TREASURY DEPARTMENT TECHNICAL EXPLANATION OF THE

CONVENTION AND PROTOCOL BETWEEN THE

UNITED STATES OF AMERICA AND THE PORTUGUESE REPUBLIC

FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE

PREVENTION OF FISCAL EVASION WITH RESPECT TO

TAXES ON INCOME SIGNED AT WASHINGTON

ON SEPTEMBER 6, 1994

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page 541.

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TREASURY DEPARTMENT TECHNICAL EXPLANATION OF THE 

CONVENTION AND PROTOCOL BETWEEN THE 

UNITED STATES OF AMERICA AND THE PORTUGUESE REPUBLIC 

FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE 

PREVENTION OF FISCAL EVASION WITH RESPECT TO 

TAXES ON INCOME SIGNED AT WASHINGTON 

ON SEPTEMBER 6, 1994 

INTRODUCTION 

This is a technical explanation of the Convention between 

the United states and Portugal signed on September 6, 1994 (the 

"Convention"). The Convention is based on the u.s. Treasury 

Department's former draft Model Income Tax Convention, published 

on June 16, 1981, the Model Tax Convention on Income and Capital 

published by the OECD in 1992 (the "OECD Model"), and recent U.S. 

and Portuguese income tax conventions. Although the former u.s. 

Model has been withdrawn pending development of a new model, it 

was relevant at the time during which much of the Convention was 

negotiated. 

The Technical Explanation is an official guide to the 

Convention. It reflects the policies behind particular 

Convention provisions, as well as understandings reached with 

respect to the application and interpretation of the Convention. 

The terms "he" or "his" should be read to mean also "she" or 

"her." 
Article 1. GENERAL SCOPE 

This article provides that the Convention is applicable to 

residents of the united States or Portugal except where the terms 

of the Convention provide otherwise. Under Article 4 (Resident), 

a person is treated as a resident of a Contracting state if that 

person is, under the laws of that State, liable to tax therein.by 

reason of domicile or other similar criteria, subject to certaln 

limitations. If a person is, under those criteria, a resident of 

both Contracting states, a single state of residence (or no state 

of residence) is assigned under Article 4. These rules govern 

for all purposes of the Convention. certain provisions of the 

Convention are also applicable, however, to persons who may not 

be residents of either Contracting State. Examples include 

Articles 26 (Non-Discrimination) and 28 (Exchange of 

Information) . 

Paragraph 1 of the Protocol contains the other provisions 

normally included in the General Scope Article of U.s. income tax 

treaties. Subparagraph l(a) (i) of the Protocol explains that the 

Convention may not restrict any exclusion, exemption, deduction, 

credit, or other benefit accorded by the tax laws of the 

Contracting states. In effect, subparagraph l(a) (i) provides 

that the Convention may not increase the overall tax burden on a 

resident of a contracting state beyond the burden imposed under 

domestic law. Thus, a right to tax granted by the Convention to 

a contracting state cannot be exercised unless the domestic law 

of that state also provides for such taxation. 

Under the principle of subparagraph l(a) (i), a taxpayer's 

U.s. tax liability need not be determined under the Convention if 

the Internal Revenue Code would produce a more favorable result. 

This does not mean, however, that a taxpayer may pick and choose 

among Code and Convention provisions in an inconsistent manner in 

order to minimize tax. For example, suppose a Portuguese 

resident has three separate businesses in the United states. One 

is a profitable permanent establishment and the other two are 

trades or businesses that earn taxable income under the Code but 

do not meet the permanent establishment threshold tests of the 

Convention. One trade or business is profitable, and the other 

incurs a loss. Under the Convention, the income of the permanent 

establishment would be taxable, and both the profit and the loss 

of the other two businesses would be ignored. Under the Code, 

all three would be taxable and the loss would be offset against 

the profits of the two profitable ventures. In this situation 

the taxpayer may not invoke the Convention to exclude the profits 

of the profitable trade or business and invoke the Code to claim 

the loss of the loss trade or business against the profit of the 

permanent establ~shment. (See Rev. Rul. 84-17, 1984-1 C.B. 308.) 

If the taxpayer lnvokes the Code for the taxation of all three 

venture~, ho~ever, he would not be precluded from invoking the 

Conventl0n wlth respect, for example, to any dividend income he 

may receive from the United States that is not effectively 
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connected with any of his business activities in the United 

states. 

Subparagraph l(a) (i) of the Protocol also provides that the 

Convention does not override any benefit provided under other 

bilateral agreements that were in force as of the date on which 

the Convention was signed (September 6, 1994). 

Subparagraph l(a) (ii) of the Protocol affects obligations 

undertaken by the Contracting states under other agreements. 

Subparagraph l(a) (ii) of the Protocol provides that, 

notwithstanding any other agreement to which the contracting 

states may be parties, a dispute concerning whether a measure is 

within the scope of this Convention shall be considered only by 

the competent authorities of the contracting states, as defined 

in this Convention, and the procedures under this Convention 

exclusively shall apply to the dispute. Thus, dispute resolution 

procedures provided for in trade, investment, or other agreements 

between the Contracting states shall not apply for the purpose of 

determining the scope of the Convention. 

Subparagraph lea) (iii) of the Protocol provides that, unless 

the competent authorities agree that a taxation measure is not 

within the scope of this convention, the nondiscrimination 

obligations of this Convention exclusively shall apply with 

respect to that measure, except for such national treatment or 

most-favored-nation ("MFN") obligations as may apply to trade in 

goods under the General Agreement on Tariffs and Trade ("GATT"). 

No national treatment or MFN obligation under any other agreement 

shall apply with respect to that measure. Thus, any national 

treatment and MFN obligations undertaken by the Contracting 

States under agreements other than the Convention, with the 

exception of GATT as applicable to trade in goods, shall not 

apply to a taxation measure. 

Subparagraph l(a) (iv) of the Protocol defines a "measure" as 

a law, regulation, rule, procedure, decision, administrative 

action, or any other form of measure. 

Subparagraph l(b) of the Protocol contains the traditional 

U.S. treaty "saving clause." Under this paragraph, each 

Contracting state may tax its residents, and the United States 

may tax its citizens, in accordance with its domestic law, 

notwithstanding any Convention provision to the contrary. If, 

for example, a Portuguese resident performs independent personal 

services in the united states and the income from the services is 

not attributable to a fixed base in the United States, Article 14 

(Independent Personal Services) would normally prevent the United 

states from taxing the income. If, however, the Portuguese 

resident is also a citizen of the United States, the saving 

clause permits the United States to include the remuneration in 

the worldwide income of the citizen and subject it to tax under 
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normal Code rules (i.e., without regard to Code section 894(a». 

Special foreign tax credit rules concerning u.S. taxation of 

certain income of u.S. citizens resident in Portugal are provided 

in paragraph 2 of Article 25 (Relief from Double Taxation) . 

For purposes of the saving clause of paragraph l(b) of the 

Protocol, residence is determined under Article 4 (Resident). 

Subparagraph l(b) of the Protocol states that the term 

"citizen" shall include a former citizen whose loss of 

citizenship had as one of its principal purposes the avoidance of 

tax, but only for the period of 10 years following such loss. 

This permits the United States to apply the rules of Code section 

877. Subparagraph l(b) of the Protocol concludes by providing 

that, upon request by the Portuguese competent authority, the 

competent authorities will consult under Article 27 (Mutual 

Agreement Procedure) on the purposes of such loss of citizenship. 

Thus, if the united states taxes a former u.S. citizen who is a 

resident of Portugal, the Portuguese competent authorities may 

request a discussion with their u.S. counterparts of the 

circumstances involved in the case. 

Subparagraph l(c) of the Protocol lists several exceptions 

to the saving clause, under which benefits granted by a 

Contracting State under the Convention are extended to its 

citizens and residents. Under subparagraph l(c) (i), u.S. 

residents and citizens are entitled to the following u.S. 

benefits provided under the Convention: the corresponding 

adjustments authorized by paragraph 2 of Article 9 (Associated 

Enterprises); the provisions of paragraph 3 of Article 14 

(Capital Gains) regarding gain from the alienation of certain 

property; the exemption from u.S. tax of social security benefits 

paid by Portugal that is provided in subparagraph l(b) of Article 

20 (pensions, Annuities, Alimony, and Child Support); the 

exemption from u.S. tax of child support payments paid by a 

Portuguese resident that is provided in paragraph 4 of Article 20 

(Pensions, Annuities, Alimony, and Child Support); the foreign 

tax credit provisions of Article 25 (Relief from Double 

Taxation); the nondiscrimination protection of Article 26 (NonDiscrimination); and the competent authority procedures of 

Article 27 (Mutual Agreement Procedure). 

Subparagraph l(c) (ii) of the Protocol provides additional 

exceptions to the saving clause for individuals resident in a 

Contracting State who are neither citizens of, nor have immigrant 

status in, that state. These exceptions preserve the benefits 

extended by the united States under the Convention to persons 

other than u.S. citizens and "green card" holders who are: 

employees of the Portuguese Government under Article 21 

(Government Service); visiting teachers or researchers under 

Article 22 (Teachers and Researchers); visiting students or 

trainees under Article 23 (Students and Trainees); or members of 
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diplomatic or consular missions under Article 29 (Diplomatic 

Agents and Consular Officers). 

Article 2. TAXES COVERED 

This Article identifies the U.S. and Portuguese taxes to 

which all articles of the Convention apply. certain provisions 

of the Convention and the Protocol are also applicable, however, 

with respect to certain taxes in addition to those specified in 

Article 2. For example, Article 26 (Non-Discrimination) applies 

with respect to all taxes imposed at all levels of gqvernment, 

including state and local governments. Article 28 (Exchange of 

Information) applies with respect to all taxes imposed by a 

Contracting State (i.e., at the national level). Paragraph 8 of 

the Protocol applies with respect to the substitute gift and 

inheritance tax (Imposto sobre Sucessoes e Doacoes por Avenca) 

imposed by Portugal. 

In the case of Portugal, the Convention generally applies to 

the personal income tax (Imposto sobre 0 Rendimento das Pessoas 

Singulares-IRS), the corporate income tax (Imposto sobre 0 

Rendimento das Pessoas Colectivas-IRC), and the local surtax on 

corporate income tax (Derrama). As noted above, other 

provisions, such as Articles 26 (Non-Discrimination) and 28 

(Exchange of Information) of the Convention and paragraph 8 of 

the Protocol, apply to certain additional taxes. 

In the case of the United states, the Convention generally 

applies to the Federal income taxes imposed by the Internal 

Revenue Code. The Convention applies to the excise taxes imposed 

with respect to the investment income of private foundations 

under Code sections 4940 et ~, but does not apply with respect 

to the excise taxes imposed on insurance premiums paid on 

policies issued by foreign insurers under Code section 4371. The 

social security taxes provided in Code sections 1401, 3101, and 

3111 are generally excluded from coverage. However, as noted 

above, certain other provisions of the convention, such as 

Articles 26 (Non-Discrimination) and 28 (Exchange of 

Information), apply to all taxes imposed by the United states, 

including the insurance premiums excise taxes and the social 

security taxes. In addition, as in other U.s. treaties, Article 

26 (Non-Discrimination) applies to taxes imposed by state and 

local governments. 

Under paragraph 2 of Article 2 (Taxes Covered), the 

Convention will apply to any taxes that are identical or 

substantially similar to those enumerated in paragraph 1 and that 

are imposed in addition to, or in place of, the existing taxes 

after September 6, 1994 (the date of signature of the 

Convention). Paragraph 2 also provides that the U.s. and 

Portuguese competent authorities will notify each other of 

changes in their taxation laws that are of significance to the 
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operation of the Convention. The competent authorities will also 

notify each other of official published materials concerning the 

application of the Convention. 

Paragraph 2 of the Protocol provides additional information 

regarding taxes that are and are not covered. Paragraph 2(a) of 

the Protocol clarifies that Article 2 does not apply to social 

security contributions established under Portuguese law. These 

amounts are not covered because, as under the U.S. system, they 

are treated as contributions to Portugal's social security 

system, not as taxes. As noted above, Article 2 itself makes 

clear that U.S. social security contributions are not covered. 

Subparagraph 2(b) of the Protocol limits the application of 

the Convention with respect to the personal holding company tax 

(Code section 541) and the accumulated earnings tax (Code section 

531). Subparagraph 2(b) (i) exempts a Portuguese company from 

liability for the personal holding company tax only for taxable 

years in which all of the Portuguese company's stock is owned by 

individuals who are not residents or citizens of the United 

States, in their capacity as individuals. Thus, if there is any 

owner that is not an individual, or any owner that is a U.S. 

citizen or U.S. resident, the Portuguese company may be liable 

for the personal holding company tax. Under subparagraph 

2(b) (ii) of the Protocol, Portuguese companies that are described 

in paragraph l(c) of Article 17 (Limitation on Benefits), which 

pertains to certain publicly traded companies, are exempt from 

the accumulated earnings tax. In general, this is intended to 

relieve such a Portuguese company from any obligation to prove 

that its earnings and profits have not accumulated beyond the 

reasonable needs of the company. It is understood that such 

publicly traded companies are unlikely to be mere holding or 

investment companies and that the interests of the shareholders 

of such companies are likely to operate so as to prevent an 

unreasonable accumulation of earnings and profits. 

Article 3. GENERAL DEFINITIONS 

Paragraph 1 defines a number of basic terms used in the 

Convention. certain other terms are defined in other articles of 

the Convention. For example, the term "resident of a Contracting 

State" is defined in Article 4 (Resident). The term "permanent 

establishmen~".is define~ in Article 5 (Permanent Establishment). 

The terms "dlvldends," "lnterest," and "royalties" are defined in 

Article7 10 (Divide~ds), 11 (Interest), and 12 (Royalties), 

respectlvely. The lntroductory language makes clear that the 

definitions specified in paragraph 1 apply for all purposes of 

the Convention, unless the context otherwise requires. The 

latter condition allows flexibility in interpretation of the 

treaty in order to avoid results not intended by the treaty's 

'I"IP(,H"lt-; ntors. 
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Subparagraph l(a) defines the term "Contracting State" to 

mean the united states or Portugal, depending on the context in 

which the term is used. 

Subparagraph l(b) defines the term "Portugal" to mean the 

Portuguese Republic. This includes the territory on the European 

continent and the archipelagoes of AZores and Madeira, the 

respective territorial seas and any other zone in which, in 

accordance with the laws of Portugal and international law, the 

Portuguese Republic has sovereign rights with respect to the 

exploration and exploitation of the natural resources of the 

seabed and subsoil and of the superjacent waters. 

Subparagraph l(c) defines the term "united States" to mean 

the united States of America. The term does not include Puerto 

Rico or the Virgin Islands, Guam, or any other u.s. possession or 

territory. When used in a geographical sense, the term "united 

states" includes the States, the District of Columbia, the 

territorial sea adjacent to those States, and any other zone 

adjacent thereto over which, in accordance with the laws of the 

united States and international law, the united states has 

sovereign rights with respect to the exploration and exploitation 

of the natural resources of the seabed and subsoil and of the 

superjacent waters. 

Subparagraph l(d) defines the term "person" to include an 

individual, a company, and any other body of persons. This 

definition is consistent which that used in the OECD Model and in 

other u.s. treaties. Any person that qualifies as a "resident" 

of a Contracting State under Article 4 (Resident) is entitled to 

the benefits of the Convention, subject to the provisions of 

Article 17 (Limitation on Benefits). 

subparagraph l(e) defines the term "company" as any body 

corporate or any entity treated as a body corporate for tax 

purposes. In the case of the united States, the rules of Treas. 

