you need to present a certificate of tax residence issued by the Portuguese Tax Authority.
The Non-Habitual Resident (NHR) regime
For those who are tax resident in Portugal under the Non-Habitual Resident regime, the treaty has an even more favourable impact:
- If the treaty allows taxation in the source country, the income may be fully exempt in Portugal.
- In other words, even if no tax was actually paid abroad, the treaty combined with the NHR regime guarantees this exemption.
Conclusion
Double Tax Treaties are a key tool for effective tax planning. They help avoid double taxation but require:
- Knowledge of the specific rules in each treaty.
- Attention to the taxation limits.
- Compliance with formal requirements in each country.
👉 For those under the NHR regime, treaties may even mean full exemption in Portugal, making case-by-case analysis essential.
Do you have foreign income and are unsure how to apply the treaty?
Yes, it proves where you should be taxed.
No. Only countries that have an agreement with Portugal.
You may be overtaxed, and in many cases the excess cannot be recovered.
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