Double-taxation treaties: how much foreign withholding tax you actually get back

Two different questions, and this answers the second

Anyone investing outside Portugal ends up asking two tax questions, and they usually arrive tangled together. The first is where to declare it, and it has an administrative answer: on Anexo J, with the source country and the tax withheld, which is covered in the guide on foreign brokers and IRS.

The second question is the one that matters here, and it is about money: of the tax already taken from me abroad, how much do I actually get back? The answer is almost never "all of it", and the reason is not bureaucratic. It is written in two lines of the income tax code that rarely appear side by side.

Portugal relieves double taxation by credit, not by exemption

As a Portuguese tax resident you declare your worldwide income here. If the country where the income arose also taxed it, the same euro was taxed twice, and article 81.º of the income tax code fixes that with a tax credit¹.

The word is literal, and it is the source of nearly every misunderstanding. A credit is set against Portuguese tax. It therefore exists only as far as there is Portuguese tax to set it against. It is not a rebate, it is not an exemption, and it never produces a refund of the foreign tax.

Paragraph 1 says the credit is the lesser of two amounts: the income tax paid abroad, and the fraction of the Portuguese tax corresponding to that income¹. Two scenarios follow immediately, with very different endings.

On the second row, Portugal does not refund the €70. The credit took the IRS to zero and stopped there, because there was no more Portuguese tax to set it against.

The treaty cap, which decides most real cases

So far we have used only paragraph 1. What changes the practical outcome for most portfolios is paragraph 2 of the same article: where a double-taxation treaty exists, the deduction cannot exceed the tax paid abroad under the terms provided by that treaty¹.

Read that closely, because the distinction is everything: Portugal credits the tax the treaty allowed the source country to charge, not the tax the source country charged. If the treaty sets a 15% cap and 30% was withheld, half of the withholding never enters the Portuguese sum.

And the part left out does not vanish, nor is it claimed from Lisbon. It has a different owner:

• The excess above the treaty cap is claimed from the tax authority of the country that withheld it, as a rule with a certificate of tax residence issued by the Portuguese authority. Portugal issues the certificate; it does not hand back the money.
• The excess caused by too little Portuguese tax is a Portuguese matter. Where the income was taxed by englobamento, paragraph 3 allows the remainder to be deducted over the following five years¹. Taxed at the autonomous rate, the income is not included in taxable income and that carry-forward never arises.

Confusing the two is why so many people write to the Portuguese tax authority asking for money it never held.

The income counts gross, and that is not a detail

Article 22.º, n.º 6 provides that, where this credit applies, income counts at its amounts gross of the taxes paid abroad². Portuguese tax is therefore charged on the amount before the withholding, not on what landed in the account.

Declaring the net amount does two wrong things at once: it understates the income, which is a problem with the tax authority, and it shrinks the base on which the credit is computed, which is a problem with your own portfolio.

The US case: what form W-8BEN is worth, to the cent

This is the concrete case most people live, because most of the shares and ETFs Portuguese investors buy through foreign brokers are American.

US domestic law withholds 30% on dividends paid to a non-resident. The Portugal-United States treaty, in article 10.º, n.º 2, provides that where the beneficial owner is a resident of the other state the tax at source may not exceed 15% of the gross amount of the dividends⁵. Form W-8BEN is the document by which you tell the broker that you are resident in Portugal and entitled to that cap.

Compare the two worlds, on €1,000 of gross dividends and the 28% Portuguese autonomous rate:

Look at the middle row: the tax due in Portugal is exactly the same in both cases, €130. The credit is €150 either way, because that is what the treaty allows. All the form does is stop €150 being withheld that Portugal was never going to credit.

On €1,000 of dividends, W-8BEN is worth precisely €150. On a portfolio generating €5,000 of US dividends a year, it is worth €750 a year. It is probably the best effort-to-return ratio of any form in private investing.

The case that generates no credit at all: accumulating ETFs

It is worth closing with the opposite scenario, because it cuts against the intuition of anyone who has just read the rest.

In an Irish-domiciled accumulating ETF, of the kind that dominates European portfolios, you receive no dividend at all: the fund reinvests it. With no payment there is no withholding from you, and with no withholding of yours there is no foreign tax to credit. The US withholding on the dividends of the shares the fund holds happens inside the fund, between the United States and Ireland, and is not the investor's tax.

That is not a problem, merely different mechanics: your taxable income only arises when you sell the units, and it is then a capital gain, taxed in Portugal at the 28% autonomous rate (art. 72.º)³ with no foreign withholding involved. The choice between accumulating and distributing is covered in the guide on funds and ETFs in IRS.

The practical consequence is simple and useful: the foreign tax credit is a concern for holders of individual shares or distributing ETFs. If you hold only accumulating funds, you do not have to think about it.

What to take away

Portugal does not refund foreign tax: it sets it off, and only up to the Portuguese tax on the same income. Where a treaty applies, it sets off only what the treaty allowed to be charged at source, so any withholding above that cap has to be claimed from the source country or it is money lost. And because most of those excess withholdings are avoided in advance with a form, the moment to deal with this is before the dividend is paid, not in May of the following year.

Always confirm the treaty rate for the country involved in the summary table published by the Portuguese tax authority⁴: 15% is the most common cap on dividends, but it is not a universal rule, and the interest rate is often different from the dividend rate.