Reg. §301.770l-2 generally will apply to determine whether an 

entity is an association taxable as a corporation, and thus is a 

company, for purposes of the Convention. Similarly, in the case 

of the united states, a publicly traded partnership that is 

treated as a corporation under Code section 7704 will be treated 

as a company for purposes of the Convention. 

Subparagraph l(f) defines the terms "enterprise of a 

Contracting state" and "enterprise of the other contracting 

State" to mean an enterprise carried on by a resident of the 

appropriate contracting State. Thus, an enterprise of a 

Contracting state need not be carried on in that State. It may 

be carried on in the other state or in a third state. 

Subparagraph l(g) defines the term "national" to mean any 

individual possessing the nationality of a Contracting state and 
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any legal person, association, or other entity deriving its 

status as such from the laws in the force in a Contracting state. 

This definition, which comes from the OECD Model, has been used 

in other u.s. treaties. In the case of the united states, the 

term "national" means a u.s. citizen when applied to an 

individual. 

Subparagraph l(h) defines the term "international traffic" 

to mean any transport by a ship or aircraft, except when such 

transport is solely between places within a Contracting state. 

The exclusion from international traffic of transport solely 

between places within a Contracting state means, for example, 

that the transport of goods or passengers solely between New York 

and Chicago by a Portuguese carrier (if permitted) would not be 

treated as international traffic. If, however, goods or 

passengers were carried by a Portuguese airline from Lisbon to 

New York and then to Chicago, the entire trip would be considered 

international traffic. This would be true even if a Portuguese 

carrier transferred goods at the u.s. port of entry from a ship 

or plane to a land vehicle, or if the overland portion of the 

trip in the United states were handled by an independent carrier 

under contract with the Portuguese carrier, so long as both parts 

of the trip were reflected in the original bill of lading. 

Subparagraph l(i) defines the term "competent authority." 

The competent authorities of the Contracting states are charged 

with administering the provisions of the Convention and with 

attempting to resolve any doubts or difficulties that may arise 

in interpreting its provisions. The U.S. competent authority is 

the Secretary of the Treasury or his delegate. The Secretary of 

the Treasury has delegated the competent authority function to 

the Commissioner of Internal Revenue, who has, in turn, delegated 

the authority to the Assistant Commissioner (International). 

With respect to interpretive issues, the Assistant Commissioner 

acts with the concurrence of the Associate Chief Counsel 

(International) of the Internal Revenue Service. In Portugal, 

the competent authority is the Minister of Finance, the Director 

General of Taxation (Director Geral das Contribuicoes e 

Impostos), or their authorized representative. 

Paragraph 2 of Article 3 provides that, in the application 

of the Convention, any term used but not defined in the 

Convention will have the meaning that it has under the tax law of 

the cont:acting State whose tax is b7ing applied. If, however, 

the meanlng of a term cannot be readlly determined under the law 

of a Contracting state, or if there is a conflict in meaning 

under the laws of the two States that creates difficulties in the 

application of the convention, the competent authorities may 

pursuant to paragraph 3 of Article 27 (Mutual Agreement ' 

Procedure), agree to a common meaning in order to prevent double 

taxation or further any other purpose of the Convention. 

Likewise, if the definition of a term under either paragraph 1 of 
-9-

Article 3 or the tax law of a Contracting state would result in a 

circumstance unintended by the treaty negotiators or by the 

contracting states, the competent authorities may agree to a 

common meaning of the term. This cornman meaning need not conform 

to the meaning of the term under the laws of either contracting 

state. 

Article 4. RESIDENT 

This Article sets forth rules for determining whether a 

person is a resident of a contracting State for purposes of the 

Convention. As a general matter, only residents of the 

contracting states may claim the benefits of the Convention. 

However, the fact that a person is determined to be a resident of 

a contracting state under Article 4 does not necessarily entitle 

that person to the benefits of the Convention. In addition to 

being a resident, a person must qualify for benefits under 

Article 17 (Limitation on Benefits). 

Under paragraph 1, the determination of residence for 

Convention purposes looks first to a person's liability to tax as 

a resident under the taxation laws of the Contracting state 

involved. Thus, a person that is liable to tax under the laws of 

a contracting State by reason of its domicile, residence, place 

of management, place of incorporation, or any other similar 

criterion is treated as a resident of that State. A person that, 

under those laws, is a resident of one contracting State and not 

of the other generally need look no further. 

Paragraph 1 concludes with an exception to the general rule 

of this paragraph. A person that is liable to tax in a 

contracting state Qnly in respect of income from sources within 

that state will not be treated as a resident of that Contracting 

State for purposes of the Convention. Thus, for example, a 

Portuguese consular official who is posted in the United States, 

and who is subject to u.S. tax on U.s. source investment income 

but not on non-U.S. source income, would not be considered a 

resident of the United states for purposes of the Convention. 

(In most cases, such an individual also would not be a U.s. 

resident under the Code.) 

Paragraph 2 provides a series of tie-breaker rules to 

determine a single State of residence for an individual who, 

under the laws of each Contracting State, and thus under 

paragraph 1, is deemed to be a resident of both Contracting 

states. These rules, which are generally included in u.s. 

treaties, come from the OECD Model. The first rule establishes 

residence where the individual has a permanent home. If that 

test is inconclusive because the individual has a permanent home 

available to him in both States, he will be considered to be a 

resident of the Contracting state with which his personal and 

economic relations are closest, i.e., the location of his "center 
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of vital interests." If this test is also inconclusive, or if he 

does not have a permanent horne available to him in either state, 

he will be treated as a resident of the contracting state where 

he maintains an habitual abode. If he has an habitual abode in 

both states or in neither, he will be treated as a resident of 

the Contracting state of which he is a citizen. If he is a 

citizen of both states or of neither, the competent authorities 

are instructed to determine his residence by mutual agreement. 

Paragraph 3 seeks to settle dual-residence issues for 

persons other than individuals. A corporation is treated as a 

resident in the united states if it is created or organized under 

the laws of the United states or a political subdivision thereof. 

In Portugal, a corporation is treated as a resident of portugal 

if it is either incorporated there or managed and controlled 

there. Dual residence, therefore, can arise if a u.s.-

incorporated corporation is managed in Portugal. Since neither 

party was prepared to give up its test of corporate residence 

under a tie-breaker rule, the paragraph provides that if a 

corporation or other person, other than an individual, is 

resident in both the United states and Portugal under paragraph 

1, the competent authorities shall seek to determine a single 

State of residence for that person for purposes of the 

Convention. If, however, they are unable to reach agreement, 

that person shall not be considered to be a resident of either 

the united States or Portugal for purposes of deriving any 

benefits of the Convention. Since it is only for the purposes of 

deriving treaty benefits that such dual residents are excluded 

from the Convention, they may be treated as resident for other 

purposes. For example, if a dual resident corporation pays a 

dividend to a resident of Portugal, the U.s. withholding agent 

would be permitted to withhold on that dividend at the 

appropriate treaty rate, since reduced withholding is a benefit 

enjoyed by the resident of Portugal, not by the dual resident. 

The dual resident corporation that pays the dividend would, for 

this purpose, be treated as a resident of the United states under 

the Convention. 

Paragraph 3 of the Protocol provides fUrther guidance on the 

issue of residence. Under subparagraph 3(a) of the Protocol a 

partnership, similar pass-through entity, estate, or trust will 

be treated as a resident of a Contracting state to the extent 

that the income derived by the partnership, similar pass-through 

entity, estate, or trust is subject to tax in that State as the 

income of a resident, whether in the hands of the entity deriving 

the income or in the hands of its partners, members 

beneficiaries, or grantors. This rule is applied t; determine 

the extent to wh~ch inco~e.received by or through an estate, 

trust, partnership, or similar pass-through entity such as a U.S. 

limited liability company, from the other Contracting State is 

entitled to Convention benefits. 
-11-

Und7r,U.S. law, par~nerships (other than certain publicly 

traded llmlted partnersh~ps and partnerships that are classified 

as associations under Treas. Reg. § 301.7701-2) are never, and 

estates and trusts often are not, taxable entities. Thus for " , Conventlon purposes, ~ncome received by a U.S. partnership 

generally is treated as received by a U.S. resident only to the 

extent that it is included in the distributive share of partners 

who are u.s. residents (looking through any partnerships that are 

themselves partners). Similarly, the treatment under the 

Convention of income received by a U.S. trust or estate will be 

determined by the residence for taxation purposes of the person 

subject to tax on such income, which may be the grantor, the 

beneficiaries, or the estate or trust itself, depending on the 

circumstances. 

Subparagraph 3(b) (i) of the Protocol confirms that the term 

"resident of a Contracting statel1 includes any not-for-profit 

organization constituted and maintained in that State, provided 

that the laws of such State or of a political or administrative 

subdivision thereof limit the use of the organization's 

resources, both currently and upon the dissolution or liquidation 

of such organization, to the accomplishment of the purposes that 

serve as the basis for such organization's exemption from income 

tax. Subparagraph 3(b) (ii) of the Protocol similarly confirms 

that a pension trust or any other organization or arrangement 

that is constituted and operated exclusively to provide pension, 

retirement, or employee benefits and that is established or 

sponsored by a person that is otherwise a resident of a 

Contracting State under Article 4 (Residence) is to be treated as 

a resident of that State for purposes of the Convention. This is 

the case notwithstanding the fact that all or part of the income 

of the organization, trust, or other arrangement may be exempt 

from income tax under the domestic laws of that State. 

Under subparagraph 3(c) of the Protocol, a U.S. citizen or a 

nonresident alien lawfully admitted for permanent residence (a 

"green card" holder) will be treated as a U.s. resident by 

Portugal for purposes of the Convention only if such individual 

has a substantial presence in the united States or would be 

treated as a resident of the united states and not of a third 

country under the principles ~f subparagraphs (a) and (b) ~f, 

paragraph 2 of Article 4 (Resldence). Therefore, a U.S. c1tlzen 

or "green card" holder whose permane~t hom7, center,of vital 

interests and habitual abode are ne1ther 1n the Unlted States 

nor in po~tugal, and who does not have a sub~tantial prese~ce in 

the United states, generally will not be ent1tle~ to benef~ts 

under the Convention. (However, as noted above 1n connectlon 

with Article 1 (Personal Scope), limited con~ention ben7fits are 

available to certain persons who are not resldents of elther 

contracting State.) 
-12-

The Article does not contain the explicit provision, found 

in some u.s. treaties, that the government of a Contracting state 

is a resident of that State. It was not considered necessary to 

clarify this point, because it is understood by both Portugal and 

the united states that the Government of each contracting state 

and political or administrative subdivisions and local 

authorities thereof are residents of that state for purposes of 

the Convention. 

Article 5. PERMANENT ESTABLISHMENT 

This Article defines the term "permanent establishment," 

which is relevant to several articles of the Convention. For 

example, under Article 7 (Business Profits), a Contracting state 

may not tax the business profits of a resident of the other 

Contracting state unless that resident has a permanent 

establishment in the first Contracting state. Articles 10 

(Dividends), 11 (Interest), and 12 (Royalties) provide for 

reduced rates of tax at source on payments of these items of 

income to a resident of the other state only when the income is 

not attributable to a permanent establishment or fixed base that 

the recipient has in the source state. If the income is 

attributable to a permanent establishment, Article 7 (Business 

Profits) applies, and if the income is attributable to a fixed 

base, Article 14 (Independent Personal Services) applies. 

Paragraph 1 provides the basic definition of the term 

"permanent establishment." As used in the Convention, the term 

means a fixed place of business through which the business of an 

enterprise is wholly or partly carried on. In the case of an 

individual, Article 15 (Independent Personal Services) uses the 

concept of a "fixed base," rather than a "permanent 

establishment," but the two concepts are considered to be 

similar. 

Paragraph 2 contains a list of examples of fixed places of 

business that constitute a permanent establishment: a place of 

management, a branch, an office, a factory, a workshop, and a 

mine, oil or gas well, quarry or other place of extraction of 

natural resources. The use of singular nouns in this 

illustrative list is not meant to imply that each such place of 

business constitutes a separate permanent establishment. In the 

case of mines or wells, for example, several such places of 

business could constitute a single permanent establishment if the 

project forms a commercial and geographical whole. 

Paragraph 3 adds that the term "permanent establishment" 

also includes a building site or a construction installation or 

assembly project, supervisory activities in connection with such 

a site or project, or,an installation or drilling rig or ship 

used for the exploratlon or development of natural resources but 

only if such site, project, or activities last more than 6 ' 
-13-

months. This 6-month threshold applies separately to each 

individual site or project. The testing period begins when work 

(including preparatory work carried on by the resident) 

physically begins in a Contracting state. A series of contracts 

or projects that are commercially and geographically 

interdependent are to be treated as a single project. For 

example, the construction of a housing development would be 

considered a single project even if each house were constructed 

for a different purchaser. Likewise, the drilling of several 

wells within the same geographic area would be considered a 

single permanent establishment. If the 6-month threshold is 

exceeded, the site or project constitutes a permanent 

establishment from its first day. This interpretation of the 

Article is based on the Commentaries to paragraph 3 of Article 5 

of the OECD Model, which constitute the generally accepted 

international interpretation of the language in paragraph 3 of 

Article 5 of the Convention. 

Paragraph 4 provides that, notwithstanding the preceding 

provisions of this Article, an enterprise of a contracting state 

that carries on business of a permanent nature in the other 

Contracting state through its own employees or any other 

personnel engaged for such purpose for a period or periods 

totalling 9 months or more in any 12-month period commencing or 

ending in the taxable year concerned shall be deemed to have a 

permanent establishment in the other state. In this context, 

"business of a permanent nature" is intended to suggest business 

other than that of a preparatory or auxiliary character. The 9-

month rule of this paragraph is, however, limited by paragraph 4 

of the Protocol, which states that the provisions of this 

paragraph shall apply only for the first 5 years in which the 

provisions of the Convention have effect. For example, if the 

Convention were to enter into force on July 3, 1995, paragraph 4 

of Article 5 (Permanent Establishment) would be in effect only 

for taxable periods beginning on or after January 1, 1996 and 

before January 1, 2001. 

Paragraph 5 is drawn directly from the OECD Model and lists 

a number of activities that may be carried on through a fixed 

place of business but that, nevertheless, will not give rise to a 

permanent establishment. Under subparagraph 5(a), the use of 

facilities solely to store, display, or deliver merchandise 

belonging to an enterprise will not constitute a permanent 

establishment of that enterprise. Under subparagraphs 5(b) and 

5(C), the maintenance of a stock of goods belonging to an 

enterprise solely for the purpose of storage, display, or 

delivery, or solely for the purpose of processing by another 

enterprise will not give rise to a permanent establishment of the 

first-mentioned enterprise. Under subparagraphs 5(d) and 5(e), 

the maintenance of a fixed place of business solely for 

purchasing goods or collecting information for the enterprise, or 

for carrying out any other activity of a preparatory or auxiliary 
-14-

character for the enterprise (~, advertising, the supply of 

information, or certain research activities) will not constitute 

a permanent establishment of the enterprise. Finally, under 

subparagraph 5(f), a combination of the activities described in 

paragraph 5 will not give rise to a permanent establishment, 

provided that the overall activity of the fixed place of business 

resulting from this combination is of a preparatory or auxiliary 

character. This is the same as the corresponding provision in 

many other u.s. income tax treaties, as well as in the DECD 

Model. 

Paragraphs 6 and 7 specify when the activities of an agent 

will give rise to a permanent establishment. Under paragraph 6, 

an enterprise will be deemed to have a permanent establishment as 

a result of the activities of a dependent agent if the agent has 

and habitually exercises an authority to conclude contracts in 

the name of that enterprise. If, however, the agent's activities 

are limited to those activities specified in paragraph 5 that 

would not constitute a permanent establishment if carried on by 

the enterprise through a fixed place of business, the activities 

of the agent will not cause the enterprise to be deemed to have a 

permanent establishment. 

