With the continuous increase of Chinese investments throughout the entire world and, particularly, in Portugal, along with the inverse phenomenon, it is extremely important to acknowledge that Portugal has already entered into double tax treaties with China and Macau, which became important instruments to be considered by companies and individuals when moving forward with their international planning strategies.

The Double Tax Treaty entered into between Portugal and China

Within this context, we would like to emphasize the Double Tax Treaty entered into between Portugal and China, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Beijing in 1998. The mentioned agreement applies to taxes on income imposed on behalf of a Contracting State, which, in case of China, are the individual income tax, the income tax for enterprises with foreign investment and foreign enterprises, and the local income tax; and, in Portugal, personal income tax (IRS), corporate income tax (IRC) and local surtax on corporate income tax (derrama).

The agreement specifically provides that dividends, interest and royalties paid or arising from a company which is a resident of a Contracting State to a resident of the other Contracting State, may be taxed in that other State. However, such dividends, interest or royalties may also be taxed in the Contracting State in which it arises and according to their internal laws, but if the recipient is the beneficial owner of the dividends, interest, or royalties, the tax so charged shall not, in any case, exceed 10% of the gross amount of the dividend, interest or royalties.

Pensions (not resulting from public sector pay), are taxed only in the state of residence.

On the other hand, capital gains from personal property (as long as such gains do not relate to immovable property located in the other Contracting State, nor property that forms part of the assets of a permanent establishment or fixed installation that a company from one of the contracting states has in another contracting State) may be taxed only in the contracting State where the alienator is resident.

The pay of director’s fees in his capacity as a member of the board of directors of a company which is resident in one of the contracting States may either be taxed in the State of source and in the State of residence. The same applies to salaries, wages and other similar remuneration derived by a resident of a contracting State in his capacity as an official in a top-level managerial position of a company which is resident of the other contracting State. The elimination of double taxation in Portugal should occur in the following way:

a) When a Portuguese resident receives income which, under the terms of the agreement, may be taxed in China, Portugal will allow the deduction from the income tax of an amount equal to the income tax paid in China. This amount is, however, limited to the fraction of the income tax, calculated before the deduction, corresponding to the income that may be taxed in China;

b) When the income received by a Portuguese resident is exempt from tax under the agreement, Portugal may, nevertheless, take the exempt income into account in the calculation of the amount of the tax on other income (exemption with progression).

The Double Tax Treaty entered into between Portugal and Macau

A few months before 20 December 1999, when Macau became a special administrative region within the People’s Republic of China, the governments of Portugal and Macau - which, for the purposes of the agreement, includes the peninsula of Macau and the islands of Taipa and Coloane - signed an agreement to avoid double taxation and to prevent tax evasion in the area of income tax.

The agreement, which was signed in Macau on 28 September 1999 and came into force retroactively as from 1 January 1999, closely follows the Organisation for Economic Co-operation and Development’s (OECD’s) model.

The agreement specifically provides for the taxation of dividends, interest and royalties in the source country at the reduced rate of 10%.

Pensions (not resulting from public sector pay), as well as capital gains from personal property (as long as such gains do not relate to property that forms part of the assets of a permanent establishment or fixed installation that a company from one of the contracting states has in another contracting state) are taxed only in the State of residence.

The pay of members of the board of directors and of higher level professionals of companies from one of the contracting states may also be taxed in this state of source as well as in the state of residence.

The pay of salaried employees is taxed in the state of residence, but it may also be subject to taxation in the contracting state where the activity is exercised. This taxation arises when: the beneficiary remains there for a period or periods which exceed 183 days in total in any 12 month period beginning or ending in the financial year in question; the pay is from an employer or in the name of an employer that is resident in that state and the pay is funded from a permanent establishment or fixed installation that the employer has in that state.

The elimination of double taxation in Portugal should occur in the following way:

1. When a Portuguese resident receives income which, under the terms of the agreement, may be taxed in Macau, Portugal will deduct from the income tax an amount equal to the income tax paid in Macau. This amount is limited to the fraction of the income tax, calculated before the deduction, corresponding to the income that may be taxed in Macau.

