Directors and Managers of Foreign Companies residing in Portugal

25 August 2022

Sérgio Varela Alves

Article 5, No. 2, § a) of the Portuguese Corporate Income Tax Code (CIRC) – which includes the concept of permanent establishment as “a Place of Management” – may determine the taxation of permanent establishments in Portugal given the Portuguese Corporate Income Tax Code provisions.

This method of taxation is foreseen in almost all Double Tax Agreements signed by Portugal with other Contracting States, and results, in part, from the OECD Model Tax Convention on Income and on Capital. The main purpose of the concept of a permanent establishment is to determine the right of a Contracting State to tax the profits of a company from another Contracting State that carries out business in Portugal.

Given the above, foreign companies being managed from Portuguese territory may be liable to Corporate Income Tax (IRC) in Portugal.

However, what should be perceived as a Place of Management?

A Place of Management relates to the location of a company’s headquarters, although it also takes into account its “place of effective management”, according to Article 4, No. 3 of the OECD Model Tax Convention on Income and on Capital.

Therefore, the competent authorities “would be expected to take into account various factors, such as where the meetings of the person’s Board of Directors or equivalent body are usually held, where the Chief Executive Officer and other senior Executives work, where the senior day-to-day management of the person is carried on, where the person’s headquarters are located, which country’s laws govern the legal status of the person, where its accounting records are kept, whether the legal person is a resident of one of the Contracting States but not of the other for the purpose of the Convention or else risk the improper use of the provisions of the Convention, etc.”, accordingly to the Commentary on Article 4 of the OECD Model Tax Convention on Income and on Capital which legally binds the Portuguese Tax Authorities.

The updated concept of PE raises several challenges, notably in respect of its interaction with the Portuguese double tax treaty network.

Going forward, there will be an increase in tax inspections, tax disputes and therefore it is recommendable that non-resident entities carry out a reassessment of the potential risk of a PE in Portugal.

If you have further questions regarding this matter, get in touch with Sérgio Varela Alves and he will be delighted to assist you.