Tax Update: New UK–Portugal Double Tax Treaty
The United Kingdom and Portugal have signed a new Double Tax Treaty that replaces the 1968 Treaty. Signed in London on 15 September 2025 the Treaty is not yet in force and will enter in effect only once domestic ratification procedures are completed.
The new tax treaty carries real strategic significance. Beyond their historic ties and long-standing commercial relationship, the UK and Portugal maintain a strong economic platform — with Portugal ranking as the UK’s 27th largest trading partner and the UK among the top three sources of FDI into Portugal in 2024. In the post-Brexit era, this tax treaty modernises the framework for cross-border taxation, aligning it with the 2017 OECD Model and introducing targeted anti-abuse provisions and enhanced dispute-resolution mechanisms that reflect the evolving dynamics of UK–EU economic cooperation.
5 Key Highlights:
OECD-aligned structure: The new Treaty comprehensively updates definitions, residence rules, permanent establishment and business-profits provisions in line with the 2017 OECD Model.
Lower withholding tax rates: Reduces rates on dividends, interest, and royalties, with specific participation-exemption conditions.
Capital-gains alignment: Expands source-state taxing rights to indirect transfers of real estate-rich entities, following OECD 2017 Article 13(4) standards.
Trusts: Specific look-through provision for income distributed from UK trusts or estates to Portuguese residents, with entitlement to foreign-tax credit in Portugal for tax paid by the trustees.
Robust dispute resolution: Introduces a mandatory arbitration protocol covering Articles 5, 7, and 9, strengthening certainty in transfer-pricing and PE-profit attribution cases.
Outline of the Tax Treaty:
Modernised Preamble: Now aligned with the 2017 OECD Model, emphasising the prevention of tax evasion and avoidance.
Saving Clause (Article 1): Preserves each State’s right to tax its own residents, subject to specific treaty benefits.
Definitions (Article 3): Updated to follow the 2017 OECD Model and to allow competent authorities to agree on alternative interpretations.
Corporate Residence (Article 4): Introduces a modern tie-breaker for companies based on mutual agreement between competent authorities, replacing the older “place of effective management” rule.
Permanent Establishment (Article 5): Retains a traditional threshold, including the 12-month rule for construction sites, while incorporating anti-fragmentation and closely-related-enterprise provisions. The broader OECD 2017 Model commissionaire and principal-role test has not been adopted.
Business Profits (Article 7): Updated to a transfer-pricing-consistent standard while stopping short of fully adopting the Authorised OECD Approach (AOA).
Associated Enterprises (Article 9): Adds a provision for corresponding adjustments and consultation between authorities where profit adjustments occur.
Dividends (Article 10): Sets a withholding capped at 10%, or 15% for real-estate investment vehicles (REIT-type entities). A participation exemption applies where the recipient company holds ≥10% for at least one year and is fully taxable. The definition extends to distributions by arrangements for participation in profits (associação em participação) and Portuguese real-estate funds.
Interest (Article 11): Sets a withholding limited to 10%, reduced to 5% for interest paid to banks and 0% for government, central-bank, or government-agency payments.
Royalties (Article 12): Sets a withholding capped at 5%, with the definition narrowed to exclude industrial-equipment rentals, focusing instead on IP and know-how.
Capital Gains (Article 13): Aligns with the 2017 OECD Model by extending source-state taxation to gains realised on the sale of shares or comparable interests that derive more than 50 per cent of their value, directly or indirectly, from immovable property situated in that State. This provision ensures that Portugal may now tax gains on direct and indirect transfers of Portuguese real-estate interests held by entities, even when the disposal involves an intermediate foreign holding company.
Employment Income (Article 14): Retains the 183-day rule but clarifies it applies to any rolling twelve-month period.
Directors’ Fees (Article 15): Newly included article granting taxing rights to the company’s State of residence.
Artistes and Sportsmen (Article 16): Extends source-state taxation to income earned through intermediaries or third parties.
Pensions and Government Service (Articles 17–18): Streamlined and symmetric treatment of private and government pensions.
Students (Article 19): Maintains exemption for foreign-sourced study or training payments.
Other Income (Article 20): Paragraphs 2 and 3 ensure that when a UK-resident trust or estate distributes income to a Portuguese-resident beneficiary, the distribution retains the source and character of the underlying income, and any UK tax already paid by the trustees is deemed paid by the beneficiary—thereby qualifying for foreign-tax credit in Portugal and preventing double taxation. Paragraph 5 adds an anti-avoidance safeguard, ensuring that the “other income” article limits the treaty benefit to the arm’s-length amount that would have been agreed in the absence of any special relationship, with any excess remaining taxable under domestic law.
Elimination of Double Taxation (Article 21): Reflects modern credit and exemption systems, including recognition of the UK’s participation-exemption and branch-exemption regimes.
Non-Discrimination (Article 22): Updated to ensure equal treatment of cross-border payments and deductibility of expenses.
Mutual Agreement Procedure (Article 23): Modernised with a three-year time limit for claims and supported by a new mandatory binding arbitration protocol (see below).
Exchange of Information (Article 24): Expanded to all taxes and uses the “foreseeably relevant” standard and includes bank and beneficial-ownership data.
Assistance in Collection of Taxes (Article 25): Introduced for the first time, allowing reciprocal recovery of tax debts (excluding VAT and customs duties).
Principal Purpose Test (Article 27): Denies treaty benefits where obtaining them was one of the principal purposes of a transaction or arrangement.
Entry into Force and Termination (Articles 28–30): Minimum five-year period before termination permitted. Provides for registration with the United Nations upon entry into force.
Arbitration Protocol: Mandatory binding arbitration procedure to strengthen dispute resolution under the Treaty, reflecting the UK’s modern treaty policy and Portugal’s recent openness to arbitration mechanisms. It applies exclusively to issues arising under Articles 5 (Permanent Establishment), 7 (Business Profits), and 9 (Associated Enterprises), where the competent authorities cannot reach agreement within the mutual-agreement-procedure framework. However, the Protocol expressly excludes from arbitration: (a) cases where income or gains are untaxed or exempt purely under domestic law; (b) cases involving taxpayers finally penalised for fraud, wilful default, or gross negligence; (c) disputes concerning domestic or treaty anti-avoidance rules; and (d) cases already covered by the EU Arbitration Convention.
Kore Take
While the new Treaty marks a significant step forward, it notably leaves interest and royalties subject to withholding tax — up to 10% for interest (5% for bank loans) and 5% for royalties. This stands in contrast to Portugal’s relationships with EU Member States, where the Interest and Royalties Directive eliminate such withholding. In addition, it may have been an opportunity to include a restructuring or reorganisation clause providing tax neutrality for certain cross-border mergers, demergers, or asset transfers since the EU Merger Directive no longer applies to UK entities following Brexit. Other notable omissions are digital-economy adaptations or specific provisions on transparent entities addressed in newer OECD and UN model updates.
The Treaty will only take effect once ratified by both countries, a process not expected to conclude during 2025, meaning it is likely to enter into force only as from 1 January 2027.
© Kore Partners, 2025
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