The tax treatment of payments made by Portuguese companies to foreign tax transparent entities has often been subject to controversy, since under the Portuguese Corporate Income Tax Code, foreign tax transparent entities should be regarded as opaque; i.e., a separate entity for tax purposes.
Consequently, under Portuguese law, payments received by these entities should not be regarded as automatically received by their shareholders, thus disregarding their tax transparent nature. Due to this mismatch, certain challenges may arise regarding the application of double tax treaties (DTTs), especially in situations where the beneficial owner of the transparent entity is domiciled in a jurisdiction other than the DTT contracting states.
In this regard, the Portuguese tax authorities (PTAs) have recently issued a ruling addressing the application of the provisions of the Portugal–Germany DTT to payments made by Portuguese companies to foreign tax transparent partnerships with a place of effective management in Germany, held by a company domiciled in Luxembourg. The findings may be applicable in similar situations.
The situation presented to the PTAs
The ruling (No. 27602, issued on April 4 2025) concerned the Portuguese company of a multinational group. The company regularly pays service fees, interest (arising from intragroup loans), and royalties to related parties that are partnerships incorporated under German law and are transparent for tax purposes in Germany.
Considering the applicable tax transparency regime of German law, income received by the partnerships is automatically allocated to their limited partner, a company domiciled in Luxembourg, for corporate income tax (CIT) purposes.
The described situation posed concerns for the Portuguese company since, as the German entities are treated as opaque for tax purposes under Portuguese law and as the beneficiaries of the income paid by the Portuguese company, the limited partner may not benefit from the Portugal–Luxembourg DTT provisions. Furthermore, as the German partnerships are not subject to CIT under German law and, therefore, are not qualified as “resident entities” for the purposes of Article 4 of the Portugal–Germany DTT, they are also not entitled to claim the benefits from the treaty.
Nonetheless, according to the specific provision of Article 4(4) of the Portugal–Germany DTT, “a partner of a partnership shall for the purposes of the taxation of his income derived from this partnership or of the capital which he holds through this partnership – excluding its distributions – be deemed to be a resident of the Contracting State in which the place of effective management of the partnership is situated. If such income or capital is not subject to tax in this State, it shall be taxable in the other State.”
Based on this provision, the Portuguese company requested a ruling from the PTAs regarding whether the provisions of the Portugal–Germany DTT (such as reduced withholding tax rates) could be applied to the payments made to the partnerships, since their place of effective management is located in Germany and the limited partner domiciled in Luxembourg is subject to tax in Germany on the income received through the same entities.
The decision
The ruling issued by the PTAs clarified that, in fact, the Portugal–Luxembourg DTT and the Portugal–Germany DTTs (at the level of the German partnerships) are not applicable to the payments made by the Portuguese company to the partnerships.
However, having been provided with proof that the place of effective management of the partnerships is located in Germany and that the Luxembourg limited partner is subject to CIT in Germany on the income received from the same entities, the PTAs considered that under Article 4(4) of the Portugal–Germany DTT, the limited partner, albeit a company domiciled in Luxembourg, may be regarded as tax resident in Germany for the purposes of the application of the DTT to the payments made by the Portuguese company to the partnerships.
Thus, according to the ruling, the payments made by the Portuguese company to the partnerships managed in Germany may benefit from the reduced withholding tax rates, where applicable, under the provisions of the Portugal–Germany DTT.
Key takeaways
Prior to the issuance of the ruling, the PTAs had already addressed the challenges arising from the mismatch in the tax treatment of foreign tax transparent entities, resulting from Portuguese legislation, by allowing recognition of their tax transparent nature in certain exceptional situations.
This ruling is a significant step towards resolving the difficulties in the application of DTTs to payments made by Portuguese companies to foreign tax transparent entities. It allows DTT provisions to be applied to partners of foreign tax transparent entities, over income directly received by the latter.
While the provision of Article 4(4) of the Portugal–Germany DTT is not reflected in the OECD Model Tax Convention on Income and on Capital, this ruling represents one of the first instances where the PTAs have bridged the gap between the domestic CIT regime, according to which foreign transparent entities should be regarded as opaque, and the common practice adopted in OECD jurisdictions of recognising the tax transparent nature of such entities.
In light of this development, multinational businesses in similar situations may reassess the tax treatment of payments made from Portugal to foreign tax transparent entities and re-evaluate the procedures adopted to mitigate the effects of the mismatch between the Portuguese tax regime applicable to foreign transparent entities and the tax regime of their residence jurisdiction.
