On 29 December 2025, the Portuguese Parliament formally approved, through Parliamentary Resolution No. 206-A/2025, the Convention for the Elimination of Double Taxation on Income and Capital Gains and the Prevention of Tax Evasion and Avoidance between Portugal and the United Kingdom (UK). Further, the Convention was ratified by Presidential Decree No. 124-A/2025, dated 29 December 2025. Portugal and the UK had signed the Convention in London on 15 September 2025.

Once in force, the new Convention will replace the one originally concluded in 1968. The new Convention shall enter into force on the date of receipt of the last written notification, through diplomatic channels, confirming that the internal legal requirements of the Contracting States necessary for this purpose have been fulfilled.

The new Convention incorporates the latest international standards on tax transparency and anti-abuse and introduces a number of significant changes compared to the existing framework. This Tax Alert highlights and summarizes the most relevant amendments.

Clarification that the Convention aims to eliminate double taxation, rather than create situations of non-taxation

In line with the Organisation for Economic Co-operation and Development (OECD) recommendations under Action 6 of the Base Erosion and Profit Shifting (BEPS) Project, the preamble of the new Convention expressly states that its purpose is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation arising from tax evasion or avoidance. This includes, in particular, arrangements involving treaty shopping designed to secure treaty benefits for the indirect benefit of residents of third states.

Persons covered

A saving clause has been introduced in Article 1, clarifying that the Convention does not affect the right of a Contracting State to tax its own residents, subject to certain expressly defined exceptions.

Principal purpose test (PPT)

The new Convention incorporates the PPT in Article 27, in line with BEPS Action 6. Under this provision, treaty benefits may be denied if, considering all relevant facts and circumstances, it is reasonable to conclude that obtaining such benefits was one of the main purposes of an arrangement or transaction. This will not apply if granting the benefit is consistent with the object and purpose of the Convention's relevant provisions.

Residence in a Contracting State

If a person other than an individual is regarded as resident in both Contracting States, residence for treaty purposes is to be determined by mutual agreement between the competent authorities. In doing so, due regard must be given to factors such as the place of effective management, place of incorporation, location of registered office and any other relevant circumstances. Failing such agreement, the entity will not be entitled to the benefits of the Convention, other than those relating to the elimination of double taxation, nondiscrimination and the mutual agreement procedure.

This approach marks a clear departure from the previous Convention, under which residence was determined exclusively by reference to the place of effective management.

Permanent establishment

The new Convention maintains the list of activities that do not constitute a permanent establishment, due to their preparatory or auxiliary nature. However, in accordance with BEPS Action 7, an anti-fragmentation rule has been introduced in Article 5, aimed at preventing the artificial splitting of activities among closely related entities in order to fall within the preparatory or auxiliary exceptions. The Convention also introduces a definition of closely related enterprises for this purpose.

Business profits

Under the new Convention, Article 7 adopts the term "business profits," replacing the former reference to "industrial or commercial profits." The detailed definition of "profits" previously included in this provision has been removed, with the treatment of profits now governed by the relevant treaty articles applicable to each category of income.

In addition, the revised wording confirms that, in determining the profits attributable to a permanent establishment, all expenses incurred for its purposes (including general and administrative expenses) are fully deductible, irrespective of where they are incurred.

Corresponding transfer pricing adjustments

If profits of an enterprise are adjusted in one Contracting State because, under arm's-length conditions, those profits should have accrued to that enterprise, and those profits have already been taxed in the other Contracting State in the hands of a related enterprise, the other State shall grant a corresponding adjustment to the extent it agrees with both the principle and the amount of the adjustment. This process may require consultations between the competent authorities of the two Contracting States.

Dividends

As a general rule, dividends that a company resident in one Contracting State pays to a beneficial owner resident in the other Contracting State may be taxed both in the recipient's State of residence and in the State of source. The new Convention provides for the following tax treatment:

• Taxation in the State of source is generally limited to a maximum rate of 10%.
• If dividends are distributed by investment vehicles that annually distribute most of their income (including gains) derived, directly or indirectly, from immovable property, and this income is exempt from tax, the maximum source tax rate is 15%.
• Dividends are taxable exclusively in the recipient's State of residence if the beneficial owner holds, directly and for an uninterrupted period of at least one year (including the payment date), a minimum participation of 10% in the distributing company's capital, provided that both entities are subject to corporate income tax and do not benefit from a general tax exemption.

In addition, the definition of "dividends" has been updated to include income distributed by Portuguese real estate investment funds and companies, constituted under Portuguese law and taxed pursuant to Article 22 of the Portuguese Tax Benefits Statute.

Interest

As a general rule, interest that a company resident in one Contracting State pays to a beneficial owner resident in the other Contracting State may be taxed both in the recipient's State of residence and the State of source. Under the new Convention, however, source State taxation is generally limited to a maximum rate of 10% of the gross amount of the interest.

The new Convention also provides for a reduced rate of 5% if the beneficial owner of the interest is a bank resident in the other Contracting State, duly established and regulated under the laws of that State. In addition, an exemption applies if the beneficial owner is the State itself, the central bank or certain other public entities.

Royalties

Although the OECD Model Convention provides for exclusive taxation of royalties in the State of residence, Portugal has maintained a reservation allowing royalties to also be taxed in the State of source, subject to a maximum rate of 5%. As with dividends and interest, the application of this regime under the new Convention is limited to payments made to the beneficial owner of the income.

In addition, the definition of "royalties" has been updated to cover only payments for the use of, or the right to use, copyrights, patents, trademarks, designs or models, plans, processes and know-how. The definition does not include income derived from the use of industrial, commercial or scientific equipment.

Capital gains

The new Convention introduces a significant change regarding capital gains. Gains from the alienation of shares or other interests that, within the previous 365 days, derived, directly or indirectly, more than 50% of their value from immovable property in the other Contracting State may be taxed both in the State where the property is located and where the alienator resides.

Independent personal services

The provision relating to independent personal services has been eliminated, in line with the OECD Model Convention.

Directors' fees

The Convention now includes a specific article allowing the State of source to tax directors' fees.

Entertainers and sportspersons

In addition to taxing entertainers and sportspersons directly, the new Convention allows taxation of income derived from activities performed in a Contracting State even if this income is attributed to another person or entity.

Other income

The new Convention introduces new rules regarding the taxation of income derived from fiduciary structures, particularly if the beneficiaries are resident in Portugal and the trustees or representatives are resident in the United Kingdom.

Mutual agreement procedure

The Protocol to the Convention sets out detailed rules governing the handling of cases submitted under the mutual agreement procedure, applicable if taxation is not in accordance with the Convention.

Exchange of information and assistance in tax collection

The new Convention updates the exchange of information rules in Article 24, streamlining cooperation between the Contracting States. In addition, Article 25 introduces a clause on mutual assistance in the collection of tax claims, covering all taxes except Value-Added Tax (VAT), customs duties and excise duties.

Implications

Entities should consider the tax implications arising from the new Portugal-UK Convention, particularly in relation to the revised capital gains regime and the strengthened anti-abuse provisions.