Analysis: Denmark – Portugal Income Treaty See treaty text Type of treaty: Income Based on the OECD Model Treaty Signed: December 14, 2000 Entry into force: May 24, 2002 Effective date: January 1, 2003. See Article 29. This Analysis was written by Alexandre Andrade, Lawyer and Head of Tax Department at PLEN - Sociedade de Advogados, RL, Lisbon, Portugal, in March 2013. Article 1 Personal Scope See treaty text Persons who are residents of one or both of the Contracting States. According to article 3 of the present Convention, “Person” comprises an individual, a company and any other body of persons; Article 2 Taxes Covered See treaty text Income tax Denmark i) The income tax to the State (indkomstskatten til staten); ii) The income tax to the municipalities (den kommunale indkomstskat); iii) The income tax to the county municipaliti (den amtskommunale indkomstskat); Portugal 1) Personal income tax (imposto sobre o rendimento das pessoas singulares - IRS); 2) Corporate income tax (imposto sobre o rendimento das pessoas colectivas - IRC); 3) Local surtax on corporate income tax (derrama); Expert Analysis: According to the Protocol signed Portugal and Denmark have agreed upon the following provisions which shall form an integral part of the Convention: i) It is agreed that the Convention also shall apply to: a) In the, case of Portugal: local immovable property tax (contribui o aut rquica). Please note that the Imposto municipal sobre im veis, know only as IMI, formerly known as Contribu o Autarquica is a municipal tax that is levied on the TPV (Taxable Patrimonial Value) of urban and non-urban property located in Portugal. b) In the case of Denmark: the tax on assessed value of immovable property (ejendomsv'r-diskatten). The Convention shall also apply to any identical or substantially similar taxes which are subsequently imposed in addition to, or in place of, the existing taxes. The article is intended to make the terminology and nomenclature relating to the taxes covered by the Convention more acceptable and precise to ensure identification of the Contracting States' taxes. IRC applies to: (i) companies with their head office or effective management in Portugal that carry out commercial, industrial or agricultural activities, (ii) unincorporated entities with their head office or effective management in Portugal, and (iii) corporate or unincorporated entities without their head office or effective management in Portugal. The actual IRC tax rate is 25 percent, which is applied to resident companies and non-resident companies with a permanent establishment in Portugal. The rate in Madeira is also 25 percent and the rate in Azores is 17,5 percent. A 3 percent tax rate applicable to taxable profits between EUR1,500,000 and EUR7,500,000 and a 5 percent rate applies to taxable profits over EUR7,500,000. Taxpayers are also subject to a local municipal tax - derrama. Each municipality sets its own level of tax, but this must not be more than 1.5 percent. IRS is levied on the yearly amount of incomes in six different categories, after the appropriate deductions. The six categories of income are the following: Category A - Dependent employment income; Category B - Business activities and supply services; Category E - Investment income/capital income; Category F - Property income; Category G - “Patrimonial increment”, including capital and other gains and Category H. The Personal Income Tax is a progressive tax, with a top band of 48 percent (plus an additional rate). In 2012 and 2013, an additional rate of 2.5 percent will be applied to taxpayers with taxable income above EUR80,000 and an additioanl income tax rate of 5 percent will be payable on any part of such taxable income that exceeds EUR250,000. An additional surtax of 3.5 percent will be payable on any part of taxable income that exceeds, for each taxpayer, the annual amount of the monthly minimum salary. Article 3 General Definitions See treaty text “A Contracting State” and “the other Contracting State” mean Denmark or Portugal, as the context requires; “Denmark” means the Kingdom of Denmark including any area outside the territorial sea of Denmark which in accordance with international law has been or may hereafter be designated under Danish laws as an area within which Denmark may exercise sovereign rights with respect to the exploration and exploitation of the natural resources of the sea bed or its subsoil and the superjacent waters and with respect to other activities for the exploration and economic exploitation of the area; the term does not comprise the Faroe Islands and Greenland; “Portugal” means the territory of the Portuguese Republic situated in the European Continent, the Archipelagos of the Azores and Madeira, the respective territorial sea and any other zone in which, according to Portuguese and international law, the Portuguese Republic has sovereign rights or jurisdiction for the purpose of exploring and exploiting, conserving and managing the natural resources, whether living or non-living, of the waters superjacent to the sea-bed and of the sea bed and its subsoil; “Person” includes an individual, a company and any other body of persons; “Company” means any body corporate or any entity that is treated as a body corporate for tax purposes; “Enterprise of a Contracting State” and “enterprise of the other Contracting State” mean respectively an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State; “International traffic” means any transport by a ship or aircraft operated by an enterprise of a Contracting State, except when the ship or aircraft is operated solely between places in the other Contracting State; “Competent authority” means: i) In Denmark: the Minister for Taxation or his authorized representative; ii) In Portugal: the Minister of Finance, the Director General of Taxation (director-geral dos Impostos) or their authorized representative; “National” means: i) Any individual possessing the nationality of a Contracting State; ii) Any legal person, partnership or association deriving its status as such from the laws in force in a Contracting State. Article 4 Resident See treaty text Expert Analysis: For the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature, and also includes that State and any political or administrative subdivision or local authority thereof. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State. Where by reason of the provisions of paragraph I an individual is a resident of both Contracting States, then his status shall be determined as follows: a) He shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests); b) If the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident only of the State in which he has an habitual abode; c) If he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only of the State of which he is a national; d) If he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement. Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated. According to the Portuguese rules, the corporate tax residence is based in its head office (legal seat) or the place of effective management. Also according to the Portuguese rules, an individual is a tax resident if his physical permanence in Portuguese territory exceeds 183 days in a calendar year; or visits Portugal for a shorter period but has a permanent or habitual residence or dwelling place on December 31 of that year; or is a crew member of a ship or aircraft operated by a resident legal entity on December 31; or is exercising a public function or commission abroad in the service of the Portuguese government. Those persons who are members of a family unit will always be considered as resident in Portugal, provided that any of those persons to whom the address belongs is a resident therein. Article 5 Permanent Establishment See treaty text Expert Analysis: For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on. A building site or construction or installation project constitutes a permanent establishment only if it lasts more than six months. An enterprise of a Contracting State which is furnishing services including consultancy services through employees or other personnel in the other Contracting State shall be deemed to have a permanent establishment in that other State but only where such activity lasts for more than 6 months within any 12 month period. The concept of “permanent establishment” (PE) is one of the cornerstone concepts in domestic and international tax law. The term “permanent establishment” is used to refer to a non-resident's business presence in a different country from that of the “country of residence”, which is of a sufficient level to justify the taxation of the attributable profits in that country.