New Portugal–UK Double Taxation Treaty: Key Changes and Practical Impact

Portugal and the United Kingdom have concluded a new Double Taxation Treaty (DTT), approved and ratified in December 2025, which will replace the 1968 Convention. This marks the first comprehensive tax treaty negotiated between the two countries following Brexit and represents a significant update to the bilateral tax framework.

The new treaty will apply from 1 January 2026 in Portugal. In the United Kingdom, it will apply from 1 January 2026 in respect of taxes withheld at source, from 6 April 2026 for Income Tax and Capital Gains Tax, and from 1 April 2026 for Corporation Tax. The agreement aligns the Portugal–UK tax relationship with current OECD standards and introduces stronger anti-abuse provisions, while updating the rules applicable to dividends, interest, capital gains and cross-border business activity.

One of the key features of the new treaty is the introduction of a stronger anti-abuse framework through the Principal Purpose Test (PPT). Under this test, tax authorities may deny treaty benefits where one of the main purposes of an arrangement is to obtain those benefits. This represents a significant tightening of treaty planning opportunities and reflects the OECD’s BEPS recommendations.

The treaty also introduces changes to the determination of tax residence and permanent establishment. For companies considered resident in both States, residence will no longer be determined solely by the place of effective management. Instead, it will be decided by mutual agreement between the tax authorities. In addition, permanent establishment rules are reinforced through an anti-fragmentation rule aimed at preventing the use of artificial structures.

With regard to passive income, the treaty updates the withholding tax limits applicable to dividends, interest and royalties. Dividends are generally subject to a maximum withholding tax rate of 10%, with a participation exemption allowing a 0% rate for qualifying shareholdings of at least 10% held for one year. Higher rates may apply to certain real estate investment vehicles. Interest may be taxed at source at a maximum rate of 10%, reduced to 5% for qualifying banks, with exemptions applicable to States and central banks. Royalties may be taxed at source at a maximum rate of 5%, under a narrower and updated definition.

The treatment of capital gains has also been revised. Under the new treaty, both States may tax gains arising from the sale of shares or interests that derive more than 50% of their value from immovable property, provided this condition was met at any point during the preceding 365 days. This change is particularly relevant for real estate-driven investment structures.

Finally, the treaty modernises dispute resolution mechanisms through updates to the mutual agreement procedure (MAP) and enhances cooperation between the Portuguese and UK tax authorities, including exchange of information and assistance in tax collection.

Overall, the new Portugal–UK Double Taxation Treaty provides greater clarity and alignment with international standards, while introducing more restrictive anti-avoidance rules. Taxpayers with cross-border investments, financing arrangements or real estate exposure involving Portugal and the United Kingdom should reassess their structures in advance of its application.

For further information, please contact our Tax & Wealth Department at gfigueira@edge-il.com.