Under paragraph 7, an enterprise is not deemed to have a 

permanent establishment in a contracting state merely because it 

carries on business in that State through an independent agent, 

including a broker or general commission agent, if the agent is 

acting in the ordinary course of his business as an independent 

agent. 

Paragraph 8 provides that a company that is a resident of a 

Contracting State will not be deemed to have a permanent 

establishment in the other Contracting state merely because it 

controls, or is controlled by, a company that is a resident of 

that other state or that carries on business in that other State. 

The determination of whether a permanent establishment exists 

will be made solely on the basis of the factors described in 

paragraphs 1 through 7 of the Article and paragraph 4 of the 

Protocol. Whether a company is a permanent establishment of a 

related company, therefore, is based solely on those factors and 

not on the ownership or control relationship between the 

companies. 

Article 6. INCOME FROM IMMOVABLE PROPERTY (REAL PROPERTY) 

Paragraph 1 provides the general rule that income derived by 

a resident of a Contracting State from immovable property (real 

property) located in the other Contracting State, including 

income from agriculture or forestry, may be taxed in that other 

State. The income may also be taxed in the State of residence. 

Thus the Article does not grant an exclusive taxing right to the 

situs state, but merely grants it the primary right to tax. 
-15-

Paragraph 2 defines the term "immovable property" or "real 

property" by reference to the domestic law of the situs state. 

In addition, the paragraph specifies certain classes of property 

that, regardless of domestic law definitions, are to be included 

within the meaning of the term for purposes of the Convention. 

It also specifies that the term "real property" does not include 

ships or aircraft in any event. 

Paragraph 3 clarifies that all forms of income from the 

exploitation of real property are taxable in the situs state, 

including but not limited to income from direct use of real 

property by the owner and rental income from the letting of real 

property. Income from the disposition of real property, however, 

is not considered to be income derived from real property and is 

not covered by this Article. The taxation of such amounts is 

addressed in Article 14 (Capital Gains). similarly, interest 

paid on a mortgage on real property and distributions by a U.s. 

real estate investment trust are not considered to be income 

derived from real property. The taxation of these items is 

addressed in Articles 10 (Interest) and 11 (Dividends), 

respectively. 

Paragraph 4 clarifies that income from real property of an 

enterprise is covered by this Article and not by Article 7 

(Business Profits). Similarly, income from real property used 

for the performance of independent personal services is covered 

by this Article and not by Article 14 (Independent Personal 

Services). Thus, the situs State may tax the real property 

income of a resident of the other State even if such income is 

not attributable to a permanent establishment or fixed base of an 

enterprise of that resident in the situs State. 

The provision in the former U.S. Model for a binding 

election by the taxpayer to be taxed on real property income on a 

net basis was not included in the Convention. Portugal permits 

taxation on a net basis only if the income is attributable to a 

permanent establishment. otherwise, tax is imposed on the gross 

amount, subject to a withholding of 25 percent by the payer. 

This is similar to the situation with Spain. 

Paragraph 5 of the Protocol clarifies that the provisions of 

Article 6 also apply to income from associated personal property 

and from the provision of services for the maintenance or 

operation of real property. 

Article 7. BUSINESS PROFITS 

This Article provides rules for the taxation by a 

Contracting state of the business profits of an enterprise of the 

other Contracting state. Paragraph 1 provides the general rule 

that business profits of an enterprise of one Contracting State 

may not be taxed by the other contracting state unless the 
-16-

enterprise carries on or has carried on business in that other 

Contracting state through a permanent establishment (as defined 

in Article 5 (Permanent Establishment)) situated there. Where 

that condition is met, the State in which the permanent 

establishment is situated may tax the business profits of the 

enterprise, but only so much as is attributable to that permanent 

establishment. 

Paragraph 2 provides that the Contracting states will 

attribute to a permanent establishment the profits that it might 

be expected to make if it were a distinct and independent 

enterprise engaged in the same or similar activities under the 

same or similar conditions and dealing wholly independently with 

the enterprise of which it is a permanent establishment and with 

any other associated enterprise. The computation of business 

profits attributable to a permanent establishment under this 

paragraph is subject to the rules of paragraph 3 for the 

allowance of expenses incurred for purposes of earning the 

income. 

Profits attributable to a permanent establishment are 

taxable in the State where the permanent establishment is 

situated or was situated at the time the profits were derived. 

This rule incorporates the rule of Code section 864(c) (6) with 

respect to deferred payments, which is also reflected in the 

provisions of Articles 11 (Interest), 13 (Royalties), 15 

(Independent Personal Services), and 24 (Other Income) dealing 

with amounts attributable to a permanent establishment or fixed 

base. If income is attributable to a permanent establishment or 

fixed base, it is taxable by the state where the permanent 

establishment or fixed base was located, even if the income is 

deferred (i.e., not taken into account) until the permanent 

establishment or fixed base has ceased to exist. 

The concept of "attributable to" in paragraph 2 is analogous 

to, but somewhat narrower than, the concept of "effectively 

connected" in Code section 864(c). For example, the profits 

attributable to a permanent establishment may be from sources 

within or without a Contracting State. Thus, Code section 

864(c) (3) is consistent with paragraph 2, i.e., the items of 

foreign source income described in Code section 864(c) (4) (B) may 

be attributed to a u.s. permanent establishment of a Portuguese 

resident and subject to tax in the United States. The limited 

"force of attraction" rule in Code section 864(c) (3) is not 

applicable under the Convention, however, because only those 

profits attributable to a permanent establishment's assets or 

activities may be taxed by the Contracting State in which the 

permanent establishment is located. 

Paragraph 3 provides that, in determining the business 

profits of a permanent establishment, deductions shall be allowed 

for expenses that are incurred for the purposes of the permanent 
-17-

establishment. These include expenses directly incurred by the 

permanent establishment and a reasonable allocation of expenses 

incurred by the home office, or by other permanent establishments 

of the home office, as long as the expenses were incurred for the 

purposes of the permanent establishment. Such expenses include, 

but are not limited to, research and development expenses, 

interest, and executive and general administrative expenses, 

wherever incurred and without regard to whether they are actually 

reimbursed by the permanent establishment. 

In connection with paragraph 3, paragraph 6 of the Protocol 

confirms that it is understood that each Contracting state may 

apply its own domestic law, whether based on tracing or 

allocation, for attributing research and development expenses, 

interest, and other similar expenses to a permanent establishment 

situated in its territory, provided that such rules are 

consistent with the provisions of Article 7. This language 

confirms that the united States may apply its expense allocation 

rules under Treas. Reg. §§ 1.861-8 and 1.882-5. 

Paragraph 4 provides that no business profits will be 

attributed to a permanent establishment merely because it 

purchases goods or merchandise for the enterprise of which it is 

a permanent establishment. This rule refers to a permanent 

establishment that performs more than one function for the 

enterprise, including purchasing. For example, the permanent 

establishment may purchase raw materials for the enterprise's 

manufacturing operation and sell the manufactured output. While 

business profits may be attributable to the permanent establishment with respect to its sales activities, no profits are 

attributable to it with respect to its purchasing activities. If 

the sole activity of the office were the purchasing of goods or 

merchandise for the enterprise, however, the issue of the 

attribution of income would not arise. Under subparagraph 5(d) 

of Article 5 (Permanent Establishment), the office would not be a 

permanent establishment to which profits could be attributed. 

Paragraph 5 is intended to assure consistent tax treatment 

over time for permanent establishments by providing that profits 

shall be determined by the same method of accounting each year, 

unless there is good reason to change the method used. This 

provision, however, does not restrict a Contracting State from 

imposing additional requirements on a permanent establishment, as 

provided in its law, in the event of a change in accounting 

method, to prevent amounts from being duplicated or omitted (see, 

~, code section 481). 

Paragraph 6 coordinates the provisions of this Article and 

other provisions of the Convention. Under paragraph 6, where 

business profits include items of income that are dealt with 

separately under other articles of the Convention, the provisions 

Df those other articles will take precedence over the provisions 
-18-

of Article 7, except where they specifically provide to the 

contrary. Thus, for example, the taxation of interest will be 

determined by the rules of Article 11 (Interest), and not by 

Article 7, except where (as provided in paragraph 6 of Article 

11) the interest is attributable to a permanent establishment. 

This Article is subject to the "saving clause" of 

subparagraph l(b) of the Protocol. Thus, if a citizen of the 

United states who is a resident of Portugal under the Convention 

derives business profits from the United States that are not 

attributable to a permanent establishment in the United States, 

the United states may, subject to the special foreign tax credit 

rules of paragraph 3 of Article 24 (Relief from Double Taxation), 

tax those profits, notwithstanding the provisions of this 

Article. 

Article 8. SHIPPING AND AIR TRANSPORT 

This Article governs the taxation of profits from the 

operation of ships and aircraft in international traffic. Under 

paragraph 1, profits derived by an enterprise of a Contracting 

state from the operation of ships or aircraft in international 

traffic are taxable only in that state. By virtue of paragraph 6 

of Article 7 (Business Profits), profits of an enterprise of a 

contracting state that are exempt in the other Contracting state 

under this paragraph are exempt in that other State even if the 

enterprise has a permanent establishment there. 

Paragraph 2 clarifies that the provisions of paragraph 1 

apply to income from participation in a pool, joint business, or 

international operating agency. This refers to various 

arrangements for international cooperation by carriers in 

shipping and air transport. For example, if the Portuguese 

airline, TAP, were to form a consortium with airlines of other 

countries, the Portuguese participant's share of the total income 

derived by the consortium from u.s. sources would be covered by 

this Article. 

Paragraph 7 of the Protocol clarifies what income is to be 

considered profits from the operation of ships or aircraft. It 

specifies that the term "income from the operation of ships or 

aircraft in international traffic" is to be interpreted in 

accordance with paragraphs 5 to 12 of the Commentary to Article 8 

of the 1992 OECD Model. As such, it is understood that full 

charters of ships and aircraft used in international traffic are 

covered by paragraph 1. International Shipping profits include 

rents from bareboat charters made by shipping and aircraft 

companies only when such charters are occasional and incidental 

to the international traffic operations of those companies. 

Rental income from bareboat charters that are not occasional and 

incidental to the lessor's international traffic operations are 

not covered by this Article, but may be covered by other articles 
-19-

of the Convention, such as Article 13 (Royalties) or Article 7 

(Business Profits). Thus, if an oil company that owns a deepwater tug (used in its offshore oil explorations) were to make a 

bareboat rental of that tug during periods of idle use, the 

income from such rental would not be covered by Article 8 because 

such company is not normally engaged in international traffic. 

It is also understood that the occasional and incidental leasing 

of terminal facilities for the loading and unloading of cargo or 

passengers would be auxiliary activity covered by the definition 

of international shipping profits if carried on by an operating 

company. 

The "profits of an enterprise of a Contracting state from 

the operation of ships or aircraft in international traffic" 

include those profits accruing to the enterprise that are 

attributable to transport between places in the other Contracting 

state when such transport is in connection with or incidental to 

transport outside of the other Contracting state, regardless of 

whether such transport is actually conducted by the enterprise. 

That is, because such transport is not solely between places 

within the other contracting state but, rather, is in connection 

with or incidental to transport outside of the other Contracting 

state, such transport is covered by the definition of 

international traffic. For example, when a shipping enterprise 

of a Contracting state undertakes to provide, in connection with 

such transport, for the transshipment and delivery by rail of the 

transported goods to a consignee within the other contracting 

state and derives profits from either direct payments by the 

consignee or commissions from the transshipment agent, such 

profits are part of the shipping enterprise's profits from the 

international traffic and, as such, are not taxable in the other 

Contracting state. 

Profits of an enterprise of a Contracting state from the 

use, maintenance, or rental of containers, and related equipment 

for the transport of containers, used for the transport of goods 

or merchandise in international traffic are treated as royalties, 

unless attributable to a permanent establishment. However, 

paragraph 11 of the Protocol provides that such royalties are 

taxable only by the Contracting State of which the recipient is a 

resident. It is understood that in the context of paragraph 11 

of the Protocol, the term "containers" includes related equipment 

incidental to the transport of containers, such as cranes and 

trailers. 

Article 9. ASSOCIATED ENTERPRISES 

This Article incorporates into the Convention the general 

principles of Code section 482. It provides generally that when 

a resident of one Contracting state engages in transactions with 

a related person resident in the other contracting state, and 

such transactions are not conducted on an arm's length basis, the 
-20-

Contracting States may make appropriate adjustments to the 

taxable income and tax liability of such persons to reflect the 

income or tax liability with respect to such transactions that 

each person would have had if the relationship between them had 

been at arm's length. 

Paragraph 1 deals with the circumstances where an enterprise 

of a Contracting State participates directly or indirectly in the 

management, control, or capital of an enterprise of the other 

Contracting State, or when the same persons participate directly 

or indirectly in the management, control, or capital of an 

enterprise of one Contracting state and of an enterprise of the 

other Contracting state. The term "control" includes any kind of 

control, whether or not legally enforceable and however exercised 

or exercisable. If, in either circumstance, the two enterprises 

make or impose conditions in their commercial or financial 

relations that differ from the conditions that would exist in 

relations between independent enterprises, the competent 

authorities may adjust the income of the related enterprises to 

reflect the profits that would have accrued to either enterprise 

if the two enterprises had been independent of each other. 

Paragraph 2 provides that, where a Contracting State has 

made an adjustment that is consistent with the provisions of 

paragraph 1, the other Contracting state will make an appropriate 

corresponding adjustment to the tax liability of the related 

enterprise in that other state. It is understood that the other 

Contracting State need adjust its tax only if it agrees that the 

initial adjustment under paragraph 1 is appropriate. The 

Contracting state making a corresponding adjustment under this 

paragraph will take the other provisions of the Convention into 

account. For example, if the effect of a corresponding 

adjustment is to treat a Portuguese corporation as having made a 

distribution of profits to its u.s. parent corporation, the 

provisions of Article 10 (Dividends) will apply to that 

distribution. The competent authorities are authorized to 

consult, if necessary, to resolve any differences in the 

application of this paragraph. 

paragraph 2 of Article 27 (Mutual Agreement Procedure) 

requires that any corresponding adjustment made under paragraph 2 

of this Article be implemented notwithstanding any time limits or 

procedural limitations in the law of the Contracting state making 

the adjustment. 

The "saving clause" of subparagraph l(b) of the Protocol 

does not apply to paragraph 2 of this Article. Thus, U.S. 

benefits are also available to U.s. citizens and residents. 

Therefore, even if the statute of limitations has run, or there 

is a closing agreement between the Internal Revenue Service and 

the taxpayer, a refund of tax may be made in order to implement a 

corresponding adjustment. Statutory or procedural limitations, 
-21-

however, cannot be overridden to impose additional tax, because, 

under subparagraph l(a) of the Protocol, the Convention cannot 

restrict any statutory benefit. 

Paragraph 3 simply confirms that this Article does not 

restrict the provisions of either Contracting state's domestic 

law relating to the determination of the tax liability of a 

person, provided that the determination is consistent with the 

principles stated in this Article, i.e., that the adjustment 

reflects what would have transpired had the related parties been 

acting at arm's length. Thus, a Contracting State is free to 

make adjustments to losses or credits, for example, to the extent 

permitted under its domestic law and the arm's-length principles 

of this Article, although such adjustments are not specified in 

paragraph 1. 

Article 10. DIVIDENDS 

This Article provides rules for the taxation of dividends 

paid by a company resident in one Contracting State to a resident 

of the other contracting state. The article permits full 

residence state taxation and limited source state taxation of 

such dividends. 

Paragraph 1 preserves the residence State's general right to 

tax its residents on dividends paid by a company that is a 

resident of the other Contracting state. 

