The Portugal–China convention: dividends, interest, royalties and the paperwork

The convention in one table

Signed in Beijing on 21 April 1998, approved by Resolução da Assembleia da República n.º 28/2000, in force since 8 June 2000, applied from 1 January 2001; it covers income taxes only (Portuguese IRS, IRC and municipal surcharge; Chinese individual and enterprise income tax) and does not extend to Hong Kong or Macau, which have their own treaties with Portugal.

Relief is by credit in both countries (art. 23): Portugal credits the Chinese tax up to the Portuguese tax on the same income; China credits the Portuguese tax, and a Chinese company holding at least 10 % of a Portuguese one also credits the underlying corporate tax. A tax-sparing clause deemed incentive tax to have been paid on business profits, dividends, interest and royalties during the convention’s first ten years, a period extendable only by mutual agreement of the two authorities (art. 23 n.º 3).

• 10 % on dividends, interest and royalties, both directions
• 0 % from Portugal to a Chinese company holding 10 % for a year, under Portuguese domestic law (CIRC art. 14.º n.º 3)
• 25 % / 28 % Portuguese withholding without the treaty paperwork; 10 % / 20 % in China on companies / individuals
• Six months to a permanent establishment; 183 days for independent professionals

Dividends out of Portugal

A Portuguese company paying a dividend withholds 25 % for a non-resident company (CIRC art. 94.º) or 28 % for a non-resident individual (IRS Code art. 71.º), unless the recipient proves entitlement before payment:

• Chinese individual or company below 10 %: the treaty rate of 10 %, on Modelo 21-RFI certified by the Chinese tax authority (or accompanied by a Chinese residence certificate), delivered to the paying company before the dividend is paid (CIRS art. 101.º-C; CIRC art. 98.º); the form is valid for a year, two for a contract of interest or royalties. Missed the deadline: refund within two years on Modelo 22-RFI, sent to the international relations directorate.
• Chinese company holding at least 10 % for one uninterrupted year, subject in China to corporate tax at a rate not below 60 % of the Portuguese IRC rate (China’s 25 % qualifies): exempt (CIRC art. 14.º n.º 3), on a declaration confirmed by the Chinese tax authority delivered before payment (n.º 4). This is a domestic rule that applies because China is a treaty country with exchange of information; it does not depend on the EU parent-subsidiary directive.
• In China the dividend is income of the recipient: a company pays 25 % with the Portuguese tax credited (10 % or nothing), and the underlying Portuguese corporate tax credited too where it holds 10 %; an individual pays 20 %.

Example: a Lisbon subsidiary pays 100 000 € to its Shanghai parent, which has held 100 % for three years. With the art. 14.º declaration: 0 € withheld, 100 000 € received, Chinese tax 25 % less the Portuguese corporate tax already borne on the profit. Without paperwork: 25 000 € withheld, of which 15 000 € refundable within two years on the treaty form and 25 000 € on the exemption claim — cash tied up for months.

Dividends out of China

A Chinese company paying a dividend to a non-resident enterprise withholds 10 % (Enterprise Income Tax Law art. 4 and Implementation Regulations art. 91); to a non-resident individual, individual income tax at 20 %, capped at 10 % under the treaty. Since 2020 the recipient claims the treaty by self-assessment: it judges its own eligibility, files the Non-resident Taxpayer Treaty Benefit Information Report with the withholding agent, and keeps the residence certificate and ownership documents for inspection (STA Announcement 2019 No. 35).

In Portugal the dividend is then taxed at 28 % for an individual with a credit for the 10 %, or exempt for a Portuguese company holding 10 % for twelve months (CIRC art. 51.º) — China’s 25 % corporate rate satisfies the subject-to-tax test. An IFICI resident is exempt on the dividend outright; a former NHR holder is exempt because the treaty lets China tax it.

Interest and royalties

Ten per cent each way, with the government-bank exemptions on interest. Portugal’s domestic withholding on interest and royalties paid to non-residents is 25 % (companies) or 28 % / 25 % (individuals), reduced on Modelo 21-RFI; royalties paid by a Portuguese company to a Chinese licensor for software, know-how or equipment hire carry 10 % under art. 12, and are deductible in Portugal. China withholds 10 % on interest and royalties to Portuguese recipients under its domestic rate, so the treaty adds nothing on the Chinese side beyond certainty; VAT of 6 % also applies to royalties and services paid abroad, withheld by the Chinese payer.

Steps

Questions