The double tax treaties executed between Portugal and Germany, Italy and Finland include a provision whereby a tax credit is granted to the residents of any of these countries if they obtain some elements of their income in Portugal where it is subject to tax but exempt. Relevant elements of income include the payment of interest and the payment of dividends.
The drafting of this provision in each of the three treaties is slightly different, for example:
- the treaties executed with Finland and Italy clearly establish that the tax credit, to be granted by Italy or Finland against taxes paid by one of their residents in Portugal, is also available in cases where payment is waived as a result of a tax exemption granted by Portugal; and
- the treaty executed with Germany deems the source taxation of the Portuguese state always to correspond (regardless of it being effectively due) to 15% of the gross amount of the relevant income.
The impact of these provisions is that a company residing in Italy, Finland or Germany, benefiting from a tax exemption in Portugal in respect of interest or dividend income in Portuguese territory, will be able to obtain a credit in its country of residence, as though the tax had been paid.
In all the treaties, the Madeira Free Trade Zone (MFTZ) is considered an integral part of Portuguese territory and, conversely, the tax exemptions granted in connection with it fully qualify for the purposes of the applicable tax sparing provision.
The application of the Convention will depend on the holder of the income being resident in either contracting state. In the case of the treaties executed between Germany and Italy, and in what concerns interest or dividend income, the Convention further requires that the resident be the 'effective beneficiary' of the income.
Miguel Teixeira de Abreu