Workers who reside in one country and carry out their professional activity in another maintain tax links with both States. The situation can lead to the so-called international double taxation, in which the same income is subject to tax in two different countries.

What is international double taxation?

According to the official website of the European Union, when a person lives in one EU country and works in another, the applicable tax regime depends on the domestic legislation of each country, as well as on bilateral agreements to avoid double taxation concluded between those states.

Depending on these rules, the employee may be taxed in the country where they carry out the activity, in their country of residence, or in both.

Taxation of employees and self-employed persons

In the case of employees, as a general rule, the country where the activity is carried out has the right to tax the income obtained in its territory.

In the case of self-employed workers, when the worker resides in one country but provides services in another, the income will normally be taxed in the country where he or she carries out the activity if he or she has a fixed base or a permanent establishment there, for example, an office, a doctor’s office, or a shop.

Situations of almost all income in a single country

If you live in an EU country but earn all or almost all of your income in another country where you pay tax, that state should treat you in the same way as a resident. This includes access to the same tax reductions and exemptions, the right to the same deductions, and the option to file the income tax return jointly with the spouse, where applicable.

How to avoid double taxation?

Most countries have entered into double taxation treaties, which establish mechanisms to prevent the same income from being taxed twice. In general, these mechanisms include a tax credit, i.e. when the tax paid in the country where one works is deducted from the tax due in the country of residence, and the exemption, i.e. the income is taxed only in the country where it is obtained and exempt in the country of residence.

It is important to bear in mind that tax rates may differ between the two countries. When the rate of the country where you work is higher, this will be, in practice, the final rate paid, even if there is a deduction or exemption in the country of residence.

To benefit from double taxation elimination mechanisms, it may be necessary to prove the country of tax residence and demonstrate that the income has already been taxed in another country.

The tax authorities indicate which forms and documents are required in each situation. In Portugal, the forms are made available by the Tax and Customs Authority in different models.

Conventions concluded by Portugal

Portugal has an extensive list of double taxation treaties, signed with more than 70 countries, which can be consulted on the Tax and Customs Authority portal.

Each convention contains specific rules for certain types of income, defining, among other issues, which country is entitled to tax each type of income, the maximum tax limits that can be withheld at source, and the mechanisms for eliminating double taxation.

Refund and exemption from withholding tax

Under the conventions in force, the employee may request total or partial exemption from withholding tax in Portugal and the refund of unduly withheld tax.

The rules apply, among others, to income from employment, dividends, interest, royalties, and other income from a foreign source, according to the limits and conditions provided for in each convention.

Information and support

Cross-border partnerships of European employment services and national tax authorities can provide support in analysing individual cases and identifying the applicable rules.

The correct application of national conventions and rules is essential to ensure that income is taxed appropriately and to avoid double taxation.

Samantha Gannon

info at madeira-weekly.com

Source: DN

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