At a glance. The foreign tax credit on Spanish dividends in Portugal allows a Portuguese resident to deduct from Portuguese IRS an amount equal to the Spanish withholding tax suffered, capped only by the fraction of Portuguese tax attributable to those dividends. CAAD arbitration decision n.º 867/2025-T, of 23 March 2026, confirms that this credit is not reduced to 50% even where Article 40-A CIRS (Portuguese Personal Income Tax Code) includes only 50% of the income in the Portuguese tax base.
1. Why this CAAD ruling matters for the foreign tax credit on Spanish dividends in Portugal
A recent decision of the Centro de Arbitragem Administrativa (CAAD), Portugal’s Administrative Arbitration Center, addresses a recurrent question for Portuguese residents receiving dividends from Spanish companies. The tribunal held, in arbitration n.º 867/2025-T, of 23 March 2026, that the elimination of international double taxation must be performed primarily under the Portugal–Spain Double Taxation Convention (DTC), and that the Convention does not allow the Autoridade Tributária e Aduaneira (AT), Portugal’s Tax and Customs Authority, to cap the foreign tax credit on Spanish dividends at 50% of the Spanish withholding, even where domestic law includes only 50% of those dividends in the Portuguese tax base.
For private clients and family-office structures with Iberian portfolios, the practical effect is material. In the case decided, the credit differential between the AT’s reading and the tribunal’s reading translated into a refund order plus indemnity interest from the date of the undue payment until the date the credit note is processed.
2. The dispute in a nutshell: Spanish dividends, Article 40-A CIRS and the AT’s 50% credit cap
The case concerned two Portuguese resident individuals who together held 50% of the share capital in a Spanish company seated in Tenerife. In April 2020 the company distributed dividends of EUR 623,529.42, of which EUR 311,764.71 were allocated to one of the requerentes. Spain applied a 15% withholding tax under Article 10 of the Portugal–Spain DTC, resulting in Spanish tax of EUR 46,724.71.
In their 2020 Portuguese IRS (Personal Income Tax) return, the taxpayers (i) elected the aggregation regime (englobamento) for foreign category E income, (ii) declared in Annex J, Table 8-A, EUR 155,882.36, half of the gross dividends, relying on Article 40-A CIRS, and (iii) declared the full Spanish tax paid as foreign tax eligible for credit.
The AT’s position, articulated in a 2024 ex officio assessment issued after a 2021 assessment had been annulled for lack of reasoning by CAAD decision n.º 425/2022-T, was that since only 50% of the dividends were included in the Portuguese tax base under Article 40-A CIRS, only 50% of the Spanish tax could be considered for the foreign tax credit. The AT also argued that the ex officio assessment, although built on 100% of both the income and the credit, was more favourable than the prior assessment and should therefore stand. The requerentes paid EUR 43,108.58 in December 2024 and challenged the assessment first by reclamação graciosa and then by arbitration.
3. Did the earlier annulment cancel the taxpayer’s aggregation option?
A preliminary procedural question had to be settled. The previous CAAD award, n.º 425/2022-T, had annulled the 2021 assessment for lack of reasoning. The AT took the view that the annulment swept away the taxpayer’s original tax return as well, freeing the AT to issue the ex officio assessment on whichever option the AT considered more favourable.
The tribunal rejected that reading. The prior arbitration annulled the act of assessment, not the taxpayer’s return. The income declaration of 30 June 2021 retained its legal effects, including the presumption of veracity under Article 75(1) of the LGT. A valid election to aggregate foreign category E income under Article 5(2)(h) and Article 40-A(1) of the CIRS therefore remained effective, since it had not been specifically annulled.
In practice, the tribunal held, the AT cannot unilaterally substitute the taxpayer’s election in an ex officio assessment, even on the ground of supposed greater favourability. The ex officio assessment must be built on the elements the AT possesses, which include the original return, in line with the inquisitorial principle and the duty to seek the material truth under Article 58 LGT. The structural takeaway is worth restating: a procedural annulment of an assessment does not erase the underlying tax elections.
4. Primacy of the Portugal–Spain Double Taxation Convention over Article 81 CIRS
The substantive holding turns on a familiar rule with operational consequences. Under Article 8(2) of the Portuguese Constitution, duly ratified international conventions vigoram na ordem interna and prevail over ordinary domestic law. Where a DTC is in force, it is the Convention that primarily governs the elimination of double taxation.
Article 10 of the Portugal–Spain DTC allows Spain, as the source state, to levy withholding tax on dividends, capped at 15% of the gross amount where the beneficial owner is a resident of Portugal. Article 23(2)(a) requires Portugal, as the residence state, to grant a tax credit equal to the tax paid in Spain, capped only by the portion of Portuguese tax attributable to the Spanish-sourced income.
