What is the Spain-Portugal double taxation treaty
The double taxation treaty between Spain and Portugal was signed on 26 October 1993 and has been in force since 1995. It follows the OECD model and allocates taxing rights over the income of residents of both countries: it decides which State may tax each type of income and sets maximum caps on withholding taxes at source.
In practice, the treaty mainly benefits SMEs and self-employed people who operate across the border: if your company pays the 21% corporate tax in Portugal and you are resident in Spain, you will not be taxed again on those same profits provided you meet the requirements of the agreement.
Dividends, interest and royalties: withholding caps
One of the most concrete effects of the Spain-Portugal double taxation treaty is to limit the withholding tax at source that the source country can apply to you. Without the treaty, these payments could be subject to much higher domestic withholding rates.
Key points
- Dividends: 10% if the receiving company holds at least 25% of the capital; 15% in all other cases.
- Interest: maximum withholding of 15%.
- Royalties: maximum withholding of 5%.
Capital gains and income from immovable property
Gains from the sale of immovable property are, as a general rule, taxed in the country where the property is located. If you sell a property in Portugal, you will pay tax there; Spain will exempt it or give you credit for that tax depending on the applicable method.
Capital gains on the sale of shares follow their own criteria: if the company's assets are mainly immovable property, they may be taxed where the property is located. For other transfers, the general rule is that only the seller's country of residence taxes them.
How double taxation is eliminated
The Spain-Portugal double taxation treaty establishes two different methods depending on the country of residence. Spain applies, as a general rule, the exemption method: income that may be taxed in Portugal is not taxed again in Spain, although it is taken into account to calculate the progressive rate (exemption with progression).
Portugal, by contrast, applies the imputation or tax credit method: the tax paid in Spain is deducted from the Portuguese tax on that same income, up to the limit of the Portuguese tax due. That is why the practical outcome depends on where you are resident and where the income is generated.
The certificate of residence, an essential formality
To apply the reduced rates under the treaty, it is not enough to invoke it: you need to prove to the tax authority of the other country that you are a tax resident in Spain or Portugal. The certificate of residence is issued by the Spanish Agencia Tributaria or the Portuguese Autoridade Tributária and is the document that allows you to benefit from the limited withholding taxes.
Without this certificate, the entity paying the dividend, interest or royalty will apply the full domestic withholding tax. That is why it is advisable to obtain it before distributing profits or collecting interest between companies in either country.
When it is worth planning Spanish-Portuguese taxation
If you are going to open a company in Portugal (an LDA Unipessoal, for example) and remain resident in Spain, the Spain-Portugal double taxation treaty defines your real tax burden: the 21% IRC in Portugal plus, when distributing dividends, the limited withholding of 10% or 15% depending on your shareholding.
Planning the structure before operating —type of company, dividend distribution, loans between group entities or property purchases— is what makes the difference between paying what is fair and paying too much. At Filnet we help you choose the right formula and prepare the residence certificate paperwork.
