Markets today have no geographical boundaries and, as such, many Portuguese companies make use of non-resident service providers.
Using these service providers at times can result in unexpected tax exposure, in particular for startups in the seed phase that are more focused on growing their business and are unaware of the tax treatment applicable to the payment of services to non-resident entities.
The Tax Inspection Authority has been keeping a close eye on these payments, given the irregularities found in the application of the provisions of treaties concluded by Portugal to avoid double taxation and to prevent income tax evasion (DTC).
Tax on services rendered by non-residents
According to domestic law (Portuguese Corporate Income Tax Code), income received by a non-resident entity as a result of services rendered is subject to withholding tax in Portugal at a rate of 25%.
Income from the following services is exempt from tax:
- Communications; and
- Financial activities.
For the time being, income from services that are rendered outside of Portuguese territory is also exempt from tax where such services are not related to goods located in said territory and are unrelated to:
- Technical or management support;
- Accounting or auditing services; and
- Consulting, organisation, research or development in any field.
Applying double taxation conventions (DTC) concluded by Portugal
The withholding tax deducted in Portugal may be eliminated by applying the DTC between Portugal and the State of residence of the recipient of the income.
The list of DTCs to which Portugal is a party is available on the Portuguese Tax Authority’s website at www.portaldasfinancas.gov.pt, under “Informação Fiscal > Convenções para Evitar a Dupla Tributação” (Tax information > Treaties for the avoidance of double taxation”).
To apply a DTC the recipient of the income must provide evidence to the entity that is required to withhold tax proving it meets the legal requirements set out in the DTC by the deadline set for paying the tax, by submitting the following documents:
- Certificate of residence certifying residency and tax liability in the State of residence of the recipient of the income; and
- 21-RFI Form, duly filled in and signed by the recipient of the income.
The 21-RFI Form is available on the Portuguese Tax Authority’s website at www.portaldasfinancas.gov.pt, under “Apoio ao Contribuinte > Modelos e Formulários > Double Taxation”. (“Taxpayer assistance > Templates and Forms > Double Taxation”).
With these two documents in its possession the paying entity will be exempted from withholding tax.
The paying entity must keep the documents submitted by the recipient of the income (Certificate of residence and 21-RFI Form) in the tax documentation file, commonly referred to as the “Tax File”.