Paragraph 2 grants the source State the right to tax 

dividends paid by a company that is a resident of that state to a 

beneficial owner that is a resident of the other Contracting 

state. The source State tax is limited to 15 percent of the 

gross amount of the dividend. Use of the term "beneficial owner" 

emphasizes that sUbstance will prevail over form in determining 

the appropriate tax treatment, so that treaty benefits may be 

denied to a nominal recipient not entitled to the beneficial 

enjoyment of the dividend income. 

In the absence of such a provision, the united States would 

apply its statutory withholding rate of 30 percent to dividends 

paid to a Portuguese resident, and Portugal would apply its 

statutory withholding rate of 25 or 15 percent to dividends paid 

to a U.s. resident. 

paragraph 2 also provides that the competent authorities of 

the Contracting states shall by mutual agreement settle the mode 

of application of this rate limitation. For example, they may 

agree on procedures whereby determinations are made as to who is 

entitled to the reduced withholding rate under this provision. 

Paragraph 2 does not affect the taxation of the company in 

respect of the profits out of which the dividends are paid. 
-22-

Paragraph 3 provides for a lower rate of taxation at source 

if the beneficial owner is a company that is a resident of the 

other Contracting state and that, for an uninterrupted period of 

2 years prior to the payment of the dividend, owned directly at 

least 25 percent of the capital of the company paying the 

dividends. (The 25-percent ownership requirement and the 2-year 

holding period correspond to Portugal's threshold for entitlement 

to receive a 95-percent dividends received deduction.) It is 

understood that in the case of the united states "capital" refers 

to voting power. In the case of Portugal, "capital" refers to 

"social capital," the nominal paid-in value of the company's 

shares. The lower rate applicable to these dividends is 10 

percent of the gross amount with respect to dividends paid after 

December 31, 1996 and before January 1, 2000. with respect to 

dividends paid after December 31, 1999, the rate for each of the 

Contracting states will be the rate Portugal may apply to such 

dividends paid to residents of European Union member states 

provided, however, that the applicable rate shall not be less 

than 5 percent. It is understood by both the United states and 

Portugal that the term "paid" means paid or credited. 

Under its domestic law, Portugal also imposes a 5 percent 

substitute gift and inheritance tax (Imposto sobre Sucessoes e 

Doacoes por Avenca) on dividends paid by certain types of 

companies. (Portuguese legislation currently extends the 5 

percent substitute gift and inheritance tax to certain types of 

interest, but the tax has not yet been imposed on interest 

payments and was recently deferred again.) That tax is not 

covered in this or any other Portuguese income tax treaty. 

However, paragraph 8 of the Protocol provides that if in the 

future the rate of tax is increased above 5 percent,that 

increase will not apply to dividends owned by residents of the 

United states. Portugal has never before agreed to lower this 

tax by treaty or to exempt a treaty partner from future rate 

increases. The fact that Portugal regards this substitute tax as 

a gift or inheritance tax, as indicated by the Protocol, does not 

affect the determination as to whether the tax is creditable for 

U.s. income tax purposes. 

Paragraph 4 provides an exception to paragraph 3 for 

dividends paid by a U.s. regulated investment company (RIC) or 

real estate investment trust (REIT). A dividend paid by a RIC is 

subject to the 15 percent portfolio dividend rate, regardless of 

the percentage of voting shares of the RIC held directly by the 

recipient of the dividend. The purpose of the reduction of the 

direct investment dividend rate is to relieve multiple levels of 

corporate taxation in cases where the recipient of the dividend 

holds a substantial interest in the payer. This rationale does 

not justify a reduction of the rate in the case of dividends paid 

by RICs, because RICs do not pay corporate tax with respect to 

amounts distributed ~o their shareholders. Further, although 

certain amounts recelved by a RIC may have been subject to U.S. 
-23-

corporate tax (~, dividends paid by a publicly traded U.S. 

company to a RIC), it is unlikely that a 25 percent shareholding 

in a RIC by a Portuguese resident will correspond to a 25 percent 

shareholding in the entity (here, the publicly traded U.S. 

company) that has paid U.S. corporate tax. Thus, in the case of 

dividends received by a RIC and paid out to its shareholders, the 

requirement of a substantial shareholding in the entity paying 

the corporate tax is presumed not to be satisfied. 

In the case of a dividend paid by a U.S. REIT to a 

Portuguese resident, the U.S. statutory rate of 30 percent 

generally applies (except in the case of amounts subject to tax 

as effectively connected income under Code section 897(h». 

Dividends beneficially owned by an individual holding a less than 

25 percent interest in the REIT are eligible, however, for the 15 

percent portfolio dividend rate provided in paragraph 2. The 

denial of the 15 percent portfolio rate to corporate shareholders 

and 25 percent or greater individual shareholders is intended to 

prevent indirect investment in U.s. real property through a REIT 

from receiving more favorable treatment than direct investment in 

such real property. 

Paragraph 5 defines the term "dividends," as used in this 

Article, to include income from any shares, "jouissancell rights, 

mining shares, founders' shares, or other rights that are not 

debt claims and that participate in profits, and income from 

other corporate rights that is subjected to the same taxation 

treatment as income from shares by the domestic laws of the 

contracting state of which the company making a distribution is a 

resident. This is consistent with the definition used in many 

u.S. treaties and in the OECD Model. Paragraph 5 adds that 

income from arrangements, including debt obligations, will also 

be a dividend, if such arrangements carry the right to 

participate in profits and the income is characterized as a 

dividend under the domestic law of the Contracting State in which 

the income arises. In the case of Portugal, the term also 

includes profits attributed under an arrangement for 

participation in profits (associacao en participacao) . 

Paragraph 6 provides that, where dividends are attributable 

to a permanent establishment or fixed base that the beneficial 

owner maintains in the source state, they are not subject to the 

provisions of paragraph 1, 2, and 3 of this Article, but instead 

are taxable under Article 7 (Business Profits) or Article 15 

(Independent Personal Services), as appropriate. Such dividends 

will be taxed on a net basis using the rates and rules of 

taxation generally applicable to residents of the Contracting 

state in which the permanent establishment or fixed base is 

located, as modified by the Convention. 

Under paragraph 7, where a company that is a resident of a 

Contracting state derives profits or income from the other 
-24-

Contracting state, that other State may not impose tax on the 

dividends paid by the company, except insofar as such dividends 

are paid to a resident of that other State or insofar as the 

holding in respect of which the dividends are paid is effectively 

connected with a permanent establishment or a fixed base situated 

in that other State. 

Article 11. INTEREST 

Paragraph 1 confirms that interest may be taxed by the State 

in which the recipient is resident. Paragraph 2 provides that 

interest arising in a Contracting state may also be taxed by that 

State in accordance with its laws. However, if the beneficial 

owner of such interest is a resident of the other Contracting 

State, then any tax so charged may not exceed 10 percent of the 

gross amount of the interest. Use of the term "beneficial owner" 

emphasizes that sUbstance will prevail over form in determining 

the appropriate tax treatment, to deny treaty benefits to a 

nominal recipient not entitled to the beneficial enjoyment of the 

interest. 

In the absence of paragraph 2, Portugal generally would tax 

interest at 20 percent, and the United states would impose its 30 

percent statutory withholding rate on interest other than 

portfolio interest. 

Paragraph 2 also provides that the competent authorities 

shall agree on how to implement this Article, for example on 

procedures whereby determinations are made as to who is entitled 

to the reduced withholding rate provided by this Article 

(Interest) . 

Paragraph 3 provides three cases where source-based taxation 

of interest is eliminated: (1) when the debtor is the government 

of the contracting state, a political or administrative 

subdivision thereof, or any of its local authorities; (2) when 

the recipient of the interest arising in a Contracting state is 

the government of the other Contracting State, its political 

subdivisions, or local authorities, or an institution or 

organization wholly owned by them; and (3) when the interest is 

on a loan with a term of 5 years or more granted by a bank or 

other financial institution that is a resident of the other 

contracting state. The second exemption, where the creditor is 

the other government, a subdivision or local authority thereof, 

or a wholly government-owned institution is broader than the 

exemption provided under Code section 892, but is similar to the 

rule in several other U.s. income tax treaties. It is 

principally intended to benefit Eximbank and OPIC. Under its 

domestic law, Portugal would tax interest paid to those U.s. 

Government lending institutions. 
-25-

Paragraph 9 of the Protocol reserves the right of the United 

states to tax an excess inclusion with respect to a residual 

interest in a real estate mortgage investment conduit (REMIC) in 

accordance with its law. Thus, Portuguese residents will be 

taxed on such excess inclusions at the U.s. statutory rate of 

withholding tax (i.e., 30 percent). 

Paragraph 4 provides an exception to paragraphs 2 and 3 

whereby interest arising in one of the Contracting states that is 

determined by reference to the profits of the issuer or of one of 

its associated enterprises and that is beneficially owned by a 

resident of the other Contracting state may be taxed in the state 

in which it arises, and according to the laws of that state, but 

the tax so charged shall not exceed the 15-percent rate 

prescribed in paragraph 2 of Article 10 (Dividends). 

Paragraph 5 defines the term "interest," as used in the 

Convention, to include income from debt claims of every kind, 

whether or not secured by a mortgage, and, subject to paragraph 5 

of Article 10 (Dividends), whether or not carrying a right to 

participate in profits. The term "interest" includes, in 

particular, income from government securities, income from bonds 

or debentures, any premiums or prizes attaching to such 

securities, bonds or debentures, and all other income treated as 

interest by the taxation law of the source State. The definition 

does not refer to penalties and fines for late payment, which are 

frequently excluded from the treaty definition of interest. 

Paragraph 6 provides an exception from the general rule of 

paragraph 1 in cases where the beneficial owner of the interest, 

who is a resident of one contracting State, carries on business 

through a permanent establishment in the other Contracting state 

or performs independent personal services through a fixed base 

situated in that other state and the interest is attributable to 

that permanent establishment or fixed base. In such a case, the 

income is taxable to the permanent establishment or fixed base in 

accordance with the provisions of Article 7 (Business Profits) or 

Article 15 (Independent Personal Services), respectively. This 

rule applies even if the permanent establishment or fixed base no 

longer exists when the interest is taken into account, as long as 

the interest would have been attributable to the permanent 

establishment or fixed base if it had been taken into account in 

the earlier year (i.e., where the debt claim on which the 

interest is paid was attributable to the permanent establishment 

in such earlier year) . 

Paragraph 7 provides a source rule for interest for purposes 

of this Article. Under this paragraph, interest is deemed to 

arise in a Contracting state when the payer is a resident of that 

state or the state itself, or a political or administrative 

sUbdivision or local authority thereof. Where, however, the 

payer (whether or not a resident of a Contracting state) has in a 
-26-

contracting State a permanent establishment or fixed base, and 

the interest is borne by such permanent establishment or fixed 

base, then the interest shall be deemed to arise in the state in 

which the permanent establishment or fixed base is situated. 

Paragraph 8 provides that if, as a result of a special 

relationship between the payer and the beneficial owner of the 

interest, or between both of them and some other person, the 

interest paid is excessive, Article 11 applies only to the amount 

of interest payments that would have been made absent such 

special relationship (i.e., an arm's length interest payment). 

Any excess amount of interest paid remains taxable according to 

the laws of the united States and Portugal, respectively, with 

due regard to the other provisions of the Convention. Thus, for 

example, if the excess amount would be treated as a distribution 

of profits, such amount could be taxed as a dividend, rather than 

as interest, subject to the provisions of Article 10 (Dividends). 

Article 12. BRANCH TAX 

Article 12 and paragraph 10 of the Protocol explicitly 

confirm the right of each Contracting state to impose a branch 

tax, that is, a tax imposed by a Contracting state on the 

earnings of an enterprise of the other Contracting state through 

a permanent establishment in the first Contracting state. Such a 

branch tax imposed on payments or deemed payments from branch to 

home office is analogous to the withholding taxes that would be 

imposed on the dividends and interest payments made by a 

subsidiary to a parent corporation. 

In the case of the United States, paragraph l(a) defines the 

amount of branch profits subject to the tax as the portion of the 

business profits of the corporation attributable to a permanent 

establishment in the united states--or subject to tax in the 

united states on a net basis under Article 6 (Income from 

Immovable Property (Real Property» or paragraph 1 of Article 14 

(Capital Gains)--that represents the "dividend equivalent amount" 

(see Code section 884(b». 

Paragraph l(b) also covers both interest paid and excess 

interest payments, as defined by Code section 884(f), deemed to 

be received by a Portuguese corporation for which deductions are 

allowable for purposes of determining income attributable to its 

u.S. permanent establishment (or taxable on a net basis in the 

united States as income from real property or gain on real 

property), to the extent such deductible amounts exceed the 

interest paid by the permanent establishment or trade or 

business. 

Paragraph 2 provides the rate at which tax may be imposed on 

the "dividend equivalent amount" and the interest amounts 

described in paragraph 1. For the "dividend equivalent amount," 
-27-

the rate shall not exceed 15 percent (or, after 1997, the lower 

rate applicable under paragraph 3 of Article 10 (Dividends)). In 

general, branch interest may be taxed at not more than 10 

percent. However, in recognition of the withholding tax 

exemption for long-term bank loans under Article 11 (Interest), 

the rate with respect to excess interest amounts of the U.S. 

permanent establishment of a Portuguese bank is limited to 5 

percent, an average of the general 10 percent rate and the 

exemption applicable to interest on long-term bank loans. A 

similar average rate has been used for this purpose in other U.S. 

treaties, including the recent treaty with Spain. 

Portugal does not presently impose a branch tax. However, 

paragraph 10 of the Protocol provides complementary treatment for 

Portugal with respect to the branch profits taxes described in 

paragraphs 1 and 2 in the event that Portugal enacts a branch 

profits tax in the future. 

Article 13. ROYALTIES 

Article 13 confirms that royalties may be taxed by the 

Contracting State in which the recipient is resident. Royalties 

arising in a contracting State may also be taxed by that State in 

accordance with its laws. However, if the beneficial owner of 

such royalties is a resident of the other Contracting State, then 

any tax so charged may not exceed 10 percent. Use of the term 

"beneficial owner" emphasizes that substance will prevail over 

form in determining the appropriate tax treatment, so that treaty 

benefits may be denied to a nominal recipient not entitled to the 

beneficial enjoyment of the royalty income. 

In the absence of paragraph 2, Portugal would apply its 

statutory withholding rate of 25 or 15 percent on royalties and 

the United States would impose its statutory rate of 30 percent. 

Paragraph 2 provides that the competent authorities may 

agree on procedures whereby determinations are made as to who is 

entitled to the reduced withholding rate provided in this 

Article. 

Paragraph 3 defines the term "royalties" as used in the 

Convention. The term "royalties" includes payments of any kind 

received as a consideration for the use of, or the right to use, 

any copyright of a literary, artistic, or scientific work, 

including cinematographic films or films or tapes and other means 

of image or sound reproduction, any patent, trademark, design or 

model, plan, secret formula or process, or other like right or 

property; for the use or the right to use industrial, commercial, 

or scientific equipment; or for information concerning 

industrial, commercial, or scientific experience. The reference 

to "other means" of reproduction makes clear that subsequent 

technological advances will not affect the treatment of payments 
-28-

relating to the use of such means of image or sound reproduction 

from the definition of royalties. The definition of royalties 

also includes payments for technical assistance performed in a 

Contracting state by a resident of the other state where such 

assistance is related to the application of any such right or 

property. In addition, the term "royalties" includes gains 

derived from the use of such right or property to the extent that 

such gains are contingent on the productivity, use, or further 

disposition of the property. 

