Double taxation occurs when the same income earned by an individual or a business is taxed twice by two different countries.

For example, if you work abroad but maintain your tax residency in Portugal, you may be required to declare your income both in the country where it was earned and in Portugal.

Without the appropriate legal mechanisms, this could result in paying tax twice on the same income, which would clearly be unfair to the taxpayer.

In this article, we explain how double taxation works and the measures available to prevent it.

Double taxation: How to avoid paying tax twice

As mentioned above, double taxation arises when the same income is taxed in two different jurisdictions.

Typically, this happens because the taxpayer pays tax in the country where the income was generated (the source country) while also being liable to tax in their country of tax residence.

To prevent this situation, Portugal has established mechanisms that either eliminate or reduce double taxation.

Depending on the circumstances, taxpayers may benefit from:

• a Double Taxation Agreement (DTA) concluded between Portugal and the other country; or
• the foreign tax credit provided for under Article number 81 of the Portuguese Personal Income Tax Code (CIRS), where no applicable treaty exists.

Double Taxation Agreements (DTAs)

Portugal has signed Double Taxation Agreements with numerous countries worldwide.

The purpose of these treaties is to ensure that the same income is not taxed twice by allocating taxing rights between the two countries. Depending on the type of income involved, the agreement may:

• exempt the income from taxation in one of the countries;
• reduce the withholding tax applied in the source country; or
• allow the country of residence to grant relief for tax already paid abroad.

Although these agreements provide significant tax relief, they are not always applied automatically.

Depending on the country and the type of income, taxpayers may need to submit specific documentation or claim the applicable treaty benefits through the relevant tax authorities.

When filing a Portuguese tax return, foreign-source income must generally still be declared, even where a Double Taxation Agreement applies.

What Happens If There Is No Double Taxation Agreement?

If Portugal has not signed a Double Taxation Agreement with the country where the income was earned, taxpayers may still benefit from the foreign tax credit provided for under Portuguese tax law.

This mechanism generally allows taxpayers to deduct the lower of the following amounts:

• the tax effectively paid abroad; or
• the portion of Portuguese tax attributable to that foreign-source income.

This helps reduce or eliminate the effects of double taxation, even in the absence of a bilateral tax treaty.

Which Mechanism Is More Advantageous?

In practice, taxpayers cannot freely choose between a Double Taxation Agreement and the foreign tax credit.

Where a Double Taxation Agreement exists, its provisions generally take precedence and determine how the income should be taxed in each country.

Where no treaty is in force, Portuguese domestic tax law provides relief through the foreign tax credit mechanism.

It is also important to note that certain types of income—such as dividends and interest—may still be taxable in both countries. However, Double Taxation Agreements usually limit the tax that can be charged by the source country, while Portugal provides relief to prevent the same income from being taxed twice.

For this reason, taxpayers with foreign-source income should always verify whether a Double Taxation Agreement applies to their specific situation.

Conclusion

Receiving income from abroad does not necessarily mean you will have to pay tax twice. Thanks to Portugal’s network of Double Taxation Agreements and the foreign tax credit system, there are mechanisms designed to prevent or significantly reduce double taxation.

However, the applicable rules vary depending on the country involved, the type of income received and the taxpayer’s tax residency status.

If you earn income abroad or are unsure about your tax obligations, it is advisable to seek guidance from a certified accountant or tax adviser to ensure full compliance with Portuguese tax legislation and avoid paying more tax than necessary.