On 15 September 2025, Portugal and the United Kingdom signed a new Convention for the Avoidance of Double Taxation with respect to income tax and capital gains tax, which fully replaces the Convention in force since 1968.
The Convention was approved by the Assembly of the Republic and ratified by the President of the Republic on 29 December 2025.
In accordance with its provisions, the Convention entered into force on 29 December 2025 and takes effect from 1 January 2026.
Scope
The new Convention applies to tax residents of Portugal and the United Kingdom and covers, amongst others, the following types of income:
business profits;
employment and self-employment;
dividends, interest and royalties;
capital gains on securities and property.
Main changes compared to the previous Convention
The new Convention introduces a significant set of updates, in line with current OECD standards and the BEPS project, notably:
- Dividends
Exemption from withholding tax for parent companies with a minimum 10% shareholding held for an uninterrupted period of at least one year; reduction of the general maximum withholding rate to 10%; specific regime applicable to certain real estate investment vehicles.
- Interest
A general maximum withholding tax rate of 10%, with a reduced rate of 5% for interest paid to duly regulated banks and an exemption for interest paid to states, central banks and equivalent public bodies.
- Royalties
Maintenance of the maximum rate of 5%, accompanied by a significant narrowing of the scope of the royalty concept, which no longer covers, in particular, the use of industrial, commercial or scientific equipment and the transfer of intellectual property rights, now treated as capital gains.
- Indirect capital gains on property
Possibility of taxation in the State where the property is situated where more than 50% of the value of the shares derives, directly or indirectly, from immovable property.
- Anti-abuse rules
Express introduction of the Principal Purpose Test and anti-fragmentation rules regarding permanent establishments.
- Conflicts of residence of entities
Elimination of the automatic effective management rule, with residence now to be determined by mutual agreement between the competent authorities.
- Mutual agreement procedure and arbitration
Strengthening of the mutual agreement procedure mechanism and introduction of mandatory binding arbitration in certain matters.
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