Article 81 CIRS, the domestic credit-method provision, therefore plays a subsidiary role. It cannot be applied in a way that contradicts the Convention. The point is doctrinally settled, but in this case it was the deciding move. The tribunal anchored the entire analysis on the Convention text and treated Article 81 CIRS as a fallback that the Convention had already displaced on the substantive question.
5. Why there is no 50% cap on the foreign tax credit on Spanish dividends in Portugal
The core holding is on the credit-cap point. The AT’s reading was that 50% inclusion under Article 40-A CIRS necessarily implied a 50% cap on the foreign tax credit, on the ground that the credit can only relate to the portion of income actually taxed in Portugal. The tribunal rejected that reading on three grounds.
First, the wording of Article 23(2)(a) of the DTC refers to “the same amount as the tax paid in Spain”. It does not refer to a proportion of that tax. The only express limitation is the ordinary credit limit: the credit cannot exceed the fraction of Portuguese tax attributable to the Spanish-taxed income.
Second, the Convention does not provide any mechanism for proportionally reducing the foreign tax credit because of internal regimes such as the 50% inclusion in Article 40-A CIRS. Internal relief regimes and treaty credit mechanisms are separate operations, and the absence of any treaty hook for the proportional reduction is determinative.
Third, on the facts, even with only 50% of the dividends taxed in Portugal under Article 40-A CIRS, the Portuguese tax attributable to that portion, calculated under the progressive IRS rates of Article 68 CIRS, exceeded the Spanish tax withheld at 15%. The ordinary credit limit was therefore not breached and the full Spanish tax should have been credited.
6. Single-limit versus double-limit credit methods: why the comparison with France and the United Kingdom matters
The tribunal grounded the holding in the broader treaty taxonomy. As Alberto Xavier and Maria Margarida Cordeiro Mesquita both observe in the standard Portuguese literature, certain Portuguese DTCs adopt a “double-limit” credit method, under which the credit is capped both by the residence-state fraction (the ordinary limit) and by a separate fraction calculated under source-state rules. The Portuguese conventions with France and the United Kingdom contain such a clause, expressly applied to the credit Portugal grants.
The Portugal–Spain DTC does not. Its Article 23(2)(a) carries the ordinary credit limit and nothing more. Where the Convention does not consagrate a double-limit method, no proportional reduction by reference to internal regimes can be inferred. The comparator is what makes the holding defendable on an interpretive level. The tribunal expressly aligned with CAAD decision n.º 201/2023-T, which had reached the same conclusion on the same point, confirming an emerging consistent line of CAAD case law.
7. Refund, indemnity interest and the consequences of the annulment
The tribunal held that the IRS assessment suffered from a substantive vice, namely the misapplication of Article 81(1)(a) and (b) CIRS in breach of Article 23(2) of the Portugal–Spain DTC and Article 8(2) CRP, and proceeded to the full set of consequences. The 2024 IRS assessment was partially annulled. The AT was ordered to refund the tax paid in excess and to pay indemnity interest under Articles 43(1) of the LGT and 61(5) of the CPPT, calculated from the date of the undue payment until the date the credit note is processed. Arbitration costs of EUR 2,142.00 were imposed on the AT.
The procedural point on indemnity interest is worth highlighting in practice. The tribunal characterised the AT’s error as an erro de direito imputável aos serviços to which the taxpayer in no way contributed. That characterisation is the gateway to the indemnity-interest layer under Article 43 LGT and should be argued explicitly in any analogous reclamação graciosa or arbitration petition.
8. Practical takeaways on the foreign tax credit on Spanish dividends in Portugal for Portuguese investors
The decision carries five operational points and a Madeira-specific layer.
- Taxpayer elections survive procedural annulments. A foreign tax credit claim, an aggregation election, or any other valid election made in the original return is not erased by the annulment of the assessment for formal reasons. The AT must respect those elections on re-assessment.
- Treaty primacy is operative, not theoretical. Where a DTC applies, Article 81 CIRS plays only a subsidiary role. Any AT reading that compresses the foreign tax credit by reference to internal inclusion rules, without a treaty hook, should be tested against the Convention text.
- The Portugal–Spain default is a full credit for the Spanish withholding on dividends, capped only by the ordinary credit limit (the fraction of Portuguese tax attributable to the Spanish-sourced income). The 15% treaty cap on Spanish source taxation and the progressive Portuguese rates on the 50% included portion will, in most realistic configurations, leave the ordinary limit unconstrained.
