After nearly 60 years, Portugal and the United Kingdom have signed a new Double Taxation Convention, replacing the outdated 1968 agreement.
Signed in London on 15 September 2025 and entering into force on 29 December 2025, this landmark treaty is also the first to be concluded between the two countries since the UK’s departure from the European Union. For Portuguese taxpayers with connections to the UK—whether through investments, employment, pensions, or business activities—this treaty brings significant changes and, in many cases, tangible benefits.
This article provides an overview of the key provisions and explains what they mean in practical terms.
Key Changes and Benefits
Lower Withholding Tax on Dividends
| Scenario | Old Treaty Rate | New Treaty Rate |
|---|---|---|
| Standard dividends | 15% | 10% |
| Qualifying parent companies (≥10% holding for 1 year) | 10% (with 25% holding requirement) | 0% (exempt) |
| Real estate investment vehicles | N/A | 15% |
This is a significant benefit for Portuguese shareholders receiving dividends from UK companies, and vice versa—particularly for corporate groups with qualifying participations who can now receive dividends tax-free at source.
Reduced Withholding Tax on Interest
| Recipient Type | Rate |
|---|---|
| Standard interest payments | 10% |
| Regulated banks | 5% |
| Government entities, central banks | 0% (exempt) |
Royalties
The 5% withholding tax rate on royalties remains unchanged. However, the definition has been narrowed—payments for industrial, commercial, or scientific equipment are no longer treated as royalties, nor are gains from the sale of intellectual property rights.
Capital Gains on Real Estate
A major change concerns capital gains from shares or interests that derive more than 50% of their value from immovable property. Under the new treaty, such gains may now be taxed in the country where the property is located, not just where the seller resides.
This provision is intended to prevent the use of holding structures to avoid taxation on what is, in substance, a disposal of real estate. Investors with property-holding structures should review their arrangements in light of this change.
Pensions
Pensions and other similar remuneration paid to a resident of a Contracting State are taxable only in that State. This provides clarity for British retirees in Portugal and Portuguese pensioners in the UK, as each will be taxed by their country of residence.
Employment Income
The 183-day rule has been modernised to use a rolling 12-month period rather than a fixed fiscal year, offering greater flexibility for short-term work assignments that span year-end.
Directors’ Fees
For the first time, directors’ fees are specifically addressed—they may be taxed in the state where the company is resident, regardless of where the director performs duties.
Anti-Abuse Measures
The treaty incorporates the Principal Purpose Test (PPT) from the OECD’s BEPS framework. This allows tax authorities to deny treaty benefits if one of the main purposes of a transaction was to obtain those benefits improperly.
Additionally, anti-fragmentation rules have been introduced to prevent businesses from artificially splitting activities to avoid creating a permanent establishment.
Summary of Benefits for Portuguese Taxpayers
For Portuguese taxpayers with income or investments in the UK, the main benefits include:
- Lower or zero withholding taxes on dividends, interest, and certain other payments from UK sources
- Clear pension taxation rules, meaning Portuguese residents will only pay Portuguese tax on their pensions
- Better dispute resolution mechanisms, including binding arbitration
- Greater legal certainty for cross-border activities in a post-Brexit environment
- Protection against double taxation through comprehensive credit mechanisms
The treaty reflects modern international standards and provides a more predictable framework for individuals and businesses operating across both jurisdictions.
Those affected are encouraged to review their existing arrangements and consider how the new provisions may apply to their circumstances.
Tax Department
João Valadas Coriel | Sofia Quental | Inês Grácio | Catarina Amaral
