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  • Writer's pictureLewis Grunfeld, CPA

Guide to the US Portugal Tax Treaty

Updated: Dec 11, 2023

Understanding the US Portugal tax treaty is crucial for Americans living in Portugal and to Portuguese residents who have U.S. sourced income. This guide breaks down the treaty's provisions, offering clarity on how it affects personal taxation and helps avoid double taxation.

Executive Summary

  • ​The U.S. Portugal tax treaty offers mechanisms to prevent double taxation.

  • The treaty includes a "Savings Clause" that maintains the US right to tax its citizens as per its domestic laws and not per the treaty with just limited exceptions.

  • US-sourced passive income, such as interest, dividends, and pensions, may be taxed at reduced rates or exempted for Portuguese residents who are U.S. NRAs (non-resident aliens).

Introduction to the US Portugal Tax Treaty

The US Portugal tax treaty, signed in 1996, serves as an agreement between the two countries for determining the taxation of income where both nations may have the legal right to tax according to their respective laws. The treaty covers, among many topics, avoidance of double taxation, residency tie-breakers and taxation of various forms of income, including business profits, dividends, interest, pensions, and capital gains. This article will focus on some of the key aspects of the treaty that hold particular significance.


Relief of Double Taxation

The Portugal US treaty provides mechanisms for relief from double taxation, ensuring that income earned in one country by residents or citizens of the other is not taxed twice. Specifically, the treaty allows U.S. citizens and residents to claim a foreign tax credit for the income tax they pay on Portuguese sourced income to Portugal against their U.S. tax liability. Conversely, Portugal offers a credit for U.S. taxes paid on U.S. sourced income against it's own tax liabilities.


Example

Luís Silva, a U.S. citizen living in Lisbon, Portugal, earns an annual salary of $80,000. In Portugal, he pays $25,000 in taxes for the year. Luís's U.S. tax liability for this income amounts to $22,000. Thanks to the relief of double taxation provision of the tax treaty, he is entitled to claim a foreign tax credit on his US taxes. Luís applies the $25,000 he paid in Portuguese taxes against his U.S. tax obligation, effectively reducing his U.S. tax liability to zero and even generating a $3,000 credit surplus, which may be carried over to subsequent tax years.


The Savings Clause

The Portugal US tax treaty contains a "savings clause" which preserves the right of the U.S. to impose taxes on its citizens according to its own laws, even if this contradicts the provisions of the treaty. As a result of this clause, the majority of the benefits and reductions offered by the treaty do not apply to U.S. citizens living in Portugal.


Example

Sofia Pereira, a U.S. citizen, resides in Porto, Portugal and works for an American bio-tech company. She performs all her work duties in Portugal and has no physical presence in the U.S. Although the Portugal U.S. tax treaty exempts such income from U.S. taxation on the basis that there is no permanent establishment in the U.S., the savings clause overrides this, requiring Sofia to declare and possibly pay U.S. taxes on her income. Nevertheless, Sofia can take advantage of foreign earned income exclusion or foreign tax credits for the taxes paid in Portugal to avoid being taxed twice on the same income.

Expert Tip: It's crucial for U.S. citizens to familiarize themselves with the savings clause exclusions in the tax treaty to accurately determine which tax benefits they can utilize.

Tax Residency and the Tie-Breaker Rules

The United States and Portugal each have their own criteria for determining who is a resident for tax purposes. It's possible for someone to meet the residency requirements of both countries simultaneously. To prevent the problems that dual tax residency could cause, the U.S. Portugal tax treaty provides a series of tie-breaker rules. These rules help to decide which country has the primary right to tax the individual's income.


  • Permanent Home Test: The first consideration is whether the individual has a permanent home available to them in one of the countries. If a permanent home is available in only one country, that country is generally considered the individual's country of residence for tax purposes.

  • Centre of vital interests Test: If the individual has a permanent home in both countries or in neither country, the treaty looks at where the individuals center of vital interests lies, in other words, where they have a closer personal and economic interests.

  • Habitual Abode Test: If the individual has a center of vital interests in both countries or in neither country, the treaty looks at where the individual has a habitual abode; in other words, where they live regularly. This could be where they spend more time or where they have a regular presence.

  • Nationality Test: If the individual has a habitual abode in both countries or in neither, the next factor considered is nationality. If the person is a citizen of only one of the countries, that country is typically considered their country of residence for tax purposes.

  • Mutual Agreement Procedure: In the rare case that the individual is a citizen of both countries or of neither, and the above tests do not resolve the issue of residency, the competent authorities of the United States and Portugal will determine the individual's residency through a mutual agreement, taking into account the person's facts and circumstances.