- Refund opportunities exist for prior years. Taxpayers who suffered a 50% restriction of the credit in analogous configurations (aggregation under Article 40-A CIRS, Spanish-source dividends) may have grounds to seek corrections, refunds and indemnity interest, subject to the four-year LGT window and the procedural posture of each case.
- Documentary discipline is decisive. The Spanish withholding certificate, the Spanish Modelo 296 declaration where applicable, evidence of payment of the Spanish tax, and a correctly completed Annex J of the IRS return are the operational base for any successful claim.
- The Madeira layer. A Portuguese resident in the Região Autónoma da Madeira (RAM) holding Spanish company shares is governed by the same Convention and the same Article 40-A CIRS as a resident in mainland Portugal; there is no regional variation in the credit mechanism on the IRS side. The Madeira angle is positioning rather than substantive, and MCS, as a Madeira-based firm with a substantial Iberian-resident client base, is set up to address these claims at scale across the RAM client population.
Where MCS can assist
We can assist Portuguese residents and their advisers, subject to a review of the specific tax years, withholding documentation and prior assessment posture, with:
- verification of whether a prior IRS assessment unduly limited the foreign tax credit on Spanish dividends;
- preparation of a reclamação graciosa or, where appropriate, a CAAD arbitration request anchored on Article 23(2)(a) of the Portugal–Spain DTC;
- computation of the credit and of the indemnity-interest layer under Articles 43 LGT and 61 CPPT;
- ongoing IRS Modelo 3 preparation and Annex J discipline for Portuguese residents with Spanish-sourced investment income.
Frequently asked questions
Is the foreign tax credit on Spanish dividends limited to 50% in Portugal? No. The Portugal–Spain DTC does not provide for a 50% cap, even where Article 40-A CIRS includes only 50% of the gross dividend in the Portuguese tax base. The credit equals the Spanish tax paid, capped only by the ordinary credit limit (the fraction of Portuguese tax attributable to the Spanish-sourced income).
What is Article 40-A CIRS and how does it apply to foreign dividends? Article 40-A CIRS provides that, where the taxpayer elects the aggregation regime, certain dividends are taken into account at 50% of their gross value for Portuguese IRS purposes. The rule operates on the income-inclusion side, not on the credit side, and it has no automatic spillover to the foreign tax credit under a Convention.
Does the Portugal–Spain Double Taxation Convention have a double-limit clause? No. The Portugal–Spain DTC adopts the ordinary credit method with a single limit, namely the fraction of Portuguese tax attributable to the Spanish-taxed income. The double-limit method, by contrast, appears in the Portuguese conventions with France and the United Kingdom.
Can I claim a refund if the Portuguese Tax Authority limited my credit to 50%? A claim may be available, subject to the four-year LGT window and the procedural posture of the assessment. The CAAD 867/2025-T holding, alongside the earlier CAAD decision n.º 201/2023-T, supports the legal basis. Each case requires file-specific analysis before a claim is submitted.
Does aggregation (englobamento) of foreign dividends always benefit the taxpayer? Not always. Aggregation brings the dividends into the progressive IRS rates, which may or may not produce a lower effective rate than the separate 28% autonomous rate. The credit-method outcome confirmed by CAAD 867/2025-T improves the case for aggregation in many configurations, but a numerical comparison remains advisable on a year-by-year basis.
What documentation supports a foreign tax credit claim for Spanish withholding? The Spanish withholding certificate, the Spanish Modelo 296 declaration where applicable, proof of payment of the Spanish tax, and a correctly completed Annex J of the Portuguese IRS return. The documentary trail must allow the AT to verify the Spanish tax amount and its allocation to the dividend income declared.
Does this CAAD ruling apply to dividends from other EU jurisdictions or only Spain? The substantive holding is grounded on the specific text of Article 23(2)(a) of the Portugal–Spain DTC and on the absence of a double-limit clause. The reasoning extends to any DTC that uses the same ordinary credit-method wording without a double-limit overlay, but whether it applies to a particular jurisdiction requires a Convention-by-Convention analysis.
This article is provided for general informational purposes only and does not constitute legal, tax or professional advice. It reflects the position of CAAD arbitration decision n.º 867/2025-T as published at the date of preparation and the legislation in force at that date. Application to any specific case requires individualised analysis. Madeira Corporate Services accepts no liability for action taken on the basis of this content without prior consultation. Readers seeking advice should contact us directly.
Miguel Pinto-Correia holds a Master Degree in International Economics and European Studies from ISEG – Lisbon School of Economics & Management and a Bachelor Degree in Economics from Nova School of Business and Economics. He is a permanent member of the Order of the Economists (Ordem dos Economistas)… Read more
