Dealing with double taxes is one of the main challenges expats or those with foreign company interests might face. This happens when your income is taxed in two nations: once in the nation where it is earned and once more in the country where you live. Fortunately, Portugal has a system of double taxation treaties (DTTs) to guard your foreign income from being unfairly taxed twice. Still, applying these accords is not always as simple as it sounds. When computing tax settlement notices, the Portuguese Tax and Customs Authority (AT) is infamous for not faithfully applying for international tax credits. Thus, Professional help is usually necessary in challenging these letters and verifying your tax bill is accurate.
What Are Double Taxation Treaties?
A double taxation treaty is a bilateral agreement between two nations meant to stop people and companies from paying twice taxes on the same revenue. These treaties essentially assign taxation rights between the two countries, thereby clarifying which nation can tax particular kinds of income, like earnings from work, company profits, dividends, royalties, or capital gains.
Portugal has signed DTTs with more than 70 countries, including several European countries, Canada, the United States, and the United Kingdom—including prominent economic actors. Depending on the provisions of the particular treaty, this comprehensive network guarantees that people with foreign income might gain from lowered tax rates or exemptions in some situations.
The Importance of Portugal’s Double Taxation Treaties
Double taxation treaties help prevent people and companies from paying taxes in both their own country and the nation from which the revenue comes. This would greatly raise the tax load, lower the profitability of international businesses, and render many worldwide mobility options financially untenable.
Portugal’s double taxation treaties help reduce this problem by offering foreign tax credits or exemptions. They make it clear which nation is entitled to tax particular kinds of revenue and to what degree. Applying the terms of these treaties will allow Portuguese citizens to avoid paying taxes twice on the same income, therefore attracting foreign investors and expatriates to the nation.
How Do Double Taxation Treaties Work in Practice?
Most DTTs have a prominent feature: ensuring taxpayers get a foreign tax credit in one nation for taxes paid in another. If you, for instance, generate income in the UK but live in Portugal, you might be entitled to claim a credit in Portugal for taxes already paid to HMRC in the UK. This credit lowers your whole tax obligation, therefore avoiding double taxation.
Though every treaty is unique, often they include clauses pon
- Income from Employment: Should you be a resident of Portugal yet work elsewhere, the treaty will determine which nation taxes your income. The nation where the job is done will often have the first right to tax your revenue.
- DTTs prohibit profits from being taxed both in Portugal and the nation where the company conducts business, avoiding taxes for companies with no permanent establishment in the other nation.
- Treaties can limit the amount of tax that can be deducted on foreign-earned dividends, interest, and royalties. PPortugal’s accords with several nations, for instance, restrict withholding taxes on dividends to a lowered rate, preserving more of your income.
- These treaties also define which nation is entitled to tax gains from selling shares, real estate, or another investment.
Problems concerning the Portuguese Tax and Customs Authority (AT)
Although double taxation treaties offer protection on paper, enforcing these accords may be difficult, particularly in Portugal. The Portuguese Tax and Customs Authority’s (AT) failure to correctly use foreign tax credits when sending tax settlement letters is one of the main problems expats and foreign company owners face.
Many taxpayers claim to receive exaggerated tax bills as, even if they should use the foreign tax credits under the pertinent DTT, the AT does not automatically recognize taxes paid overseas. You may thus be wrongfully taxed twice until you can show your entitlement to the tax credit by challenging the settlement notification.
Why is professional help vital?
Dealing with the AT’s neglect to apply international tax credits might be difficult. Often engaged in protracted arguments to challenge the tax settlement notification, taxpayers must provide thorough evidence proving international taxes were paid, and the treaty applies. This procedure requires detailed knowledge of Portuguese tax law and international tax treaties.
Employing a tax attorney knowledgeable about Portugal’s double taxation agreements will often save you time and money. If needed, a professional can represent you in conflicts with the AT, check that the foreign tax credit is applied appropriately, and examine your tax status. They may also help with correct documentation filing to guarantee adherence to Portuguese and foreign tax rules.
Portuguese Foreign Tax Credit Claiming Guidelines
When you file your tax return in Portugal, you will be entitled to a foreign tax credit should you have paid taxes on income earned abroad. Here’s how to do it:
- Organize your documentation proving the taxes you paid elsewhere. This might call for foreign tax authority notifications or tax receipts.
- Know the applicable treaty: Consult the particular double taxation treaty between Portugal and the nation from where you paid taxes. This will clarify your credit entitlement.
- File a claim using your yearly Portuguese tax return; you must disclose your international income and ask for the foreign tax credit. Usually, a suitable form or portion of your tax return will help you to accomplish this.
- Once you submit your return, keep an eye on your settlement notification from the AT. Make sure the notification matches your claimed foreign tax credits. If it does not, you will have to contest the settlement.
Resolving Conflicts with the AT
Should the AT mishandle the foreign tax credit, you could have to follow a formal dispute procedure. First, file a claim to the AT together with any pertinent records proving your recent foreign tax payments. This procedure might take several months; occasionally, you might have to rely on a tax lawyer or specialist to negotiate the complexity.
Other advantages of Portugal’s double taxation treaties
Apart from preventing double taxation, DTTs provide consistent overseas income policies, giving taxpayers certainty and transparency. They frequently have clauses for:
- Non-discrimination: Taxpayers from one nation shouldn’t be burdened more than those from another treaty nation.
- Countries engaged in DTTs consent to provide tax-related information to stop tax avoidance and guarantee compliance with international tax commitments.
- If taxpayers feel they have been unfairly taxed, DTTs frequently allow dispute resolution methods whereby the tax authorities of both nations may cooperate to address the matter.
In summary
Portugal’s double taxation agreements offer vital protection for foreign income, enabling citizens to avoid paying two taxes on the same wages. Applying these treaties can be difficult, especially if the Portuguese Tax and Customs Authority misplaces international tax credits. Having a solid knowledge of the pertinent treaties and, in many circumstances, consulting a specialist can help you prevent expensive mistakes and guarantee accurate settlement of your taxes.
FAQs
- What is a double taxation treaty? It is an agreement between two nations that prevents people and companies from paying twice on the same revenue.
- Does Portugal have several double taxation treaties? How many Portugal has signed more than seventy double taxation agreements with other nations all across the globe.
- Why in Portugal do I need a tax consultant? Sometimes the Portuguese Tax and Customs Authority neglects to apply international tax credits, which increases tax payments. A tax specialist can guide you through this procedure and settle disagreements.
- What effect might ignoring my overseas tax credit have? Should you neglect to claim the international tax credit, you may find yourself paying taxes on the same income in both countries, thereby raising your tax load.
- How would I object to a Portuguese tax settlement notice? Submitting a claim to the AT together with proof of taxes paid overseas may help you contest a tax settlement notification and might call for the help of a tax professional.
The information in this article on “Portugal double taxation treaties ” is for general informational purposes only and is not intended to constitute legal advice. While every effort has been made to ensure the accuracy of the content, laws and legal procedures can change, and the specifics of each case can vary widely. Therefore, readers are advised to consult a qualified professional or attorney in Portugal for advice tailored to their circumstances before taking action. This article does not create an attorney-client relationship between the reader, the authors, or the publishers. The authors and publishers are not liable for any actions taken or not taken based on the content of this article.
Rosana Rodrigues is a co-founder and partner of TFRA Law Firm. Her work mainly involves advising foreign investors in Portugal, particularly in areas of Corporate and Tax law. She has also worked extensively in Shipping law… Read more