The united States prefers to provide a treaty exemption at 

source for royalties arising in one contracting state and derived 

and beneficially owned by a resident of the other Contracting 

state and to exclude equipment rental income from the definition 

of royalties. However, like a number of countries, Portugal 

objects strongly to these positions. The maximum treaty rate of 

10 percent represents a significant reduction of the Portuguese 

domestic law rate. The united states has accepted this rate and 

equipment rental rule in other recent treaties (see, ~, 

Mexico, Spain). 

As noted earlier in the discussion of Article 8, paragraph 

11 of the Protocol provides that royalties received in 

consideration for the use of, or the right to use containers in 

international traffic shall be taxable only in the Contracting 

State of which the recipient is a resident, unless attributable 

to a permanent establishment in the other Contracting state. 

(See below.) 

Paragraph 4 provides an exception to the rules of paragraphs 

1 and 2 in cases where a beneficial owner of royalties who is a 

resident of one Contracting state carries on or has carried on 

business through a permanent establishment in the other 

Contracting state or performs or has performed independent 

personal services through a fixed base in that other state and 

the royalties are attributable to that permanent establishment or 

fixed base, i.e., the right or property in respect of which the 

royalties are paid forms part of the business property of such 

permanent establishment or fixed base. In such a case, the 

royalties are taxable in accordance with the provisions of 

Article 7 (Business Profits) or Article 15 (Independent Personal 

Services), respectively, and the source State will generally 

retain the right of taxation. This rule applies even if the 

permanent establishment or fixed base no longer exists when the 

royalties are taken into account, as long as the royalties would 

have been attributable to the permanent establishment or fixed 

base if they had been taken into account in the earlier year 

(i.e., where the license in respect of which the royalties are 

paid was attributable to the permanent establishment in such 

earlier year) . 
-29-

Paragraph 5 provides rules for determining the source of 

royalty payments. Royalties paid by a resident of a Contracting 

state or by the government of a Contracting state, or a political 

or administrative subdivision or local authority thereof, 

generally are considered to have their source in that state. If 

the royalties are attributable to a permanent establishment or 

fixed base located in a Contracting state, they are sourced in 

that Contracting state provided that they are borne by such 

permanent establishment or fixed base. The term "borne by" is 

understood to mean allowable as a deduction in computing taxable 

income. However, when the royalties are not borne by a permanent 

establishment or fixed base located in a contracting state and 

the payer is not a resident of either Contracting state, then the 

source of the royalties is the state in which the property or 

rights are used. These rules are a compromise between the U.s. 

statutory rule, which sources royalties in the state in which the 

property or rights are used, and the Portuguese rule, which 

sources royalties according to the residence of the payer. They 

permit the United States to tax a royalty paid by a third country 

resident to a resident of Portugal for the use of property in the 

United states. A taxpayer who prefers the source rule of the 

Code may choose to be taxed under the Code, as provided in 

paragraph l(a) (i) of the Protocol. However, in that case the 

taxpayer may not claim the rate reduction under the treaty; the 

taxpayer must choose between either the treaty source and rate 

rules or the Code source and rate rules. 

Paragraph 6 provides that if, as a result of a special 

relationship between the payer and the beneficial owner of a 

royalty, or between both of them and some other person, the 

royalty paid is excessive, Article 13 applies only to the amount 

of the royalty payment that would have been made absent such 

special relationship (i.e., an arm's length royalty payment). 

Any excess amount of royalty paid remains taxable according to 

the laws of the united states and Portugal, respectively, with 

due regard to the other provisions of the Convention. If, for 

example, the excess amount is treated as a distribution of 

profits by a company under the domestic law of the source state, 

such excess amount will be taxed as a dividend, rather than as a 

royalty payment, subject to the provisions of Article 10 

(Dividends) . 

Article 14. CAPITAL GAINS 

This Article provides rules for source and residence state 

taxation of gains from the alienation of property. 

paragraph 1 provides that gains derived by a resident of one 

Contracting state from the alienation of real property situated 

in the other Contracting state may be taxed in the other (situs) 

state. 
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Paragraph 2 clarifies that the term "real property situated 

in the other Contracting state" is understood to include a united 

States real property interest when the united states is the 

"other Contracting State." Thus, the united states preserves its 

right to collect the tax imposed by Code section 897 on gains 

derived by foreign persons from the disposition of united states 

real property interests. For this purpose, the source rules of 

Code section 861(a) (5) shall determine whether a united states 

real property interest is situated in the united states. In 

addition, the paragraph clarifies that real property situated in 

Portugal includes stock, participations, or other rights in a 

company or other legal person the property of which consists, 

directly or indirectly, principally of immovable property 

situated in Portugal. 

The provisions of paragraph 2 apply "for the purposes of 

paragraph 1" of this Article 14 (Capital Gains) and have no 

effect on the right of a Contracting state to tax income covered 

in other Articles. For example, the inclusion of interests in 

certain corporations in the definition of "real property situated 

in the other contracting state" for purposes of permitting source 

country taxation of gains derived from dispositions of such 

interests under Article 14 does not affect the treatment of 

dividends paid by such corporations. Such dividends remain 

subject to the limitations on source state taxation contained in 

Article 10 (Dividends) and are not governed by the unlimited 

source state taxation right provided in Article 6 (Income from 

Immovable Property (Real Property)) with respect to real 

property. 

paragraph 3 preserves the right of the source State to tax 

gains from the alienation of movable (personal) property in 

certain circumstances. Under paragraph 3, gains from the 

alienation of movable property forming part of the business 

property of a permanent establishment that an enterprise of a 

Contracting state has or had in the other Contracting State, or 

of movable property pertaining to a fixed base that is or was 

available to a resident of a Contracting state in the other 

Contracting state for the purpose of performing independent 

personal services, including such gains from the alienation of 

such a permanent establishment (alone or with the whole 

enterprise) or of such fixed base, may be taxed in that other 

State. In the case of the United States, this preserves the 

taxing right of Code section 864(c) (7). In the case of Portugal, 

it preserves Portugal's statutory taxation of gain on property 

removed from a permanent establishment. 

Subparagraph 12(a) of the Protocol acknowledges that the 

meaning of the term "business property," as used in this 

paragraph 3 of this Article, is narrower in some cases than that 

of the term "assets," used in paragraph 2 of this Article . , despite the use In Portuguese of the same term in both places. 
-31-

However, subparagraph 12(b) of the Protocol modifies 

paragraph 3 of the Convention by providing that removal of 

personal property from a Contracting State by an enterprise of 

the other Contracting state may be treated as an alienation of 

that property and taxed by the first-mentioned State only to the 

extent of the gains accrued on the property as of the date of 

removal. In this case, subsequent taxation by the State of 

residence of the enterprise is limited to the gains accruing 

after the time of removal from the first-mentioned contracting 

state. For U.S. tax purposes, the taxpayer will carryover the 

basis of the property and will be required to sUbstantiate its 

fair market value on the date of removal from Portugal in 

computing any subsequent gain that becomes taxable in the united 

states. This provision does not affect the operation of Code 

section 987 with respect to foreign currency gain or loss on 

remittances by a qualified business unit of property or currency. 

Under this provision, each Contracting state will limit its tax 

on the resident of the other Contracting state to the gain 

accrued on the property while in its territory. In the absence 

of this provision, there could be double taxation. Portugal 

would tax the gain accrued on the property as of the date on 

which property was removed from Portugal by an enterprise of the 

United States, and the United states would tax the full gain at 

the time the property was disposed of by the U.s. enterprise. 

Subparagraph 12(c) of the Protocol ensures that a U.S. 

company that incorporates a branch in Portugal will receive the 

same beneficial treatment that Portugal is required to provide to 

a company resident in a member state of the European Union, i.e., 

deferral of the gain by carrying over to the subsidiary the basis 

of the assets of the branch. In the absence of such protection, 

Portugal would treat the reorganization in such a case as a 

taxable event and tax the gain on the assets of the branch at 

that time. 

Paragraph 4 provides that gains derived by an enterprise of 

a Contracting state from the alienation of ships or aircraft 

operated in international traffic are taxable only in that state. 

Paragraph 5 clarifies that gains from the alienation of any 

right or property described in Article 13 that are contingent on 

the productivity, use, or further disposition of the property, 

are taxable only in accordance with the provisions of Article 13, 

as provided in paragraph 3 of that Article. 

Paragraph 6 grants to the residence State the exclusive 

right to tax gains from the alienation of property other than 

property referred to in paragraphs 1 through 5. Therefore, for 

example, gains from the sale of corporate shares that are not 

attributable to a permanent establishment of the seller in the 

other State will be taxable only in the state of residence of the 

seller. 
-32-

Article 15. INDEPENDENT PERSONAL SERVICES 

The Convention deals in separate articles with different 

classes of income from personal services. Article 15 generally 

deals with income from independent personal services, while 

Article 16 (Dependent Personal services) generally deals with 

income from employment. Exceptions and additions to these 

general rules are provided for directors' fees in Article 18; for 

performance income of artistes and sportsmen in Article 19; for 

pensions in respect of personal service income and social 

security benefits in Article 20; for government service salaries 

and pensions in Article 21; for certain income of teachers and 

researchers in Article 22; and for certain income of students and 

trainees in Article 23. 

Under paragraph 1, income derived by an individual who is a 

resident of one Contracting state from the performance of 

professional services in an independent capacity, or other 

independent activities, in the other Contracting State is exempt 

from tax in that other state unless either (a) the income is 

attributable to a fixed base regularly available to the 

individual in that other state for the purpose of performing his 

services, in which case the income attributable to that fixed 

base may be taxed in that other State, or (b) the individual 

remained in that other State for more than an aggregate of 183 

days in any twelve-month period, in which case the income derived 

from the individual's activities performed in that other State 

may be taxed in that other state. The State of residence may tax 

in either case under subparagraph l(b) of the Protocol. In 

addition, under that subparagraph of the Protocol, if the 

individual is a Portuguese resident who performs independent 

personal services in the united States, and the individual is 

also a u.s. citizen, the united States may tax his income without 

regard to the restrictions of this Article, subject to the 

special foreign tax credit rules of paragraph 2 of Article 25 

(Relief from Double Taxation) . 

Paragraph 13 of the Protocol provides that the term "fixed 

base" used in paragraph 1 of Article 15 (Independent Personal 

Services) shall be interpreted according to paragraphs 3 and 4 

of the Commentary on Article 14 (Independent Personal Services) 

of the 1992 OECD Model and of any guidelines that, for the 

application of such term, may be developed by the OECD in the 

future. These paragraphs explain that the meaning of "fixed 

base" is analogous to that of the term "permanent establishment." 

Therefore, the income attributed to a fixed base will be taxed in 

accordance with principles similar to those provided in Article 7 

(Business Profits) for the taxation of business enterprises. 

paragraph 2 of Article 15 notes that the term "professional 

services" includes independent scientific, literary, artistic . . . . , educational, or teachlng actlvltles, as well as the independent 
-33-

acti~ities of physicians, lawyers, engineers, architects, 

dentlsts, and accountants. This list, which is derived from the 

OECD Model and routinely included in u.s. treaties is not 

" ' exhaustlve. The term lncludes all personal services performed by 

an individual for his own account, where he receives the income 

and bears,the risk of loss arising from the services. However, 

the taxatlon of income from the types of independent services 

that are covered by Articles 18 through 23 is governed by the 

provisions of those articles. 

Article 16. DEPENDENT PERSONAL SERVICES 

This Article deals with the taxation of remuneration derived 

by a resident of a Contracting state from the performance of 

personal services in the other Contracting State as an employee. 

However, the more specific rules of Articles 18 (Directors' 

Fees), 19 (Artistes and Sportsmen), 20 (Pensions, Annuities, 

Alimony, and Child Support), 21 (Government Service), 22 

(Teachers and Researchers) and 23 (Students and Trainees) apply 

in the case of employment income described in one of these 

articles. Thus, even though the contracting State in which 

employment income has its source generally has the right to tax 

such income under Article 16, it may not have the right to tax a 

particular type of income under the Convention if that right is 

limited by one of the aforementioned articles. Similarly, though 

a source State may have no general right of taxation under 

Article 16 with respect to a particular item of income, the State 

may have the right to tax that income under one of the 

aforementioned Articles. 

Under paragraph 1, remuneration derived by an employee who 

is a resident of a Contracting state may be taxed by his State of 

residence. However, to the extent that the remuneration is 

derived from an employment exercised (i.e., the performance of 

services) in the other contracting State, the remuneration also 

may be taxed by that other State unless the conditions specified 

in paragraph 2 are satisfied. 

Under paragraph 2, remuneration of an individual resident of 

a Contracting State that is derived from the performance of 

services as an employee within the other Contracting State may 

not be taxed by that other State if three conditions are 

satisfied: (a) the individual is present in that State for a 

period or periods not exceeding in the aggregate 183 days in any 

twelve-month period that begins or ends in the taxable year 

concerned; (b) the remuneration is paid by, or on behalf of, an 

employer who is not a resident of that State; and (c) the 

remuneration is not borne by a permanent establishment or fixed 

base that the employer has in that State. If a foreign employer 

pays the salary of an employee, but a host country corporation or 

permanent establishment reimburses the foreign employer in a 

deductible payment, neither condition (b) nor condition (c) will 
-34-

be considered to have been fulfilled. Conditions (b) and (c) are 

intended to ensure that a Contracting state will not be required 

both to allow a deduction to the payor for the amount paid and to 

exempt the employee on the amount received. In order for the 

remuneration to be exempt from tax in the source state, all three 

conditions must be satisfied. 

Paragraph 3 contains a special rule applicable to 

remuneration for services performed by an individual who is a 

resident of a Contracting state as an employee aboard a ship or 

aircraft operated in international traffic. Such remuneration 

may be taxed only in the Contracting State of residence of the 

employee if the services are performed as a member of the regular 

complement of the ship or aircraft. The "regular complement" of 

a ship or aircraft includes the crew. In the case of a cruise 

ship , it may also include others" such as entertainers or 

lecturers, employed by the shipping company to serve on the ship. 

The use of the term "regular complement" is intended to clarify 

that a person who exercises his employment as, for example, an 

insurance salesman, while aboard a ship or aircraft or a person, 

such as an entertainer who visits the ship only temporarily 

during stopovers, is not covered by this paragraph. 

If a u.s. citizen who is resident in Portugal performs 

dependent services in the united states and meets the conditions 

of paragraph 2, or is a crew member on a Portuguese ship or 

airline, and would therefore be exempt from u.s. tax if he were 

not a u.s. citizen, he is nevertheless taxable in the united 

states on his remuneration by virtue of the "saving clause" of 

subparagraph l(b) of the Protocol, subject to the special foreign 

tax credit rules of paragraph 2 of Article 25 (Relief from Double 

Taxation) . 

Article 17. LIMITATION ON BENEFITS 

Article 17 addresses the problem of "treaty shopping" by 

limiting the source basis tax benefits of the Convention to those 

residents of the other Contracting state that are either 

individuals or governmental entities or have a substantial 

business nexus with or a significant business purpose for 

residing in the other Contracting State. In a typical case of 

treaty shopping, a resident of a third State might establish an 

entity resident in a Contracting state for the purpose of 

deriving income from the other Contracting State and claiming 

treaty benefits with respect to that income. Article 17 limits 

the abuse of the Convention by limiting the benefits of the 

Convention to those persons whose residence in a Contracting 

state is not considered to have been motivated by the existence 

of the ,convention. ~bsent Article 17, the entity generally would 

be entltled to beneflts under the treaty as a resident of a 

contracting state, although the entity might be denied those 

benefits as a result of limitations (~, business purpose, 
-35-

substance-over-form, step transaction, or conduit principles) 

applicable to the transaction or arrangement under the domestic 

law of the source state. Article 17 and the anti-abuse 

provisions of domestic law complement each other, as Article 17 

generally determines whether a person has a sufficient nexus to 

the Contracting State to be entitled to benefits for treaty 

purposes, while domestic anti-abuse provisions determine whether 

a particular transaction should be recast in accordance with the 

substance of the transaction. 

