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Information Note

PORTUGAL – TIMOR-LESTE: DOUBLE TAXATION CONVENTION

24 may 2023

On 2 February 2023, Notice no. 2/2023 was published making public the entry into force on 12 October 2022 of the Convention between the Portuguese Republic and the Democratic Republic of Timor-Leste for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion in respect of Income Taxes, signed in Lisbon on 27 September 2011.

This Convention thus contributes to the development of trade and investment between the two countries, eliminating tax obstacles to the movement of capital and workers, thus creating a stable and favorable tax environment.

It aims to eliminate international double taxation in the different categories of income received by residents of the two States, as well as to prevent tax evasion.

It also provides for the exchange of tax information between the tax administrations of the two States.

This Convention is applicable to residents of one or both States and the definitions of resident or permanent establishment are set out therein

In Portugal, the Convention applies to personal income tax, corporate income tax and municipal surcharge, while in Timor-Leste it applies to income tax, wage income tax, taxes due under the oil and gas taxation and withholding tax.

According to Article 24 of the Convention, the method for the elimination of double taxation in Portugal is that “where a resident of Portugal derives income which, in accordance with the provisions of the Convention, may be taxed in Timor Leste, Portugal shall deduct from the tax on that resident’s income an amount identical to the income tax paid in Timor Leste. Such amount deducted shall not exceed the fraction of the income tax, calculated before the deduction, corresponding to the income that may be taxed in Timor Leste.

The same Section also provides that in Timor Leste the method for the elimination of double taxation is as follows: “where a resident of Timor Leste derives income which, in accordance with the provisions of the Convention, may be taxed in Portugal, Timor Leste shall deduct from the tax on that resident’s income an amount identical to the income tax paid in Portugal. The amount deducted may not exceed the fraction of the income tax, calculated before the deduction, corresponding to the income that may be taxed in Portugal.

Finally, if the income obtained by a resident of a Contracting State is exempt from tax in that State, that State may nevertheless, when calculating the amount of tax on that resident’s other income, take into account the exempt income.

Article 27 of the Convention also provides for the exchange of tax information, whereby the competent authorities of the two States exchange information that is foreseeably relevant to “the application of the provisions of the Convention” or to “the administration or enforcement of internal laws relating to taxes of any kind or denomination levied for the benefit of States, insofar as the taxation provided for therein is not contrary to the Convention”.

CRA Timor
Miguel Paixão