Portugal tax treaty

Australia and Portugal have signed a new tax treaty – the Convention between Australia and the Portuguese Republic for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance.

When it enters into force, it will be the first tax treaty between the 2 nations.

Her Excellency Indra McCormick, Australia’s Ambassador to Portugal, signed the new tax treaty and its associated Protocol on 30 November 2023 in Lisbon, Portugal.

A tax treaty with Portugal will reduce withholding tax rates on dividends, interest and royalties. This will:

• encourage cross‑border trade and investment.
• make it cheaper for Australian businesses to access Portuguese capital and technology.

This will create new opportunities for Australian business.

The treaty will also provide more certainty and reduce compliance costs for Australians and Australian businesses who earn income here and in Portugal.

Main features of the new treaty

Tax certainty

The treaty will determine where profits from cross‑border dealings are allocated between Australia and Portugal. This will improve tax certainty and relieve double taxation for:

• businesses looking to expand into Portugal
• other Australian taxpayers deriving income from Portugal.

Lower withholding tax rates on dividends

The treaty will provide a general rate of 10 per cent on dividends.

A 5 per cent rate will be provided for portfolio dividends derived by:

• governments (including government investment funds)
• central banks
• tax‑exempt Portuguese pension funds
• Australian superannuation funds
• other Australian residents carrying out complying superannuation activities.

Intercorporate dividends on non‑portfolio holdings of at least 10 per cent will have a 5 per cent rate.

The dividend withholding tax rate is reduced by at least 20 per cent for Portuguese businesses (from Australia’s 30 per cent default). This will encourage them to invest in Australia.

The withholding tax rate on dividends will be reduced by at least 15 per cent for Australian businesses investing in Portugal (from Portugal’s current 25 per cent rate). This will lower the cost of conducting business for Australians in Portugal.

Lower withholding tax rates on interest

The treaty will provide a general rate of 10 per cent on interest.

A zero per cent rate will be provided for interest derived by governments (including government investment funds) and central banks.

A 5 per cent rate will be provided for:

• tax‑exempt Portuguese pension funds
• Australian superannuation funds
• other Australian residents carrying out complying superannuation activities
• independent financial institutions.

This reduces withholding rates on interest by 15 per cent (from Portugal’s current 25 per cent rate). This lowers costs for Australians investing in Portugal.

Australia’s tax under the treaty will remain at 10 per cent for all other Portuguese investors.

Lower withholding tax rates on royalties

The treaty will provide a rate of 10 per cent.

This reduces Australia’s default 30 per cent royalty withholding tax rate by 20 per cent. This will make it cheaper for Australians to access Portugal’s intellectual property.

This reduces Portugal’s current 25 per cent rate by at least 15 per cent. This incentivises the Portugeuse to utilise Australian intellectual property.

Protection over natural resources

The treaty preserves Australia’s source country taxing rights over income from natural resources. This includes the operation of substantial equipment.

Tax certainty for pensions

The tax treaty provides that only the recipient’s country of residence can tax non‑government periodic pension payments (superannuation). This means Australia can tax non‑government pension payments where a Portuguese citizen has retired in Australia.

The source (paying) country may tax lump sum payments from:

• pension funds
• retirement benefit schemes
• certain life events (for example, disability or death).

This will prevent instances of double non‑taxation of lump sums. It allows Australia to tax eligible termination payments paid by Australian employers and pension funds.

Preserving either country’s domestic anti‑avoidance rules

The treaty provides it will not prevent either country from applying its own domestic laws to prevent the evasion or avoidance of taxes. This maintains the integrity of Australia’s existing laws.

Prevention of multinational tax avoidance

The treaty incorporates important integrity provisions. These provisions are consistent with the outcomes of the G20/OECD Base Erosion and Profit Shifting project. They prevent tax evasion and avoidance through treaty abuse.

Non‑discrimination

The treaty prevents Australia and Portugal from treating each other’s nationals and businesses less favourably. This means that Australian businesses will not be subject to any discriminatory tax measures in Portugal. This allows them to compete on a level playing field with Portuguese businesses.

The non‑discrimination article will not apply to any Australian law relating to a rate of taxation for working holiday makers.

Rules relating to the exchange of taxpayer information

The treaty will ensure the rules relating to exchange of taxpayer information is consistent with Australia’s existing policies and international obligations.

The data used and transferred within the scope of the treaty will be safeguarded in accordance with the domestic laws of each state.

Rules to resolve tax disputes

The treaty will provide mechanisms for taxpayers to seek dispute resolution between tax authorities if they believe they are not or will not be taxed in accordance with the treaty, subject to certain criteria. It requires Australia and Portugal to endeavour to resolve the issue by mutual agreement.

If the dispute remains unresolved after 3 years, the taxpayer may seek independent binding arbitration.

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