Article 17 follows the basic structure of the limitation on 

benefits articles in other recent treaties, such as the one with 

Germany. The structure of the Article is as follows: Paragraph 

1 lists a series of attributes of a resident of a Contracting 

state, anyone of which will entitle that person to benefits of 

the Convention. Paragraph 2 provides a test whereby other 

residents may be granted benefits with respect to certain items 

of income. Paragraph 3 provides that benefits also may be 

granted to a person not entitled to benefits under the tests of 

paragraph 1 or 2, if the competent authority of the source state 

determines that it is appropriate to provide benefits in that 

case. Paragraph 4 defines the term "recognized securities 

exchange" as used in subparagraph l(c). Paragraph 5 defines the 

term "gross income" as used in subparagraph l(e) (ii). Paragraph 

6 provides a special rule with respect to tax-free zones. 

The first two categories of persons eligible for benefits 

from the other Contracting State under the Convention are 

individual residents of a Contracting state (subparagraph l(a» 

and the two Contracting states and their political subdivisions, 

local authorities, or wholly-owned institutions or organizations 

(subparagraph l(b». It is considered unlikely that persons 

falling into these two categories can be used improperly to 

derive treaty benefits on behalf of a third-country resident. If 

an individual is receiving income as a nominee on behalf of a 

third-country resident, benefits will be denied with respect to 

those items of income under the articles of the Convention that 

grant the benefit, because of the requirements in those articles 

that the beneficial owner of the income be a resident of a 

Contracting state. 

The third category, described in subparagraph l(C), consists 

of companies in whose principal class of shares there is 

sUbstantial and regular trading on a recognized securities 

exchange (as defined in paragraph 4) and companies more than 50 

percent of each class of whose shares are owned either by 

companies that are residents of either Contracting State, whose 

principal class of shares are so traded, or by persons referred 

to in subparagraph l(b). 

The fourth category, described in subparagraph l(d), 

includes tax-exempt organizations, including not-for-profit 
-36-

organizations, private foundations, pension trusts, and other 

organizations and arrangements, described in subparagraph 3(b) of 

the Protocol, provided that more than half of the beneficiaries, 

members, or participants, if any, in such organization, trust, or 

arrangement are residents of that Contracting state who are 

entitled under this Article to benefits of the Convention. 

The fifth category, described in subparagraph l(e) of 

paragraph 1, includes persons who satisfy two tests: the socalled "ownership" and "base erosion" tests. The "ownership" 

test requires that more than 50 percent of the beneficial 

interest in the person (or, in the case of a company, more than 

50 percent of the vote and value of each class of its shares) be 

ultimately beneficially owned by persons who are themselves 

entitled to benefits under the other tests of paragraph 1 or who 

are U.s. citizens. The "base erosion" test requires that less 

than 50 percent of the person's gross income (as defined in 

paragraph 5) be used, directly or indirectly, to meet liabilities 

(including liabilities for interest or royalties) to persons who 

are not entitled to benefits under the other tests of paragraph 1 

or are not U.S. citizens. 

The rationale for the two-part test of subparagraph l(e) 

derives from the fact that treaty benefits can be indirectly 

enjoyed not only by equity holders of an entity, but also by that 

entity's various classes of obligees, such as lenders, licensors, 

service providers, insurers and reinsurers, and others. In order 

to prevent such benefits from inuring substantially to thirdcountry residents, it is not sufficient merely to require 

sUbstantial ownership of the entity by treaty country residents 

or other qualified persons. It is also necessary to require that 

the entity's deductible payments be made in substantial part to 

such treaty country residents or other qualified persons. For 

example, a third-country resident could lend funds to a 

Portuguese-owned Portuguese corporation to be reloaned to the 

united states. The U.s. source interest income of the Portuguese 

corporation would be subject to a reduced U.s. withholding tax 

under Article 11 (Interest) of the Convention. While the 

Portuguese corporation would be subject to Portuguese income tax, 

its taxable income could be reduced to near zero by the 

deductible interest paid to the third-country resident. If, 

under a Convention between Portugal and the third country, that 

interest were exempt from Portuguese tax, the U.s. treaty benefit 

with respect to the U.s. source interest income would have flowed 

to the third-country resident. 

Paragraph 2 provides that a person resident in one of the 

Contracting states may be entitled to benefits with respect to 

certain items of income derived from the other State if it is 

engaged in the active conduct of a trade or business in its State 

of residence and satisfies certain conditions. Such a person 

will be entitled to the benefits of the Convention with respect 
-37-

to an item of income derived from the other State if the income 

is derived in connection with, or is incidental to the trade or . , bus1ness conducted in the State of residence and the trade or 

business is sUbstantial in relation to the income-producing 

activity. This determination is made separately for each item of 

income derived from the other State. 

The Convention does not define the term "substantial." As 

in the case of other recent Conventions, it is understood that it 

is not necessary that the activity in the State of residence be 

as large as the activity in the other State in order to be 

considered sUbstantial. It must, however, represent more than a 

de minimis percentage of the activity in the other State, whether 

measured in terms of income, assets, or other similar measures. 

This requirement is intended to prevent the following type of 

abuse. If, for example, a third-country resident wants to 

acquire a u.S. company that manufactures televisions sets for 

worldwide markets, but the country of residence of the investor 

has no tax treaty with the United States, any dividends generated 

by the investment would be subject to a U.S. withholding tax of 

30 percent. Absent a substantiality requirement, the investor 

could set up a Portuguese corporation that would operate a small 

outlet in Portugal to sell television sets manufactured by the 

company, and, in fact, sell a few sets per year and earn a very 

small amount of income. That Portuguese corporation could then 

acquire the u.s. manufacturer with capital prov~ded by the thirdcountry resident and produce a very large number of sets for sale 

in several countries, generating a much larger amount of income. 

It might attempt to argue that the U.s. source income is 

generated from business activities in the United States that are 

related to the television sales activity of the Portuguese 

parent, and that, therefore, the dividend income should be 

subject to a U.S. tax of 10 percent. In this example, however, 

the substantiality requirement would not be met, and the 

dividends would remain subject to withholding in the United 

States at a rate of 30 percent. 

It is intended that the provisions of paragraphs 1 and 2 

will be self-executing. Unlike the provisions of paragraph 3, 

discussed below, a claim of benefits under paragraph 1 or 2 does 

not require advance competent authority ruling or approval. The 

tax authorities may, of course, determine on review that the 

taxpayer has improperly interpreted these paragraphs and is not 

entitled to the benefits claimed. 

Paragraph 3 of Article 17 permits the competent authority of 

the State in which income arises to grant Convention benefits in 

additional cases, even if they do not meet the standards of 

paragraphs 1 or 2 (or sufficient information is not available to 

make such a determination). This discretionary provision is 

included in recognition that, with the increasing scope and 

diversity of international economic relations, there may be cases 
-38-

where significant participation by third-country residents in an 

enterprise of a Contracting state is warranted by sound business 

practice and does not indicate a motive of attempting to derive 

unintended Convention benefits. 

Paragraph 4 defines the term "recognized securities 

exchange" as used in subparagraph l(C). In the case of the 

United States, this term means the NASDAQ System owned by the 

National Association of Securities Dealers, Inc. and any stock 

exchange registered with the Securities and Exchange Commission 

as a national securities exchange for purposes of the Securities 

Exchange Act of 1934. In the case of Portugal, the term means 

the Lisbon and Oporto Stock Exchanges. The term "recognized 

securities exchange" also includes any other stock exchanges that 

may be agreed upon by the competent authorities. 

Paragraph 5 defines the term "gross income," as used in 

subparagraph l(e) (ii), generally to mean gross receipts. In the 

case of an enterprise engaged in a manufacturing or production 

business, the term "gross income" is defined to mean gross 

receipts reduced by the direct costs of labor and materials 

attributable to such manufacture or production and paid or 

payable out of such receipts. 

Paragraph 6 provides that, notwithstanding the provisions of 

paragraphs 1 through 5, the benefits of this Convention shall not 

be allowed to any person that is entitled to income tax benefits 

under the provisions of the legislation and other measures 

relating to the tax-free zones (zonas francas) of Madeira and 

Santa Maria Island, or to benefits similar to those provided with 

respect to such tax-free zones that are made available under any 

legislation or other measure adopted by either Contracting State 

after the date of signature of this Convention. For example, 

suppose a Portuguese bank located in Lisbon, whose shares are 

publicly traded on the Lisbon Stock Exchange, establishes a 

wholly owned subsidiary in Madeira's International Business 

Centre. In this case, the bank in Lisbon is entitled to treaty 

benefits under subparagraph l(C) (i) of Article 17 (Limitation of 

Benefits) because there is substantial and regular trading of its 

shares on a recognized securities exchange. Although its whollyowned Madeira subsidiary passes the requirements for benefits 

laid out in subparagraph l(c) (ii) of Article 17, the Madeira 

subsidiary is not entitled to benefits under the Convention 

because it is entitled to the benefits available to financial 

institutions located in Madeira's International Business Center 

and paragraph 6 of Article 17 applies "notwithstanding the ' 

provisions of paragraphs 1 through 5." 

Paragraph 6 further provides that the competent authorities 

shall notify each other of any future legislation or measure 

providing benefits similar to those of the tax-free zones of 
-39-

Madeira and Santa Maria Island and shall consult as to whether 

such benefits are similar. 

In order to implement paragraph 6 appropriately, it is 

essential that both countries be able to exchange relevant 

information to distinguish operations in these tax-free zones 

from other operations in Portugal or the United States that are 

entitled to the benefits of this Convention. In this connection, 

see the discussion of Article 28 (Exchange of Information), 

below. 

Article 18. DIRECTORS' FEES 

This Article provides that a Contracting State may tax the 

fees paid by a company that is a resident of that State for 

services performed by a resident of the other Contracting state 

in his capacity as a director of the company, provided that the 

services are performed outside of that other Contracting State. 

This rule is an exception to the more general rules of Article 15 

(Independent Personal Services) and Article 16 (Dependent 

Personal Services). Thus, for example, in determining whether an 

outside (non-employee) director's fee is subject to tax in the 

State of residence of the company, whether the company 

constitutes a fixed base of the director in that State is not 

relevant. 

The rule provided in this Article represents a departure 

from the former U.S. Model, which treated a corporate director in 

the same manner as any other individual performing personal 

services--outside directors would be subject to the provisions of 

Article 15 (Independent Personal Services) and inside directors 

would be subject to the provisions of Article 16 (Dependent 

Personal Services). The preferred Portuguese position is 

reflected in the OECD Model, in which a resident of one 

Contracting state who is a director of a company resident in the 

other Contracting State is subject to tax in that other State in 

respect of his directors' fees regardless of where the services 

are performed. The provision in Article 18 of the Convention 

represents a compromise between these two positions. The State 

of residence of the company may tax nonresident directors with no 

threshold, but only with respect to remuneration for services 

performed outside the other contracting state. 

This Article is subject to the "saving clause" of 

subparagraph l(b) of the Protocol. Thus, if a U.S. citizen who 

is a Portuguese resident is a director of a u.s. corporation, the 

United states may tax his full remuneration regardless of the 

place of performance of his services. 
-40-

Article 19. ARTISTES AND SPORTSMEN 

Article 19 addresses the taxation in a contracting state of 

artistes (i.e., performing artists and entertainers) and 

sportsmen resident in the other Contracting state from the 

performance of their services as such. The Article applies both 

to the income of an entertainer or sportsman who performs 

services on his own behalf and to that of one who performs his 

services on behalf of another person, either as an employee of 

that person or pursuant to any other arrangement. This Article 

applies, however, only with respect to the income of performing 

artists and sportsmen. Others involved in a performance or 

athletic event, such as producers, technicians, managers, and 

coaches, remain subject to the provisions of Article 15 or 16, as 

the case may be. 

Paragraph 1 describes the circumstances in which a 

Contracting state may tax the performance income of an 

entertainer or sportsman who is a resident of the other 

Contracting state. Income derived by a resident of a contracting 

State from his personal activities as an entertainer or sportsman 

exercised in the other Contracting state may be taxed in that 

other state if the amount of the compensation derived by the 

individual exceeds $10,000 (or its equivalent in Portuguese 

escudos) for the taxable year concerned. The $10,000 includes 

expenses reimbursed to the individual or borne on his behalf. If 

the compensation exceeds $10,000, the full amount, not just the 

excess, may be taxed in the state of performance. 

The OECD Model provides for taxation by the country of 

performance of the remuneration of entertainers with no dollar or 

time threshold. The United States introduces the dollar 

threshold test to distinguish between two groups of entertainers 

and sportsmen--those who are paid large sums of money for short 

periods of service (and who would, therefore,normally be exempt 

from host country tax under the standard personal services income 

rules) and those who earn modest amounts (and are, therefore, not 

clearly distinguishable from those who earn other types of 

personal service income). 

Paragraph 1 applies notwithstanding the provisions of 

Articles 15 (Independent Personal Services) and 16 (Dependent 

Personal Services). Thus, if an individual would otherwise be 

exempt from tax under those Articles, but is subject to tax under 

this Article, he may be taxed. An entertainer or sportsman who 

receives less than the $10,000 threshold amount, and who is 

therefore, not affected by this Article, may nevertheless b~ 

subject to tax in the host country under Article 15 or 16 if the 

tests for tax~bility u~der t~ose Articles are met. For example, 

if an enterta1ner who 1S an 1ndependent contractor earns only 

$9,000 of income for the calendar year, but the income is 

attributable to a fixed base regularly available to him in the 
-41-

state of performance, that state may tax his income under Article 

15. 

Paragraph 2 is intended to deal with the potential for abuse 

when income from a performance by an entertainer or sportsman 

does not accrue to the performer himself, but to another person. 

When the income accrues to a person other than the performer, and 

the performer (or persons related to him) participate, directly 

or indirectly, in the profits of that other person, the income 

may be taxed in the Contracting state where the performer's 

services are exercised, without regard to the provisions of the 

Convention concerning business profits (Article 7) or independent 

personal services (Article 15). Thus, even if the "employer" has 

no permanent establishment or fixed base in the host country, its 

income may be subject to tax there under the provisions of 

paragraph 2. Taxation under paragraph 2 is on the person 

providing the services of the entertainer or sportsman. This 

paragraph does not affect the rules of paragraph I, which apply 

to the entertainer or sportsman himself. The income taxable by 

virtue of paragraph 2 to the person providing the performer's 

services is reduced to the extent of salary payments to the 

performer, which are treated under paragraph 1. 

For purposes of paragraph 2, income is deemed to accrue to 

another person (i.e., the person providing the services of the 

entertainer or sportsman) if that other person has control over, 

or the right to receive, gross income in respect of the services 

of the entertainer or sportsman. Direct or indirect 

participation in the profits of a person may include, but is not 

limited to, the accrual or receipt of deferred remuneration, 

bonuses, fees, dividends, partnership income, or other income or 

distributions. 

The paragraph 2 override of the protection of Articles 7 

(Business Profits) and 15 (Independent Personal Services) does 

not apply if it is established that neither the entertainer or 

sportsman, nor any persons related to him, participate directly 

or indirectly in the profits of the person providing his 

services. This exception for non-abusive cases to the paragraph 

2 override of the Articles 7 and 15 protection of persons 

providing the services of entertainers and sportsman is not found 

in the OECD Model. 

