AMERICA AND THE PORTUGUESE REPUBLIC FOR THE …

CONVENTION BETWEEN THE GOVERNMENT OF 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, TOGETHER WITH A RELATED PROTOCOL

GENERAL EFFECTIVE DATE UNDER ARTICLE 30: 1 JANUARY 1996

TABLE OF ARTICLES

Article 1---------------------------------Personal Scope Article 2---------------------------------Taxes Covered Article 3---------------------------------General Definitions Article 4---------------------------------Residence Article 5---------------------------------Permanent Establishment Article 6---------------------------------Income from Immovable Property (Real Property) Article 7---------------------------------Business Profits Article 8---------------------------------Shipping and Air Transport Article 9---------------------------------Associated Enterprises Article 10--------------------------------Dividends Article 11--------------------------------Interest Article 12--------------------------------Branch Tax Article 13--------------------------------Royalties Article 14--------------------------------Capital Gains Article 15--------------------------------Independent Personal Services Article 16--------------------------------Dependent Personal Services Article 17--------------------------------Limitation on Benefits Article 18--------------------------------Directors' Fees Article 19--------------------------------Artistes and Sportsmen Article 20--------------------------------Child Support Article 21--------------------------------Government Service Article 22--------------------------------Teachers and Researchers Article 23--------------------------------Students and Trainees Article 24--------------------------------Other Income Article 25--------------------------------Relief from Double Taxation Article 26--------------------------------Non-Discrimination Article 27--------------------------------Mutual Agreement Procedure Article 28--------------------------------Exchange of Information Article 29--------------------------------Diplomatic Agents and Consular Officers Article 30--------------------------------Entry into Force Article 31--------------------------------Termination Protocol----------------------------------of 6 September, 1994 Letter of Submittal---------------------of 9 September, 1994 Letter of Transmittal-------------------of 19 September, 1994 The "Saving Clause"-------------------Paragraph 1(b) of Protocol

MESSAGE

FROM

THE PRESIDENT OF' THE UNITED STATES

TRANSMITTING

CONVENTION BETWEEN THE GOVERNMENT OF 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, TOGETHER WITH A RELATED PROTOCOL, SIGNED AT WASHINGTON

ON SEPTEMBER 6, 1994

LETTER OF SUBMITTAL

DEPARTMENT OF STATE, Washington, September 9, 1994.

THE PRESIDENT, The White House.

THE PRESIDENT: I have the honor to submit to you, with a view to its transmission to the Senate for advice and consent to ratification, the Convention 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, together with the related Protocol, signed at Washington, September 6, 1994.

This Convention is the first income tax treaty between the United States and Portugal. As such, it represents an important addition to the U.S. tax treaty network.

Like other U.S. income tax conventions, this Convention provides rules specifying when income that arises in one of the countries and is derived by residents of the other country may be taxed by the country in which the income arises (the "source" country). Rules are provided for each category of income, such as business profits, investment income, and personal service income.

In the case of investment income, such as dividends, interest, branch profits, and royalties, the Convention sets specific limits on the tax that may be imposed by the source country. Although higher than the preferred U.S. rates for OECD countries, these limits represent a significant reduction in the taxes now being imposed. The following rates apply to investment income that is not part of the profits of a permanent establishment.

Specifically, withholding taxes on dividends paid cannot exceed 15 percent. In cases where the recipient of the dividends owns at least 25 percent of the company paying the dividends the

rate will be 10 percent from 1997 through 1999 and may be lower thereafter but not lower than 5 percent) if the rate that Portugal applies to dividends paid to residents of the European Union member states is also lowered.

Withholding taxes on interest may not exceed 10 percent. In the following cases, interest arising in and owned by a resident of one country will be exempt from tax by another country: (1) the payor or the recipient of the interest is the federal government or a local authority; or (2) the interest is on a long-term loan (5 years or more) granted by a bank or other financial institution that is a resident of the other country.

Withholding on royalties may not exceed 10 percent of the gross amount of royalties.

The Convention provides conditions under which each country may tax income derived by individual residents of the other country from independent personal services or as employees, as well as social security benefits and pension benefits from public employment. Pension benefits from private employment may be taxed only by the country of residence of the recipient.

