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Portugal — Software Taxation, Tax Treaties, and the OECD Model

Portugal — Software Taxation, Tax Treaties, and the OECD Model

Portugal — Software Taxation, Tax Treaties, and the OECD

PortugalSoftware Taxation, Tax Treaties, and theOECD Modelby Francisco de Sousa da Câmara and Gustavo Lopes CourinhaFrancisco de Sousa da Câmara is a partner with Morais Leitão, Galvão Teles, Soares da Silva &Associados in Lisbon, and Gustavo Lopes Courinha is a senior associate with RPBA & Associados inLisbon.On February 2, 2011, the Administrative SupremeCourt (the highest jurisdiction on tax matters)adopted a decision with significant repercussions notonly for the taxation of software but also for all paymentsmade to nonresidents. The Court in its analysisdistilled various elements in assessing the applicabilityof the rules of the treaty (in this case the 1969Belgium-Portugal treaty), its interaction with theOECD model (its different versions), as well as thevalue of the Portuguese reservations and observations.The Court was requested to review a decision issuedby the Tax Court of Leiria (court of first instance),which upheld the tax authorities’ tax assessment; thecourt of first instance agreed that the periodic (yearly)payments made by a Portuguese corporation for theupdating of a software license granted for internal useonly to a Belgium resident company should be characterizedas remunerating know-how and be subject tocorporate withholding tax as royalties. The dispute betweenthe parties dealt with two issues. First, it wouldbe relevant to determine whether such income can betaxed under domestic tax provisions or not; second,assuming the existence of such right of taxation by thestate of source (Portugal), one would need to verifywhether the Belgium-Portugal income tax treaty hadprevented Portugal from taxing such income. In thecourse of their discussions and analyses, the partiesinvoked the history of tax treaties and the evolutionfrom the OECD model treaty.The Parties’ PositionsThe plaintiff was a Portuguese corporation thatqualified the payment made to the Belgium companyas a mere service fee (software license fee) not subjectto withholding tax, so it paid the fee gross. The taxauthorities did not agree with that view and made atax assessment against the Portuguese corporation becauseit was held responsible for the tax due by a nonresidentwithout a permanent establishment in Portugal.As noted above, the Tax Court of Leiria upheldthe tax authorities’ views and considered that the taxassessment was neither illegal nor jeopardized by theBelgium-Portugal treaty.In its appeal to the Supreme Court, the Portuguesecorporation contended that:• the Tax Court of Leiria did not explain and justifywhich and what type of know-how wasdeemed to have been rendered under the licenseagreement;• the payments for the use of the software licensemade in 1995, 1996, and 1997 remunerated thepossibility to use such software program in theactivity of the plaintiff, namely enabling the latterin designing metallic structures;• the Belgium company did not grant specific knowhowbut merely allowed the Portuguese corporationto apply and use a computer program for internalpurposes;(C) Tax Analysts 2011. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.TAX NOTES INTERNATIONAL MAY 16, 2011 • 585

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