Economic, trade, and investment relations between continental Europe and the UK have become more complex following Brexit. In this context, international tax instruments provide legal certainty, avoid international double taxation, and prevent tax evasion and avoidance in cross-border transactions.
Portugal and the United Kingdom have maintained significant financial, commercial, and business bonds; therefore, the old double taxation treaty signed in 1968 must be updated, because it no longer adequately responds to current standards of tax transparency, information exchange, and regulation of international business structures.
In response to the above, in September 2025, both states signed a new Double Taxation Agreement, aligned with the OECD criteria and recent trends in international tax law. Conversely, despite its official signing, the treaty has not yet entered into force, raising significant questions for taxpayers, multinational companies, investors, and tax advisors.
This article provides a comprehensive overview of the new treaty, its essential content, its current legal status, the reasons why it does not yet have legal effect, and its main implications, including a specific reference to its relationship with Transfer Pricing.
Signing of the New Agreement and Main Objective
The new Double Taxation Agreement between the United Kingdom and Portugal was signed on September 15, 2025, which intends to:
- Avoid double taxation on income and capital gains.
- Prevent tax evasion and misuse of the treaty.
- Establish effective mechanisms for administrative cooperation and information exchange between both tax administrations.
The treaty will definitively replace the 1968 agreement once it enters into force, introducing modern rules adapted to the current dynamics of international business.
Why Is the Treaty Not Yet in Force?
Although the agreement has already been signed, its entry into force depends on compliance with mandatory internal procedures in both countries. Specifically:
- Each State must complete its internal ratification process in accordance with its national legislation.
- Subsequently, both governments must formally exchange diplomatic notifications confirming compliance with these procedures.
- Only after this exchange is the date of entry into force officially published.
Until these steps are completed, the treaty remains legally classified as “not in force.”
Practical Implications
They imply that:
- The benefits of the new treaty have not yet been applied.
- Tax treatment between the two countries is governed by the 1968 agreement or, if not, by each State’s domestic legislation.
- Any tax planning based on the new instrument would be legally premature and risky.
Main Contents of the 2025 Treaty
The new agreement incorporates a modern and technically robust structure. Among its most relevant provisions are:
- Taxes covered: Income and capital gains taxes in both countries-including personal and corporate income tax, as well as capital gains tax.
- Persons subject to taxation: Residents of one or both contracting states, with rules for determining residence in dual residence cases.
- Benefits for companies with permanent establishments (PEs): Business profits based in one or the other country are taxed only there, unless there is a permanent establishment in the other State, in which case only the profits attributable to the PE may be taxed there.
- Rules for associated enterprises: When companies from one country and the other maintain financial and trade relations, and the terms differ from those of independent companies, the State may “adjust” the attributable profits, which prevents the artificial transfer of profits.
- Mechanisms for eliminating double taxation include tax credits, exemptions, and rules designed to prevent “economic double taxation” or the double taxation of the same income and capital gains.
- Anti-abuse rules and “Entitlement to Benefits” (EoB): To prevent the treaty from being used by third parties (non-actual residents) solely for tax optimization purposes (“treaty shopping”).
- Information exchange and administrative assistance in tax collection: The States undertake to collaborate in obtaining tax information and even in international tax collection.
- The agreement regulates a wide variety of income, earnings, and profits obtained between Portugal and the UK, establishing specific rules for each category. The most relevant types of income include business profits, dividends, interest, royalties, capital gains, employment income and pensions, real estate income, international transportation activities, and other forms of income that may arise in cross-border economic relations.
As a whole, the agreement represents a thorough modernization of the 1968 treaty, adapting to the realities of international investment, complex corporate structures, transnational financial flows, and contemporary standards of tax transparency.
Relationship of the Treaty to Transfer Pricing
Although the treaty is not a specific Transfer Pricing rule, it contains provisions that directly affect this area, particularly through the article on associated enterprises and the Arm’s Length Principle.
In transactions with related parties established in Portugal and the UK, tax administrations may:
- Adjust profits when the agreed terms do not reflect market values.
- Question structures aimed at artificially transferring profits across jurisdictions.
- Exchange tax information more freely to support joint audits.
In this regard, the treaty indirectly strengthens the Transfer Pricing Compliance Framework, raising the standards of technical support, documentation, and economic consistency in intra-group transactions between both jurisdictions.
Impact on Companies, Investors, and Taxpayers
The new agreement will have significant implications for:
- Multinational companies in both countries.
- Investors with dividend, interest, or capital gains flows.
- Individuals with dual residence or cross-border income.
Among the main effects are:
- Greater tax predictability.
- Reduced risk of double taxation.
- Increased anti-abuse controls.
- Greater requirement for economic substance in international structures.
Conclusion
The new Double Taxation Agreement between the United Kingdom and Portugal represents a significant update to the bilateral tax framework, aligned with the latest international tax standards. Although it is not yet in force, its mere signing anticipates a scenario of greater control, transparency, and tax cooperation.
For business groups, investors, and residents operating in both jurisdictions, this treaty will require a comprehensive review of their tax structures, contracts, and Transfer Pricing policies to anticipate a more sophisticated and coordinated tax enforcement environment.
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Source: GOV.UK