Cross-Border Lawyers’ Interpretation: Key Points in Handling Cross-Border Tax Disputes in Portugal

1. Mechanisms for Dealing with Double Taxation

In cross-border situations, where double taxation arises as a result of additional tax assessments or tax adjustments, domestic litigation is a commonly used approach. However, this does not mean that the Mutual Agreement Procedure (MAP) is not also used as an alternative or supplementary tool to judicial proceedings. According to OECD statistics, Portugal had 56 new relevant cases in 2023, concluded 94 cases during the same year, and had 139 pending cases as of the end of 2023.

Specifically for transfer pricing matters, the same source shows that 11 new cases were initiated in 2023, 39 were concluded during the year, and 61 remained pending as of the end of 2023.

The Arbitration Directive and the Multilateral Instrument (MLI)

In September 2019, Portugal enacted Law No. 120/2019 to implement the EU Arbitration Directive. That law establishes the rules governing mechanisms for resolving disputes between member states arising from the interpretation and application of treaties and conventions intended to eliminate double taxation of income, and where applicable, capital, and also sets out the rights and obligations of affected persons when such disputes arise.

According to European Commission statistics, Portugal had 8 new related cases in 2023, concluded 29 during the same year, and had 49 pending cases by the end of 2023.

1. Application of the General Anti-Avoidance Rule (GAAR) / Specific Anti-Avoidance Rules (SAAR) in Cross-Border Contexts

After the 2003 update of the OECD Model Tax Convention, Portugal added a note to the commentary on Article 1 stating that, under the hierarchy of laws within the Portuguese legal system, double tax treaties (DTTs) prevail over domestic law, regardless of whether the domestic rule was enacted before or after the treaty. Therefore, where a general anti-avoidance rule (GAAR) or specific anti-avoidance rules (SAARs) conflict with treaty provisions, they should not take precedence. This note was removed in the 2010 update of the OECD Model Tax Convention.

Following the removal of that note, Portugal began negotiating treaties that allow the application of domestic anti-avoidance provisions. With respect specifically to the application of the GAAR, some have argued that it may violate double tax treaties because it may allow tax authorities to recharacterize actual facts and transactions into others with equivalent economic effect, thereby altering the taxing rights of the contracting states. However, as far as is known, this argument has never been successfully upheld in court.

That said, the landscape has changed. The Multilateral Instrument (MLI) introduced additional anti-avoidance rules and incorporated the Principal Purpose Test (PPT) into all conventions signed by Portugal. In addition, Portugal has accepted the principle that tax treaties generally do not restrict a state’s right to tax its own residents unless the treaty expressly excludes that right, a principle commonly referred to as the saving clause. This is intended to clarify that certain SAARs, such as controlled foreign corporation (CFC) rules, may be compatible with treaties.

These developments, together with broader international trends, indicate that taxpayers should exercise particular caution when relying on treaty benefits in cross-border transactions, but they should not be discouraged by these new rules. In practice, the impact of the Principal Purpose Test may not differ significantly from that of the GAAR.

1. Challenges to International Transfer Pricing Adjustments

Portuguese tax law allows corresponding adjustments. Although the tax authorities may initiate such adjustments under the framework of a double tax treaty that foresees this possibility, it is usually the taxpayer who should take the initiative, since that best serves the taxpayer’s interests by avoiding double taxation caused by a transfer pricing adjustment made to an associated company in another jurisdiction. By law, the taxpayer must apply to the tax authorities for a corresponding adjustment, and that application must be filed within the time limit provided for the MAP under the relevant double tax treaty. If the tax authorities accept the adjustment made by the other state, the corresponding adjustment must be made within 120 days after agreement is reached with the foreign tax authorities.

At present, there is no publicly available information on how many such adjustments have actually been made by the tax authorities or how often taxpayers have challenged them. The only available information is that, in 2023, 11 new transfer pricing cases were initiated under MAP, 39 were concluded during the same year, and 61 remained pending by the end of 2023.

For the impact of the Multilateral Instrument on cross-border tax disputes, please refer to section 8.2 on the application of the GAAR / SAAR in cross-border contexts.

1. Unilateral / Bilateral Advance Pricing Arrangements (APA)

Although Portugal has had detailed transfer pricing rules in its legislation since 2001, Advance Pricing Arrangements (APAs) were not introduced until 2008. In the early years, taxpayers were reluctant to initiate APAs, but this has changed in recent years, and their use is becoming increasingly widespread as a means of reducing transfer pricing disputes and litigation. If the number of APAs does not continue to grow, an increase in tax disputes in the transfer pricing area is expected. Although APAs are time-consuming and involve complex administrative procedures, an increasing number of taxpayers are showing interest in entering into them.

The APA procedure begins with the taxpayer filing an application with the tax authorities. If the taxpayer wishes to include transactions with associated enterprises resident in a state that has concluded a double tax treaty with Portugal, it may apply for a bilateral or multilateral APA. In that case, the application will be submitted to the tax authorities of the other relevant countries through the Mutual Agreement Procedure. Any agreement reached between the tax authorities will then be communicated to the taxpayer for confirmation of acceptance. The application must include the following:

the method proposed by the taxpayer;

a clear identification of the period and transactions covered;

the signatures of all entities bound by the agreement;

a statement by the taxpayer confirming cooperation with the tax authorities and waiving any reliance on commercial or professional secrecy;

all information necessary to enable automatic exchange of information between the tax authorities.

1. Cross-Border-Related Litigation

Based on case law from the higher courts, withholding tax matters generate the highest volume of litigation in cross-border scenarios. However, transfer pricing and tax residence issues are increasingly drawing the attention of the tax authorities, and several important court cases in these fields have recently been initiated and/or decided.

To mitigate these risks, taxpayers should establish internal compliance rules to manage such matters. In addition, taxpayers should verify all formalities and standards required for the implementation of EU rules and double tax treaties. Particular attention should be given to facts, documentation, compliance rules, and procedures that may prevent or reduce contingent tax liabilities.

Disclaimer

Laws and procedures may change. This article provides general information only and does not constitute legal advice. If you encounter a legal dispute overseas, please contact us immediately to consult a professional foreign-related lawyer.