Paragraph 3 provides an exception to the rules in paragraphs 

1 and 2 in the case of a visit to a Contracting state by an 

entertainer or sportsman who is a resident of the other 

contracting state, if the visit is substantially supported, 

directly or indirectly, by the public funds of his State of 

residence or of a political sUbdivision or local authority of 

that state. In the circumstances described, only the Contracting 

state of residence of the entertainer or sportsman may tax his 
-42-

income from the performances. A similar exception is provided in 

some other recent u.s. treaties. 

This Article is subject to the provisions of the "saving 

clause" of subparagraph l(b) of the Protocol. Thus, if an 

entertainer or sportsman who is a resident of Portugal is a 

citizen of the United States, the united states may tax all of 

his income from performances in the united states without regard 

to the provisions of this Article, subject, however, to the 

special foreign tax credit provisions of paragraph 2 of Article 

25 (Relief from Double Taxation). 

Article 20. PENSIONS, ANNUITIES, ALIMONY, AND CHILD SUPPORT 

Article 20 provides rules concerning the taxation of 

pensions, social security payments, annuities, alimony, and child 

support. However, the taxation of pensions in respect of 

governmental services rendered to a Contracting state is covered 

by the provisions of Article 21 (Governmental Service). 

Paragraph l(a) grants each Contracting state an exclusive 

taxing right with respect to pensions and other similar 

remuneration paid to its residents in consideration of past 

employment, regardless of where the past employment occurred. 

Paragraph l(b) provides that social security payments and other 

public pensions paid to a resident of a Contracting State or a 

citizen of the United States by the other Contracting state may 

be taxed in that other state. This rule includes railroad 

retirement benefits provided for in the Railroad Retirement Act 

of 1974. Social security payments may be taxable in both 

Contracting States, with the State of the recipient's residence 

allowing relief from double taxation under the provisions of 

Article 25 (Relief from Double Taxation) for any taxes imposed by 

the contracting state in which such payments arise. 

Paragraph 2 grants an exclusive taxing right with respect to 

annuities beneficially derived by a resident of a Contracting 

state. The term "annuities" is defined to mean a stated sum paid 

periodically at stated times during a specified time period, 

under an obligation to make the payments in return for adequate 

and full consideration (other than for services rendered). 

Payments for services rendered are either employment income or 

income from the performance of independent personal services. 

Paragraph 3 provides that alimony paid to a resident of a 

Contracting state is taxable only in that State and only to the 

extent that it is taxable under the domestic law of that State. 

The term "alimony" is broadly defined and intended to include all 

periodic payments legally required to be paid as a result of a 

divorce or separation (other than child support payments). Thus, 

if a divorced united states resident receives alimony payments 

from a former spouse resident in Portugal, Portugal may not 
-43-

impose tax on those payments. However, such payments are taxable 

to the recipient under u.s. domestic law. 

Paragraph 4 provides that child support payments made by a 

resident of one Contracting state to a resident of the other 

Contracting state may not be taxed by the other Contracting 

state. As with alimony, child support payments are broadly 

defined and are intended to include all periodic payments legally 

required to be paid for the support of minor children as a result 

of divorce or separation. By prohibiting the state of residence 

of the recipient from taxing such payments, the Convention 

ensures that the full amount received is available for the 

support of the minor children. 

with the exception of paragraph 4, Article 20 is subject to 

the provisions of the "saving clause" of subparagraph l(b) of the 

Protocol, so that, in general, the United States may tax its 

citizens and residents on pensions, annuities, and alimony 

without regard to any restriction in Article 20. However, by 

virtue of paragraph l(c) of the Protocol, paragraph 4 of Article 

20 is not subject to the saving clause. Thus, domestic law 

cannot overrule the exemption provided for in paragraph 4 from 

tax for child support payments. 

Article 21. GOVERNMENT SERVICE 

Article 21 applies to remuneration paid by a Contracting 

state (or political subdivision or local authority thereof) in 

respect of services rendered to that State (or political 

subdivision or local authority). Paragraph 1 applies to 

remuneration, other than pensions, for governmental service, and 

paragraph 2 applies to pensions arising from such governmental 

service. 

Paragraph l(a) grants an exclusive taxing right for 

remuneration in respect of governmental service to the 

Contracting state (or political subdivision or local authority 

thereof) to which such services are rendered, regardless of who 

renders such services or where such services are rendered. 

Paragraph l(b) provides an exception to paragraph l(a). It 

grants an exclusive taxing right for remuneration for 

governmental services to the State in which such services are 

rendered, provided that the recipient is a :esident of that state 

and is either a national of that State or dld not become a 

resident solely for the purpose of rendering the services. Thus, 

if a Portuguese resident renders services to the u.s. Government 

in Portugal, Portugal is granted the exclusive right to tax such 

services if the recipient is either a Portuguese national or did 

not become a Portuguese resident solely for the purpose of 

providing such services. 
-44-

Paragraph 2(a) grants an exclusive taxing right for any 

pension paid in consideration for past governmental services to 

the Contracting state (or political subdivision or local 

authority thereof) to which such services were rendered. 

Paragraph 2(b) provides an exception to paragraph 2(a) and grants 

an exclusive taxing right for such pensions to the other 

Contracting State if the recipient is both a resident and a 

national thereof. Thus, the united states is granted the 

exclusive right to tax a u.s. national who retires to Portugal 

and receives a pension resulting from services rendered to the 

U.S. Government. 

Under paragraph 3, payments for (and subsequent pensions 

arising from) services that are rendered in connection with a 

business carried on by a Contracting state or a political 

subdivision or local authority thereof are, as appropriate, dealt 

with under Article 15 (Independent Personal Services), 16 

(Dependent Personal Services), 18 (Directors' Fees), 19 (Artistes 

and Sportsmen), or 20 (Pensions, Annuities, Alimony, and Child 

Support). It is understood that determinations of whether 

remuneration is for services (1) rendered to a Contracting State 

(or political subdivision or local authority thereof) or (2) 

rendered in connection with a business carried on by a 

governmental agency or authority is to be made by reference to 

the laws of the state in which the income arises. 

Article 21 is subject to the provisions of the "saving 

clause" of subparagraph l(b) of the Protocol, as modified by 

subparagraph l(c) of the Protocol. With respect to the united 

States, the modified saving clause applies to u.S. citizens and 

persons having immigrant status in the United States ("green 

card" holders). Thus, the provisions of the Article that would 

grant exclusive taxing rights to Portugal are overridden by the 

saving clause if the individuals are u.S. citizens or green card 

holders. 

Article 22. TEACHERS AND RESEARCHERS 

Paragraph 1 of the Article deals with visiting professors, 

teachers, and researchers. Paragraph 1 provides that if a 

professor, teacher, or researcher who is a resident of one 

Contracting State visits the other Contracting State for the 

purpose of teaching or conducting research at an accredited 

educational or research institution, he will be exempt from tax 

in both Contracting States on his compensation for such teaching 

or research for a period not exceeding two years. An individual 

may claim the benefits of paragraph 1 only once. 

For the exemption of paragraph 1 to apply to income from 

research, the research must be undertaken in the public interest, 

and not primarily for the private benefit of a specific person or 

persons. For example, the exemption would not apply to a grant 
-45-

from a tax-exempt research organization to search for the cure to 

a disease if the results of the research become the property of a 

for-profit company. The exemption would not be denied, however, 

if the tax-exempt organization licensed the results of the 

research to a for-profit enterprise in consideration of an arm's 

length royalty consistent with its tax-exempt status. 

This Article is an exception to the "saving clause" of 

subparagraph l(b) of the Protocol. Thus, a Portuguese student, 

teacher, or researcher is entitled to the benefits of this 

Article even if such individual becomes a resident of the united 

states under the "substantial presence" test of Code section 

7701(b). The benefits of this Article are not available to a 

u.s. citizen or "green card" holder for u.s. tax purposes. 

However; Code section 911 generally exempts the first $70,000 of 

foreign earned income of a U.s. citizen or resident who spends a 

specified period of time in one or more foreign countries. 

ARTICLE 23. STUDENTS AND TRAINEES 

Paragraph 1 of Article 23 provides that a resident of a 

Contracting state who visits the other Contracting state for the 

primary purpose of studying at an accredited educational 

institution, securing training in a professional specialty, or 

studying or doing research as a recipient of a grant from a taxexempt organization shall be exempt from taxation in that 

Contracting state with respect to certain items of income during 

such per~od of study, research, or training. Paragraph l(b) 

defines those exempt items of income as: (1) payments from 

abroad for maintenance, education, study, research, or training; 

(2) grants, allowances, or awards from a governmental, religious, 

charitable, scientific, literary, or educational institution 

funding the research or studies; and (3) income from personal 

services performed in that other contracting state to the extent 

of $5,000 (or the equivalent in Portuguese escudos) per taxable 

year. The exemptions provided in paragraph 1 are available to 

the visiting student or trainee for a period not exceeding five 

years from the beginning of the visit. 

The second paragraph of the Article provides an exemption 

for residents of a Contracting state who are employed by, or 

under contract with, a resident of the same Contracting state and 

who temporarily visit the other contracting state for the purpose 

of studying at an accredited educational institution or acquiring 

technical, professional, or business training or experience in 

that other contracting state, provided such training is from a 

person other than the employer or contractor. Such student or 

trainee is exempt from taxation in the other Contracting state 

for a period of twelve consecutive months on personal 

services income to the extent of $8,000 (or the equivalent in 

Portuguese escudos) during that period. 
-46-

The Article denies its exemptions, as does paragraph 2 of 

Article 22 (Teachers and Researchers), to income from research if 

such research is undertaken primarily for the private benefit of 

a specific person or persons. For example, personal service 

income arising from research at a corporate research facility 

would, in general, not qualify as exempt income. 

The benefits conferred by the other Contracting State under 

Article 23 are subject to the provisions of the "saving clause" 

in subparagraph l(b) of the Protocol, as modified by subparagraph 

l(c) of the Protocol. With respect to the United States, the 

modified saving clause applies to u.s. citizens and persons 

having immigrant status in the United States ("green card" 

holders). Thus, the provisions of paragraph 1 that would exempt 

a Portuguese resident from taxation as a student in the United 

states are overridden by the saving clause if that student is a 

U.s. citizen or green card holder. On the other hand, if a 

student who is not a citizen or a green card holder acquires 

residence in the United states for tax purposes during that 

period of study or training, he will be exempt from tax in the 

United states on those items of income. 

ARTICLE 24. OTHER INCOME 

Paragraph 1 of Article 24 provides for exclusive residence 

state taxation of items of income that are not dealt with in the 

foregoing Articles of the Convention, unless the income arises in 

the other contracting State. If the income arises in the other 

State, that other state may also tax it. This rule applies, for 

example, to prizes, awards, or gifts, and to income from third 

states. 

Paragraph 2 provides that, if the beneficial owner of such 

other income carries on business in the other Contracting state 

through a permanent establishment or fixed base situated therein 

and the income is attributable to such permanent establishment or 

fixed base, that other income is taxable in that other State in 

accordance with the provisions of Article 7 (Business Profits) or 

15 (Independent Personal Services), rather than under the 

provisions of paragraph 1. Thus, for example, income of a U.S. 

resident that arises in a third country but is attributable to a 

permanent establishment of such person in Portugal may be taxed 

by Portugal under the provisions of Article 7. 

However, paragraph 2 does not provide an exception to the 

exclusive taxing right granted in paragraph 1 to the state of 

residence with respect to income from real property. Thus, for 

example, income derived from real property located in a third 

country is ~axable und~r.this conve~t~on only in the Contracting 

state of whlch the reclplent (beneflclal owner) is a resident, 

even if the recipient has a permanent establishment (or fixed 

base) in the other Contracting state and that real property forms 
-47-

part of the business property of that permanent establishment or 

fixed base. 

Article 24 is subject to the provisions of the "saving 

clause" of subparagraph l(b) of the Protocol so that, in general, 

the United States may tax "other income" of u.s. residents and 

citizens without regard to the Convention. Specifically, this 

means that, irrespective of the exclusive right to tax third 

country income granted to the state of residence in paragraph 1, 

the United States also may tax such income received by a resident 

of Portugal if that resident is a u.S. citizen, subject, however, 

to the special foreign tax credit provisions of paragraph 2 of 

Article 25 (Relief from Double Taxation). 

Article 25. RELIEF FROM DOUBLE TAXATION 

In this Article, each Contracting State undertakes to 

relieve double taxation by granting a foreign tax credit against 

its income tax for the income tax paid to the other country. 

Under paragraph 1, the credit granted by the United states is 

allowed in accordance with the provisions and subject to the 

limitations of U.S. law, as that law may be amended over time, so 

long as the general principle of this Article (the allowance of a 

credit) is retained. Thus, although the Convention provides for 

a foreign tax credit, the terms of the credit are determined by 

the provisions of the u.S. domestic law in effect for the taxable 

year concerned. 

The U.S. foreign tax credit is generally limited under the 

Code to the amount of u.S. tax due with respect to net foreign 

source income within the relevant foreign tax credit limitation 

category (see Code section 904(a)). However, nothing in the 

Convention would prevent the limitation of the u.S. credit from 

being applied on a per-country or overall basis or some variation 

thereof, if U.s. domestic law so provided. In general, where 

source rules are provided in the Convention for purposes of 

determining the taxing rights of the Contracting States, these 

are consistent with the Code source rules for foreign tax credit 

and other purposes. Where, however, there is an inconsistency 

between Convention and Code source rules, the Code source rules 

(~, Code section 904(g») will be used to determine the limits 

for the allowance of a credit under the Convention. 

Paragraph 2 provides an exception to the general rule of 

paragraph 1 for the tax treatment of u.S. citizens resident in 

Portugal. Under this paragraph, income that may be taxed by the 

united states solely by reason of citizenship in accordance with 

the "saving clause" of subparagraph l(b) of the Protocol shall be 

treated as having its source in Portugal to the extent necessary 

to avoid double taxation. This provision overrides u.s. law 

source rules only in those cases where u.S. law would operate to 

deny a foreign tax credit for taxes imposed by Portugal under the 
-48-

provisions of the Convention on u.s. citizens resident in 

Portugal. In no case, however, will this provision apply to 

reduce the taxes paid to the United states below the amount that 

would be paid if the individual were not a citizen of the united 

states, i.e., the u.s. tax that would be imposed if the 

individual were not a resident or citizen of the United states. 

As an example of the application of paragraph 2, consider a 

U.s. citizen resident in Portugal who receives $200 of portfolio 

dividend income from United states sources and is subject to U.s. 

tax at 28 percent ($56) on that income. Under the provisions of 

Article 10 (Dividends), the U.s. tax on portfolio dividends paid 

to residents of Portugal who are not U.s. citizens is limited to 

15 percent ($30 in this case). Suppose Portugal taxes that 

income of its resident at 40 percent ($80) and grants, in 

accordance with the provisions of its domestic law and paragraph 

2 of this Article, a credit for the $30 of U.s. tax imposed on 

the basis of source only. The net Portuguese tax would be $50 

and the combined U.s. and Portuguese tax $106. Thus, the total 

tax would be higher than the total tax in either of the two 

countries, indicating some double taxation. Under paragraph 2, 

the United states agrees to resource enough of that dividend 

income to avoid double taxation, but not to reduce the U.s. tax 

paid below the $30 it is entitled to tax at source. In this 

example, the U.s. will resource enough of the dividend to permit 

a credit of $26, thus reducing its net tax from $56 to $30. The 

total tax becomes $80 ($50 + 30), the higher of the two taxes, 

and double taxation is eliminated. 

By reason of subparagraph l(c) (i) of the Protocol, Article 

25 is not subject to the provisions of the "saving clause" of 

subparagraph l(b) of the Protocol. Thus, the saving clause 

cannot be used to deny a Portuguese resident the benefit of the 

credits provided for in paragraph 1 or to deny a U.s. citizen or 

resident the benefit of the credits provided for in paragraphs 2 

and 3. 

