Double Taxation Agreements are bilateral international conventions aimed at preventing the same legal fact, which generates tax, from being taxed twice.

Other objectives have been added to the conventions, whose initial aim was to eliminate double taxation and tax evasion, such as combating double non-taxation, eliminating discrimination, ensuring the exchange of information, preventing and combating money laundering, among others. Notwithstanding some differences, the various Double Taxation Conventions have a set of rules that are repeated and of which the following stand out:

• The profits of a company (article 7 of the CMOCDE) of a contracting state can only be taxed in the State of Residence, unless the company carries out its activity in another contracting state by means of a permanent establishment (1). In this case, profits may be taxed in the other State, but only to the extent that they are attributable to that permanent establishment.(2)

• Where a resident of a Contracting State earns income which, in accordance with the provisions of Double Taxation Agreements, may be taxed in the other Contracting State, the former State shall deduct from the tax on that resident’s income an amount equal to the tax paid in the other Contracting State.

REAL ESTATE INCOME

According to Art. 6 of the CMOCDE, income from immovable property (including income from agricultural or forestry holdings) is taxed at source.

This method applies even to income from real estate owned by companies. Thus, there are situations in which this rule prevails over article 7 of the CMOCDE, and income from immovable property should be treated separately from business income. In practice, this may lead to a permanent establishment, even if it has losses, being taxed on income generated by real estate.(3)

DIVIDENDS

For this type of income, the Convention limits the ability of the source State by applying a maximum rate of taxation. The benefit arising from this provision only applies if the person receiving the dividends is the actual beneficiary of the dividends. It cannot be an interposed person, a mere agent, nor someone who is contractually obliged to immediately transfer the rights to another company, nor someone interposed in that operation solely for the purpose of receiving the dividends.(4)

INTEREST

In the case of interest, the person receiving it must always be a resident of a Contracting State, but the person paying the interest may or may not be a resident of the Contracting State. Even in situations where dividends are owed by a permanent establishment, article 11 of the CMOCDE may apply.(5)

ROYALTIES

According to art. 12 of the OECD, when there is double taxation of royalties, the rule is taxation only on the Residence.  The article is simple to apply, the problem lies in the delimitation of the concept of royalties itself, which is difficult to isolate (as it appears associated with other income). In terms of dynamics, it is very similar to the previous articles.

CAPITAL GAINS

If there is a temporary assignment of copyright (licensing), article 12 of the CMOCDE applies. If there is a total disposal of the rights (different from the licence, since in that case the licensor remains the owner of those rights), the framework is made in article 13 of the CMOCDE.

This general rule has some exceptions. When we are not dealing with capital gains on real estate, capital gains from movable assets linked to a permanent establishment, sale of ships or aircraft and sale of shares which have the value of real estate as their basis, taxation is only done in the State of Residence.(7)

PERCENTAGES OF BOARD MEMBERS

According to the provisions of article 16 of the CMOCDE, there may be taxation in the director’s place of Residence and also in the company’s State of Residence, which corresponds to the Source State.

This is because it is often not known where the income of the directors is obtained. To simplify matters it is possible to attribute tax jurisdiction to the company’s State of Residence.

SUMMARY

The rules limiting jurisdiction in the source State may be divided into 4 distinct groups, according to the limitation they impose on the source State:

1. Within the categories of income and wealth that may be taxed without any limitation in the Source State enter the profits of a permanent establishment in that State (article 7 of the CMOCDE). (8)
2. Next, within the categories of income that may be subject to limited taxation in the source State are dividends and interest (articles 10 and 11 of the CMOCDE).
3. Within the categories of income or wealth that cannot be taxed in the Source State, but are taxable only in the Residence State, are royalties, gains from the disposal of securities and business profits that are not attributable to a permanent establishment situated in the Source State (Articles 12, 13(5), 7(1) of the OECD).
4. Where a resident of a Contracting State earns income which, in accordance with the provisions of the Double Taxation Agreements, may be taxed in the other Contracting State, the former State shall deduct from the tax on the income of that resident an amount equal to the tax paid in the other Contracting State. The amount deducted may not, however, exceed the fraction of the tax of the first State, calculated before the deduction, corresponding to the income taxed in the other State, that is, the deduction shall never exceed the amount already paid in the other Contracting State.

[1] Permanent establishment (SE) is merely a test to determine whether the activity of the nonresident multinational is sufficiently significant to justify a form of taxation similar to that of resident companies. This test is based on several elements, that is, it is concluded that a permanent establishment exists if there is a physical installation that meets certain requirements, if there is a project that also complies with the requirements established in art. 5 of the CMOCDE, or if there is a so-called ‘agency’ permanent establishment.

[2] This is how Article 7 of the Double Taxation Convention entered into between Portugal and Brazil understands it, by providing that, as a rule, it is the company’s State of residence that may tax the company’s profits, unless the company carries on its activity in another contracting State through a permanent establishment.

[3] The Double Taxation Convention concluded between Portugal and Spain provides for this rule in its article 6 by considering that “[t]he income that a resident of a Contracting State derives from real estate (…) situated in the other Contracting State may be taxed in that other State”.

[4] The term ‘dividends’, present in article 10 of the CMOCDE, refers to income derived from shares, fruition bonuses, mines shares, founder’s shares or other rights, as well as income derived from other shares subject to the same tax regime as income from shares by the legislation of the State of Residence of the company distributing them.

[5] For example, article 11 of the Double Taxation Convention concluded between Portugal and France provides that dividends may be taxed in the State of Residence and in the State of Residence of the company, but, in the latter, “the tax so established shall not exceed 15% of the gross amount of the dividends”.

[6] The term ‘royalty’ is very broad: “The term ‘royalties’ used in this Article, means fees of any kind granted for the use or assignment of the use of a copyright in a literary, artistic or scientific work, including cinematographic films, of a patent, of a trademark, of a design, of a model, of a plan, of a formula or of a secret process, or for information concerning experience gained in the industrial,commercial or scientific sector.”

[7] If we are in one of these exceptions, the taxation regime varies. In the first case (capital gains on real estate), taxation takes place in the State of residence and source, in the second (capital gains on movable assets linked to a permanent establishment) also, in the third (sale of ships or aircraft) taxation takes place in the State of residence of the State that owns the ships or aircraft.

[8] In this group of income, the Source State is not limited, it can fully tax such income according to its domestic law. If there is a situation of double taxation in relation to this type of income, the Convention allows the Source State to tax without any type of limitation. If there is no limitation at the Source, it will be the responsibility of the State of Residence to compensate this double taxation.