2. When a company resident in Portugal receives dividends from a company in Macau in which the former has a direct capital share of not less than 25%, and the Macau company fulfils either of the following conditions: its main activity is air transport; or it is an industry in the sector of the transformation, production and distribution of electricity, gas and water, or in construction, accommodation or catering and is located predominantly in Macau.

Portugal will allow a deduction of 95% of these dividends included in the tax assessment base, as long as the said share of 25% has been held continuously for the two preceding years or, or since the date of incorporation of the Portuguese company (when more recent).

Finally, when the income received by a Portuguese resident is exempt from tax under the agreement, Portugal may, nevertheless, take the exempt income into account in the calculation of the amount of the tax on other income (exemption with progression). In turn, in the elimination of double taxation in Macau, it should be considered that, when a Macau resident receives income that under the agreement may be taxed in Portugal, this income is exempt from tax in Macau (therefore by the exemption method).

If the 1999 agreement was made in the light of the need to regulate the relationship between the two tax authorities, shortly afterwards the Special Administrative Region of Macau began to manifest its intention to widen its network of agreements in order to avoid double taxation in all Portuguese-speaking countries as a way of attracting investment from them. This intention was made clear by the government of the Special Administrative Region of Macau when it introduced a bill entitled “Tax system in the case of regional or international double taxation”. The bill was justified by the fact that economic development on both a regional and international level has boosted both transnational economic relationships and the phenomenon of the movement of people between a number of tax jurisdictions and these two circumstances have inevitably given rise to double taxation situations.

With the same issue in mind, Macau has already presented proposals to the other Portuguese-speaking countries and has widened the application of the agreements to be made to mainland China. All the countries involved have shown their willingness to open negotiations on this proposal and, in the meantime, an agreement was signed with Mozambique in 2007 and negotiations are taking place with the rest of the countries.

So the agreement made between Portugal and Macau, apart from being groundbreaking in achieving the aims of the Special Administrative Region of Macau, is also an increasingly important factor to be taken into consideration by businessmen and women, Portuguese investors in particular and Portuguese speakers in general, when making decisions related to their wish to expand their activity to the continent of Asia.

General overview of international double taxation in Portugal

International double taxation is an obstacle to trade relations and to the free movement of goods, services, people and capital. The need to eliminate this obstacle has become more acute in the current context, dominated by new technologies and by the internet. By regulating the right of the countries involved to levy taxes, it is possible to avoid the relocation of income and capital to other countries merely for tax purposes and boost (economic and other) ties between the countries in question.

Over the years, Portugal has signed fifty-two double tax treaties for the avoidance of double taxation on income tax, following the OECD Model Convention, with some reservations which are aimed essentially at ensuring a broader concept of permanent establishment and seek to raise the level of taxation in the source country with regard to dividends, interest and royalties. As a rule, the method used in the concluded treaties is that of the ordinary tax credit, although it should be noted that in some of the treaties, provision has been made for a matching credit or tax-sparing credit.

By circular issued on 13 March 2009 (No. 20137), the International Relations Services Department of the Directorate- General of Taxation again released the official list of all the international double tax treaties entered into by Portugal. An updated list has recently been made available in the internet site of the Portuguese tax authorities (www.portaldasfinancas.gov.pt).

The reason behind this release is that traders need up-to-date information about the existing agreements and the legal instruments which preceded their publication, the date on which they came into force and easy access to the rates of tax for situations where withholding tax is partially waived.

The treaties concluded by Portugal in accordance with this OECD model come into play only when those paying the income have the necessary forms for this purpose (21-RFI to 24-RFI), duly completed and authenticated by the respective tax authorities. These forms replaced the old forms (7-RFI to 18-RFI) in 2008. However, according to Circular No. 5/2008, of 7 March, issued in the meantime by the International Relations Services Department of the Directorate-General of Taxation, the Portuguese and Spanish versions of forms (7-RFI to 18-RFI) will remain in force until the new forms in these two languages have been approved, in view of the fact that internal legislation obliges the respective tax authority to certify only documents drawn up in Spanish.

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