The New UK–Portugal Double Tax Treaty

The New UK Portugal Double Tax Treaty

The treaty applies to withholding taxes in both jurisdictions, with UK income tax, capital gains tax and corporation tax following from April. The timing matters.

This is the first comprehensive tax treaty concluded between the two countries since the UK left the European Union, and the first to be drafted entirely within the post-Brexit global tax environment.

The new convention rewrites the rules on dividends, interest, capital gains, permanent establishment, dispute resolution and information exchange. This new convention will facilitate genuine economic activity while closing avenues for artificial tax planning.

UK–Portugal Deal Context: Why This Treaty Carries Weight

The UK–Portugal economic relationship is historical by any measure. The UK has long been one of Portugal’s largest sources of foreign direct investment, particularly across real estate, hospitality, infrastructure, financial services and professional services for centuries, holding a long-stablished alliance.

Portugal has become an increasingly important destination for British individuals and businesses, driven by mobility, lifestyle considerations and strategic expansion into European markets. 

In fact, data from Statistics Portugal indicates that the United Kingdom was the single largest source of inbound flights to Portugal in 2025.

With this growing relationship between both countries, the 2026 tax convention addresses that gap directly. 

It aligns the bilateral framework with OECD norms, reflects lessons from the Base Erosion and Profit Shifting (BEPS) project, and embeds post-Brexit realities into a legally robust structure.  

What Actually Changes In Practice With The New UK–Portugal Double Tax Treaty

Real Estate Capital Gains: Immovable Property Takes Precedence

Perhaps the most consequential change for investors lies in the treatment of capital gains. 

• Gains derived from the disposal of shares or comparable interests that derive more than 50% of their value from immovable property may now be taxed in the jurisdiction where that property is located.
   
• This provision directly targets indirect real estate disposals and limits the scope for planning around property-rich entities. 

It brings the UK–Portugal treaty into line with a growing number of modern conventions that prioritise source-state taxation of land and buildings.

Dividends: lower rates, tighter conditions

• Under the new treaty, dividends paid by a company resident in one state to a resident of the other may be taxed in both jurisdictions, but with capped withholding rates. 
   
• A general 10% withholding tax cap applies, replacing the 15% rate under the previous convention. More significantly, a zero-rate withholding tax is available where a qualifying parent company holds at least 10% of the capital of the distributing company for an uninterrupted period of at least one year, provided both entities are subject to corporate tax without general exemption. 
   
• However, the treaty also introduces a 15% rate for dividends paid by certain tax-exempt investment vehicles where the underlying income is derived from immovable property. This reflects a deliberate policy choice to protect source-state taxation of real estate income, a recurring theme throughout the convention.

Interest: Differentiation by Recipient

• Interest payments are subject to a 10% withholding tax cap, with notable exceptions.  
   
• Interest paid to regulated banks benefits from a reduced 5% rate, while interest paid to government entities, central banks and their agencies is fully exempt.

Royalties: Narrower Scope, Stable Rates

• The withholding tax rate on royalties remains capped at 5%, but the definition of what constitutes a royalty has been significantly narrowed. 
   
• Payments for the use of industrial, commercial or scientific equipment are no longer treated as royalties, nor are gains from the sale of intellectual property rights.

Permanent Establishment: Substance over Fragmentation

• The treaty modernises the definition of permanent establishment (PE), introducing anti-fragmentation rules designed to prevent businesses from avoiding taxable presence by splitting activities across related entities or locations. 
   
• A construction site constitutes a PE only if it lasts more than 12 months, maintaining continuity with international norms, but the broader PE framework is now explicitly designed to capture cohesive business operations carried out through artificial segmentation.

Employment Income And Directors’ Fees

• The familiar 183-day rule for employment income has been updated to operate on a rolling 12-month basis rather than a fixed fiscal year, providing greater flexibility for short-term assignments that straddle year-end. 
   
• Directors’ fees are addressed explicitly for the first time, allowing taxation in the state where the company is resident, regardless of where the duties are performed. This removes a longstanding grey area and reduces scope for mismatches.

Dispute Resolution And Enforcement: Mutual Agreement Procedure and arbitration

• The convention strengthens the Mutual Agreement Procedure and introduces mandatory binding arbitration for unresolved cases after three years. This is limited to disputes concerning permanent establishment, business profits and associated enterprises.
   
• Importantly, cases involving tax fraud, domestic anti-avoidance rules or treaty anti-abuse provisions are excluded. This marks that arbitration is intended to resolve genuine interpretative disputes, not to dilute enforcement.

Exchange of information and assistance in Collection

• The treaty incorporates comprehensive exchange of information provisions meeting current OECD standards, including mandatory information gathering even in the absence of domestic tax interest and the explicit removal of bank secrecy as a defence.
   
• For the first time, mutual assistance in the collection of taxes is also available, allowing one state to assist the other in enforcing revenue claims. This materially raises the stakes for non-compliance and reduces the practical value of cross-border opacity.

Strategic Implications for Cross-Border Investment

• From an investment perspective, the new treaty sends a dual signal, as it offers greater certainty for genuine cross-border activity. Lower withholding rates, clearer definitions and robust dispute resolution mechanisms reduce friction for businesses operating across both jurisdictions.
   
• However, it raises the bar for defensibility on interposed entities with limited commercial function. This is particularly relevant in sectors such as real estate, private equity and asset management, where holding structures are common but increasingly exposed to source-based taxation and purposive review.

Closing Perspective: Certainty Through Credibility

Ultimately, the new UK–Portugal Double Tax Treaty reflects a shared understanding that cross-border capital will continue to grow.

For investors operating between the UK and Portugal must now withstand legal rules and strategic rationale. 

Decisions around capital allocation, governance and asset ownership are no longer peripheral tax considerations; they sit at the centre of investment strategy itself.

In this environment, experience matters. 

Firms such as HP Invest, also within the Harland & Poston Group, with a long-standing presence across both jurisdictions and direct exposure to real estate and hospitality assets on the ground, are already adapting to this new framework, not as a constraint, but as a filter that rewards credible, well-structured investment. 

And for those prepared to meet that standard, the UK–Portugal corridor remains very much open for business.