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Australia and Portugal have signed a new tax treaty, which following its entry into force, will represent the first tax treaty between the two nations.
The 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 and its associated Protocol was signed on 30 November 2023 in Lisbon, Portugal by Her Excellency Indra McCormick, Australia’s Ambassador to Portugal.
A tax treaty with Portugal will encourage cross‑border trade and investment by reducing withholding tax rates on dividends, interest, and royalties. This will create new opportunities for Australian business by making it cheaper for Australian businesses to access Portuguese capital and technology. The treaty will also provide more certainty and reduced compliance costs for Australians and Australian businesses who earn income here and in Portugal.
Further information on the signing of the treaty is available in the media release.
Main features of the new treaty
Tax certainty
The treaty will determine the allocation of profits between Australia and Portugal from cross‑border dealings. This will improve tax certainty and alleviate double taxation for businesses looking to expand into Portugal and for 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, and Australian superannuation funds or other Australian residents carrying out complying superannuation activities.
A 5 per cent rate will be provided for intercorporate dividends on non-portfolio holdings of at least 10 per cent.
These rates will provide Portuguese businesses with at least a 20 per cent reduction from Australia’s default 30 per cent dividend withholding tax rate. This will encourage greater investment in Australia by Portuguese businesses.
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 or other Australian residents carrying out complying superannuation activities, and independent financial institutions.
Australians investing in Portugal will have lower costs with withholding rates on interest to be reduced by 15 per cent (from Portugal’s current 25 per cent rate).
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.
A 20 per cent reduction from Australia’s default 30 per cent royalty withholding tax rate will make it cheaper for Australians to access Portugal’s intellectual property. In Portugal, the rate will be reduced by at least 15 per cent (from Portugal’s current 25 per cent rate) which will incentivise greater utilisation of Australian intellectual property by Portuguese.
Protection over natural resources
The treaty preserves Australia’s source country taxing rights over income from natural resources, including the operation of substantial equipment.
Tax certainty for pensions
The tax treaty provides that non‑Government periodic pension payments (superannuation) will be taxed only in the recipient’s country of residence. 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 or in certain life events (for example, disability or death). This will prevent instances of double non‑taxation of lump sums and would also allow Australia to tax eligible termination payments paid by Australian employers and pension funds.
Preserving either country’s domestic anti-avoidance rules
The treaty maintains the integrity of Australia’s existing laws by providing that nothing in the treaty will prevent either country from applying its own domestic laws to prevent the evasion or avoidance of taxes.
Prevention of multinational tax avoidance
The treaty incorporates important integrity provisions consistent with the outcomes of the G20/OECD Base Erosion and Profit Shifting project to prevent tax evasion and avoidance through treaty abuse.
Non-discrimination
Australia and Portugal will be prevented 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 and can compete on a level playing field with Portuguese businesses.
The non‑discrimination article will not apply to any law of Australia that relates 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, and requires Australia and Portugal to endeavour to resolve the issue by mutual agreement.
If the dispute remains unresolved after three years, the taxpayer may seek independent binding arbitration.