The Convention provides special rules that limit the host country's taxing authority with respect to teachers, researchers, students and trainees. Teachers and researchers from either country are exempt from tax in the other country for one visit of up to two years. Students and trainees from one country that seek training in the other country are exempt from tax in the other country on up to $5000 of income from personal services.

The Convention confirms that the country of residence will avoid international double taxation by providing relief for the tax imposed by the source country.

The Convention includes an article on limitation on benefits, designed to ensure that the benefits of the Convention are enjoyed only by those persons intended to derive such benefits. It also provides for administrative cooperation between the tax authorities of the two countries in order to improve tax compliance. Both of these provisions are essential because only by providing for adequate exchange of information is it possible to ensure that benefits are limited to entities to which the Convention intended to provide benefits. The benefits of the Convention are not available, for example to those residents of Madeira and the Azores who are entitled to the benefits of the tax-free zones of those islands.

The Convention is subject to ratification. It will enter into force on the date of the exchange of instruments of ratification. The provisions concerning taxes on dividends, interest, and royalties will take effect for amounts paid or credited on or after the first day of January of the year following the date of entry into force. Similarly, the provisions concerning other taxes generally will take effect for taxable years occurring on or after January 1 of the year following the entry into force.

A Protocol accompanies and forms an integral part of the Convention and provides further clarification with respect to the application of the Convention in specified cases.

A technical memorandum explaining in detail the provisions of the Convention will be prepared by the Department of the Treasury and will be submitted separately to the Senate Committee on Foreign Relations.

The Department of the Treasury and the Department of State cooperated in the negotiation of the Convention. It has the full approval of both Departments.

Respectfully submitted,

WARREN CHRISTOPHER.

LETTER OF TRANSMITTAL

THE WHITE HOUSE, September 19, 1994.

To the Senate of the United States:

I transmit herewith for Senate advice and consent to ratification the Convention 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, together with a related Protocol, signed at Washington on September 6, 1994. Also transmitted for the information of the Senate is the report of the Department of State with respect to the Convention.

The Convention is the first income tax convention between the United States of America and the Portuguese Republic. The Convention reflects current income tax treaty policies of the two countries.

I recommend that the Senate give early and favorable consideration to the Convention and related Protocol and give its advice and consent to ratification.

WILLIAM J. CLINTON.

CONVENTION 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

The Government of the United States of America and the Government of the Portuguese Republic, desiring to conclude a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, have agreed as follows:

ARTICLE 1 Personal Scope

This Convention shall apply to persons who are residents of one or both of the Contracting States, except as otherwise provided in the Convention.

ARTICLE 2 Taxes Covered

1. The existing taxes to which this Convention shall apply are: (a) in Portugal: (i) Personal income tax (Imposto sobre o Rendimento das Pessoas Singulares - IRS); (ii) Corporate income tax (Imposto sobre o Rendimento das Pessoas Colectivas - IRC); and (iii) Local surtax on corporate income tax (Derrama), (hereinafter referred to as "Portuguese tax"). (b) in the United States: (i) the Federal income taxes imposed by the Internal Revenue Code (but excluding social security contributions); and (ii) the excise tax with respect to the investment income of private foundations under section 4940 of the Internal Revenue Code, as it may be amended from time to time without changing the general principle thereof, (hereinafter referred to as "United States tax").

2. The Convention shall apply also to any identical or substantially similar taxes which are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes. The competent authorities of the Contracting State shall notify each other of any significant changes that have been made in their respective taxation laws and of any official published material concerning the application of the Convention.

ARTICLE 3 General Definitions

1. For the purposes of this Convention, unless the context otherwise requires: (a) the terms "a Contracting State" and "the other Contracting State" mean

Portugal or the United States as the context requires; (b) the term "Portugal" means the territory of the Portuguese Republic situated in

the European Continent, the archipelagoes of Azores and Madeira, the respective territorial sea 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;

(c) the term "United States" means the United States of America and, when used geographically, means the States thereof, the District of Columbia, the territorial sea adjacent to those States, and any other zone adjacent thereto in 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;

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