On September 15, 2025, a new Convention between Portugal and the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion regarding Taxes on Income was signed in London, replacing the previous Convention, which had been in force since 1968.
Effective January 1, 2026, the new Convention focuses on income and capital gains taxes and has been modernized based on current practices of tax cooperation and combating tax evasion, in line with international standards.
We highlight the following changes:
- Incorporation of a modern anti-abuse mechanism – Principal Purpose Test – which allows treaty benefits to be denied when it is concluded that one of the main purposes of a transaction was to obtain tax advantages;
- Updating of the rules on the definition of “permanent establishment,” introducing an anti-fragmentation clause;
- Reduction from 15% to 10% of the general withholding tax rate on dividends;
- The direct participation required in the capital of the paying company for the purposes of applying the favorable regime on dividends has been reduced from 25% to 10%;
- Possibility of reducing the general rate on interest from 10% to 5% if the beneficial owner of the interest is a bank resident in the other Contracting State;
- Change in the rules on the taxation of capital gains when these result from the sale of shares or other holdings which, at any time during the 365 days prior to the sale, directly or indirectly withdraw more than half of their value from real estate located in the other Contracting State. These gains may be taxed in the State where the real estate is located and also in the State of residence of the seller.
Considering these changes, it is important to analyze what the main fiscal impacts might be.