Subparagraph 2(a) provides that Portugal shall provide a 

"deduction from tax," i.e., a credit, for taxes paid to the 

united states by a Portuguese resident. The credit is limited, 

however, to the amount of income tax that would otherwise be owed 

to Portugal on the income that may be taxed in the United states. 

Portuguese domestic law does not give a credit similar to 

the U.s. credit for taxes deemed paid under Code section 902. 

However, subparagraph 3(b) provides the same 95-percent dividends 

received deduction for dividends received by a Portuguese company 

from a U.s. company that Portugal provides domestically for 

dividends received by a Portuguese company from another 

Portuguese company. As a practical matter, this eliminates 

double taxation of such profits. 
-49-

Subparagraph 3(c) provides that where, in accordance with 

any provision of the convention, income derived by a resident of 

Portugal is exempt from tax in Portugal, Portugal may, 

nevertheless, in calculating the amount of tax on the remaining 

income of such resident, take into account the exempted income. 

The portion of tax forgiven is thus calculated at the average tax 

rate, not at either the top or bot~om bracket rate. 

Article 26. NON-DISCRIMINATION 

This Article prohibits the discriminatory taxation by one 

Contracting state of nationals, enterprises, and residents of the 

other Contracting state. 

Paragraph 1 provides that a national of one Contracting 

state may not be subject to taxation or any connected requirement 

in the other Contracting state that is different from or more 

burdensome than the taxation and connected requirements imposed 

upon a national of that other state in the same circumstances. A 

national of a contracting state is afforded protection under this 

paragraph even if the national is not a resident of either 

Contracting State. Thus, a u.s. citizen who is resident in a 

third country is entitled, under this paragraph, to the same 

treatment in Portugal as a Portuguese national who is in similar 

circumstances. It is understood, however, that for u.s. tax 

purposes, a U.S. citizen who is resident outside the United 

States, whether in Portugal or a third country, is not in the 

same circumstances as a national of Portugal who is a resident 

outside the United States, because the U.s. citizen is subject to 

U.S. tax on his worldwide income while the Portuguese national is 

subject to U.s. tax only on U.S. source income and limited types 

of foreign source income. 

Paragraph 2 of the Article provides that a permanent 

establishment in a Contracting state of a resident of the other 

Contracting State may not be less favorably taxed in the first 

state than an enterprise of that first state that is carrying on 

the same activities. This provision, however, does not oblige a 

Contracting state to grant to a resident of the other Contracting 

state any tax allowances, reliefs, or deductions that it grants 

to its own residents on account of their civil status or family 

responsibilities. Thus, in assessing income tax on the profits 

attributable to a U.s. permanent establishment of a Portuguese 

enterprise owned by an individual resident in Portugal, the 

United states is not obligated to allow to the Portuguese 

resident the personal allowances for himself and his family that 

would be allowed if the permanent establishment were a sole 

proprietorship owned and operated by a U.S. resident. 

section 1446 of the Code imposes on any partnership with 

income effectively connected with a U.s. trade or business the 

obligation to withhold tax on amounts allocable to a foreign 
-50-

partner. In the context of the Convention, this obligation 

applies with respect to a Portuguese resident partner's share of 

the partnership income attributable to a u.s. permanent 

establishment. There is no similar obligation with respect to 

the distributive shares of u.s. resident partners. However, it 

is understood that this distinction is not a form of 

discrimination within the meaning of paragraph 2 of the Article, 

but like other withholding on nonresident aliens, is a reasonable 

method for the collection of tax from persons who are not 

continually present in the United states and as to whom it may 

otherwise be difficult for the United states to enforce its tax 

jurisdiction. If tax is over-withheld, the partner can, as in 

other cases of over-withholding, file for a refund. 

Paragraph 3 of the Article specifies that no provision of 

the Article will prevent either Contracting state from imposing 

the branch tax described in paragraph 1 of Article 12 (Branch 

Tax) . 

Paragraph 4 prohibits discrimination in the allowance of 

deductions. When a resident of a Contracting state pays interest 

or royalties or makes other disbursements to a resident of the 

other contracting state, the first Contracting state must allow a 

deduction for those payments in computing the taxable profits of 

the enterprise under the same conditions as if the payment had 

been made to a resident of the first state. An exception to this 

rule is provided for cases where the provisions of paragraph 1 of 

Article 9 (Associated Enterprises), paragraph 8 of Article 11 

(Interest), or paragraph 6 of Article 13 (Royalties) apply, 

because all of these provisions permit the denial of deductions 

in certain circumstances in respect to excessive (non-arm's 

length) payments between related persons. The term "other 

disbursements" is understood to include a reasonable allocation 

of executive and general administrative expenses, research and 

development expenses, and other expenses incurred for the benefit 

of a group of related persons that includes the person incurring 

the expense. 

Paragraph 5 requires that a Contracting State not impose 

other or more burdensome taxation or connected requirements on a 

company that is a resident of that State and that is wholly or 

partly owned or controlled, directly or indirectly, by one or 

more residents of the other Contracting state, than the 

requirements that it imposes on similar resident companies owned 

by residents of the first State. The rules of Code section 

367(e) (2) regarding liquidating distributions of appreciated 

property by a U.S. subsidiary to a foreign parent corporation, 

the provision in Code section 1446 for withholding of tax on 

distributions to non-U.S. partners (discussed above), and the 

rule of Code section 1361 under which nonresident alien 

individuals are ineligible to become shareholders of subchapter S 

corporations, do not violate the provisions of this Article. 
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Paragraph 6 provides that, notwithstanding the list of taxes 

covered by the Convention in Article 2 (Taxes Covered), the 

nondiscrimination provisions of this Article apply to taxes of 

every kind and description imposed by a Contracting state or a 

political subdivision or local authority thereof. Customs duties 

are not considered to be taxes for this purpose. 

The "saving clause" of subparagraph 1(b) of the Protocol 

does not apply to this Article, by virtue of the exceptions in 

subparagraph l(c) of the Protocol. Thus, for example, a u.s. 

citizen who is resident in Portugal may claim u.s. benefits under 

this Article. 

Article 27. MUTUAL AGREEMENT PROCEDURE 

This Article provides for cooperation between the competent 

authorities of the Contracting states to resolve disputes that 

may arise under the Convention and to resolve cases of double 

taxation not provided for in the Convention. The competent 

authorities of the two contracting States are identified in 

subparagraph l(i) of Article 3 (General Definitions). 

Paragraph 1 provides that, where a person considers that the 

actions of one or both Contracting states result or will result 

for him in taxation that is not in accordance with the 

Convention, he may present his case to the competent authority of 

his State of residence or citizenship. The case must be 

presented within three years from the first notification of the 

action resulting in taxation not in accordance with the 

Convention. It is not necessary for a person first to have fully 

exhausted the remedies provided under the national laws of the 

Contracting States before presenting a case to the competent 

authorities. 

Paragraph 2 provides that, if the competent authority of the 

Contracting State to which the case is presented considers the 

case to have merit, and if it cannot reach a satisfactory 

solution unilaterally, it will seek agreement with the competent 

authority of the other Contracting State to avoid taxation not in 

accordance with the Convention. Any agreement reached under this 

provision is to be implemented even if implementation would be 

otherwise barred by the statute of limitations or by some other 

procedural limitation, such as a closing agreement. Because, as 

specified in subparagraph l(a) (i) of the Protocol, the Convention 

cannot operate to increase a taxpayer's liability, time or other 

procedural limitations can be overridden only for the purpose of 

making refunds and not to impose additional tax. 

Paragraph 3 authorizes the competent authorities to seek to 

resolve difficulties or doubts that may arise as to the 

application or interpretation of the Convention. It is intended 

that the competent authorities may agree, for example, to the 
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same attribution of income, deductions, credits, or allowances 

between a resident of one Contracting state and its permanent 

establishment in the other; to the allocation of income, 

deductions, credits, or allowances between persons; or to settle 

a variety of interpretive issues under the Convention, including 

those regarding the characterization of items of income or of 

persons, the application of source rules to particular items of 

income, the meaning of a term, and the application of penalties, 

fines and interest. Agreements reached by the competent 

authorities under this paragraph need not conform to the domestic 

law provisions of either Contracting state. 

Paragraph 3 also authorizes the competent authorities to 

address double taxation in cases not provided for in the 

Convention, with respect to types of taxes covered by the 

Convention. An example might be double taxation arising from a 

transfer pricing adjustment between two permanent establishments 

of a third-country resident, one in the United states and the 

other in Portugal. Since no resident of a Contracting state is 

involved in the case, the Convention does not, by its terms, 

apply. The competent authorities may, nevertheless, use the 

authority of the Convention to seek to prevent double taxation. 

Paragraph 4 authorizes the competent authorities to 

communicate with each other directly, rather than through 

diplomatic channels, for these purposes. 

The benefits of this Article are also available to residents 

or citizens of either Contracting state under subparagraph 

l(c) (i) of the Protocol. Thus, rules, definitions, procedures, 

and other matters that are agreed upon by the competent 

authorities under this Article may be applied by the United 

states with respect to its citizens and residents, even if those 

agreements differ from the comparable Code provisions. 

Similarly, U.s. law may be overridden to provide refunds of tax 

to a u.s. citizen or resident under this Article. 

Article 28. EXCHANGE OF INFORMATION 

This Article provides for the exchange of information 

between the competent authorities of the Contracting States. The 

information to be exchanged is that necessary for carrying out 

the provisions of the Convention or the domestic laws of the 

united states or Portugal concerning the taxes covered by the 

Convention. For purposes of this Article, the taxes covered by 

the Convention include all taxes imposed at the national level. 

Exchange of information with respect to domestic law is 

authorized insofar as the taxation under those domestic laws is 

not contrary to th~ Convention. Thus, for example, information 

may be exchanged wlth respect to a national-level tax, even if 

the transaction to which the information relates is a purely 

domestic transaction in the requesting State. 
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Paragraph 1 states that information exchange is not 

restricted by Article 1 (Personal Scope). This means that 

information may be requested and provided under this Article with 

respect to persons who are not residents of either Contracting 

State. For example, if a third-country resident has a permanent 

establishment in Portugal that engages in transactions with a 

u.S. resident, the united States could request information with 

respect to that permanent establishment, even though it is not a 

resident of either Contracting state. such information would not 

be routinely exchanged, but may be requested in specific cases. 

Paragraph 1 also provides assurances that any information 

received in accordance with this Article will be treated as 

secret, subject to the same disclosure constraints that apply to 

information obtained under the laws of the requesting State. 

Information received may be disclosed only to persons, including 

courts and administrative bodies, concerned with the assessment, 

collection, enforcement, or prosecution in respect of the taxes 

to which the information relates, or to persons concerned with 

the administration of these taxes. The information must be used 

by such persons in connection with these designated functions. 

Persons concerned with the administration of taxes, in the United 

States, include the tax-writing committees of Congress and the 

General Accounting Office. Information received by these bodies 

is for use in the performance of their role in overseeing the 

administration of u.S. tax laws. Information received under this 

Article may be disclosed in public court proceedings or in 

judicial decisions. 

Paragraph 2 explains that the obligations undertaken in 

paragraph 1 to exchange information do not require a Contracting 

State to carry out administrative measures that are at variance 

with the laws or administrative practice of either Contracting 

state. Nor is a State obligated to supply information not 

obtainable under the laws or administrative practice of either 

State. Thus, there is no obligation to furnish information if 

either the requested state or the requesting State could not 

obtain such information for itself in a domestic case. There is 

also no obligation to disclose trade secrets or other 

information, the disclosure of which would be contrary to public 

policy. However, it is understood that bank records will be made 

available to the same extent obtainable for enforcing domestic 

tax laws, including requests for court orders where the taxpayer 

does not voluntarily comply. Paragraph 14 of the Protocol 

confirms that records of financial institutions, including 

records relating to third parties, are among the types of records 

that may be exchanged. 

A contracting State may, at its discretion, subject to the 

limitations of paragraph 2 and its domestic law, provide 

information that it is not obligated to provide under the 

provisions of this paragraph. 
-54-

Paragraph 3 provides that, when information is requested by 

a Contracting state in accordance with this Article, the other 

Contracting state is obligated to obtain the requested 

information as if the tax in question were the tax of the 

requested state, even if that State has no tax interest in the 

case to which the request relates. The paragraph further 

provides that the requesting state may specify the form in which 

information is to be provided (~, depositions of witnesses and 

authenticated copies of unedited original documents), so that the 

information can be used in the judicial proceedings of the 

requesting State. The requested State must provide the 

information in the form requested to the same extent that it can 

obtain information in that form under its own laws and 

administrative practices with respect to its own taxes. 

This Article is particularly important for implementing 

paragraph 6 of Article 17 (Limitation of Benefits), the provision 

that denies benefits under the Convention to persons entitled to 

the benefits of tax-free zones. Since the tax-free zones of 

Madeira and Santa Maria Island are within the Portuguese 

Republic, it is essential that the united states be able to 

obtain the information necessary to distinguish between income 

associated with entities that are entitled to treaty benefits and 

income associated with entities that are not entitled to treaty 

benefits. In this regard, it is often particularly difficult to 

make such distinctions for financial institutions. Portugal has 

assured the united states that it will use the same measures in 

responding to u.s. requests that it is able to use for its own 

internal purposes. This commitment extends to requests to 

Portuguese courts, if necessary, that a bank be compelled to 

provide requested information. Information supplied by Portugal 

suggests that when the Portuguese authorities ask their courts to 

obtain necessary information from Portuguese taxpayers, the 

courts provide timely, positive responses. 

Article 29. DIPLOMATIC AGENTS AND CONSULAR OFFICERS 

This Article confirms that any fiscal privileges to which 

members of diplomatic or consular missions are entitled under the 

general provisions of international law or under special 

agreements will apply, notwithstanding any provisions of this 

Convention to the contrary. This provision also applies to 

residents of either Contracting state, provided that they are not 

citizens of that State and, in the case of the United States, are 

not "green card" holders. (See subparagraph 1(c) (ii) of the 

Protocol. ) 

Article 30. ENTRY INTO FORCE 

This Article provides the rules for bringing the Convention 

into force and giving effect to its provisions. Paragraph 1 

provides that the Convention is sUbject to ratification by each 
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Contracting state, and that the instruments of ratification shall 

be exchanged as soon as possible. 

Paragraph 2 provides that the Convention will enter into 

force on the date on which instruments of ratification are 

exchanged. Subparagraph 2(a) provides that the Convention will 

have effect with respect to taxes withheld at source for amounts 

paid or credited on or after the first day of January following 

the date of entry into force. For example, if the Convention 

were to enter into force on July 1, 1995, the withholding rates 

on dividends, interest and royalties would be reduced (or 

eliminated) for amounts paid on or after January 1, 1996. For 

all other taxes, the Convention will have effect for any taxable 

year beginning on or after January 1 of the year following the 

year in which the Convention enters into force, (in this example, 

January 1, 1996). 

Article 31. TERMINATION 

The Convention is to remain in effect indefinitely, unless 

terminated by one of the Contracting States in accordance with 

the provisions of this Article. The Convention may be terminated 

at any time after five years from the date of its entry into 

force, provided that written notice has been given through 

diplomatic channels at least six months in advance. If such 

notice is given, the Convention will cease to apply in respect of 

taxes withheld on dividends, interest, and royalties paid or 

credited on or after the first day of the January following the 

expiration of the six-month period. The Convention will cease to 

apply with respect to other taxes for taxable periods beginning 

on or after the first day of January following expiration of the 

six-month period. Thus, for example, if notice of termination is 

given in July or later of a calendar year, the termination will 

not be effective as of the following January 1 but as of the 

second January 1 thereafter, since the notice period must last at 

least six months.