Taxation of US-Sourced Passive Income

Passive income from U.S. sources, which is not tied to a U.S. trade or business, is generally taxed at a flat rate of 30% if earned by a non-resident alien. However, the US Portugal tax treaty lowers this rate and in some cases totally exempts it from US taxation for certain types of income. We've summarized some of the tax treaty rates in the table below. It's important to note that that these rates generally do not apply to U.S. citizens due to the savings clause mentioned earlier.


Tax Rate

Treat Article Citation

​Interest

10%

11(1)

​Dividends - Paid by U.S. Corporations

15%

10(2),(3)

Dividends - Qualifying for Direct Dividend Rate

5%

10(2),(3)

Pensions and Alimony

0%*

20(1)(a)

Social Security

30%**

20(1)(b)

*The rate applies to both periodic and lump-sum payments.

**Tax rate applies to 85% of the social security payments.


Income Earned While Temporarily Present in the US

Generally, income earned from work performed in the US would be considered US source income and would be subject to US taxation. However, the US Portugal tax treaty lists certain exemptions where such income is not subject to US taxes. It's important to note that these exceptions generally do not apply to U.S. citizens because of the savings clause mentioned earlier. We've summarized some of these exceptions in the table below:

Income Type

Maximum Presence in U.S

Required Employer or Payer

Maximum Amount of Compensation

Treaty Article Citation

Employee

183 days

Any foreign resident*

No limit**

16

Contractor

182 days

Any contractor

No limit***

15

Public entertainment

No limit

Any U.S. or foreign resident

$10,000

19

Scholarship or fellowship grant

5 years

Any U.S. or foreign resident

No limit

23(1)

Teaching

2 years

U.S. educational institution

No limit****

22

​Full-time students - remittances or allowances

3 years

Any foreign resident

No limit

20

*The exemption does not apply if the employee's compensation is borne by a permanent establishment that the employer has in the United States.

**Does not apply to fees paid to a director of a U.S. corporation.

***Exemption does not apply to the extent income is attributable to the recipient's fixed U.S. base.

****Does not apply to compensation for research work primarily for private benefit.


Totalization Agreement

The United States and Portugal have a totalization agreement in place, specifically aimed at preventing the double taxation of income in relation to social security taxes. This agreement sets forth guidelines regarding which country's social security system a taxpayer is subject to. Consequently, employees or self-employed individuals are subject to social security taxation in only one country at a time.


State Taxes and Tax Treaties

Numerous states within the United States impose income taxes on their residents. The adherence to the Portugal U.S. tax treaty provisions varies by state, some may recognize them, while others may not.

​Expert Insight: Always check with a tax professional about how state tax laws interact with the treaty, as this can vary significantly from state to state.

Need Help Navigating the US Portugal Tax Treaty?

At CPAs for Expats, we specialize in helping US expats stay compliant with their US taxes. Our low fees and 4.9/5 rating on independent review platforms attests to our commitment to excellence and client satisfaction. Contact us today, and let our tax experts simplify your life and taxes.



Frequently Asked Questions

Does Portugal have a tax treaty with the US?

Does Portugal have a totalization agreement with the US?

Do Portuguese citizens pay tax on US capital gains?



Article by Lewis Grunfeld, CPA

Lewis is a seasoned expert in international and U.S. expat taxation. With over 10 years of international tax experience, he specializes in applying tax treaties to benefit expats, handling complex tax scenarios and ensuring significant tax savings for his clients. Lewis's expertise in international compliance and U.S. expat tax returns has made him a trusted advisor in the expatriate community.

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3 Comments


Guest
Feb 22

In one part of this article, you stated that US pensioners may be eligible for reduced taxes due to the US-Portugal treaty. But in the chart referencing passive income, you seem to state that the Savings Clause disallows the use of the Foreign Tax Credit to offset taxes on US based pensions, dividends, etc. But doesn't Article 25 allow US citizens to "re-source" the income to Portugal, allowing them to use the FTC? Thanks

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Guest
Jan 03

Good afternoon,

Could I know more about how to prepare, plan or set my US movable assets in certain way after reading about preparing inheritance and finding out that when the beneficiaries are not US Citizens and are not US residents, there is a tax withheld before the distribution or transfer take place on certain accounts ( which ones)?

SUBJECT: US-Portugal/ Treaty

Subject : Inheritance

-Where in the Portugal_US TAX Treaty is there a reference to inheritance between 2 countries?


Case scenario: Foreign Beneficiaries are Portuguese residents, NRA and are not direct heirs. They are cousins of the decedent.

-On inheritance, will there be taxes taken before distributions of money - from US decedent's account because the Beneficiaries are Foreig…

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Guest
Jan 03

Your article is the best! It is great and I thank you. I am glad a cam across it. So well written to understand.

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