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HMRC internal manual

Double Taxation Relief Manual

Double Taxation Relief Manual: Guidance by country: Portugal: Interest and Royalties

Article 11 provides that interest arising in Portugal which is beneficially owned by a resident of the United Kingdom is taxable in Portugal at a rate not exceeding 10 per cent. Article 12 provides that royalties arising in Portugal to a United Kingdom resident are taxable there at a rate not exceeding 5 per cent of the royalties.

The EC Directive on Interest and Royalties (2003/49EC) (see INTM400010 to INTM400110) provides for the abolition of source state taxation on interest and royalty payments made between associated companies in different Member States. It also ensures that the payments are subject to tax once in a Member State.

However, Portugal has obtained a derogation and will be allowed to defer full implementation of the Directive and carry on deducting withholding taxes until the expiry of an eight year period commencing on the date of application of the EC Savings Directive in Portugal. The specified withholding rates permitted by the Directive are 10 per cent for the first four year period and 5 per cent for the second four year period.

The reduced rate of 5 per cent in respect of royalties available under the treaty will still apply throughout the period of derogation.