By: PEDRO SIMÕES
financial@portugalresident.com
A SIMPLE definition of double taxation is tax which has been charged twice instead of once. It can occur in the same country but it is more common and more spoken of when occurring between two or more countries.
The Organisation for Economic Co-operation and Development (OECD) studies all economical and fiscal behaviour of all countries in order to reduce the problem of double taxation. All treaties to avoid double taxation are based on a model, which is normally discussed at OECD between 30 countries. They study and give answers to avoid double taxation.
Points of view
The problem of double taxation starts when both countries want to tax the same person from different points of view. The residence is one point of view, and the source of the income is another. For example, Georg is a resident in Germany and owns a property in Italy, which he rents out. Should Georg pay his tax in Germany or in Italy?
The rent can be taxed in Germany as well in Italy. Georg lives in Germany, but the source of the income is in Italy. In this case, the country of residence will offer a tax exemption or credit Georg by the amount that he paid in Italy.
Another example is if a company based in the UK receives interest from a bank deposit in Luxembourg should it pay tax in the UK or in Luxembourg? The interest can be taxed in the UK and in Luxembourg, but in Luxembourg they have a limitation to tax (10 per cent maximum of gross interests). The UK will credit the tax paid in Luxembourg.
The biggest problems in international fiscal laws are the national laws that can contradict the rules of the EC (European Community) Treaty.
In October 2006 Portugal was told its national laws contradicted the EC Treaty. Gains from the sale of a person’s permanent residence are exempt from tax if, within a period of 24 months from the date of completion of the sale, the proceeds of that sale are reinvested. Gains can be exempt from taxation if the person purchases another property, plot of land for the construction of a property or if the person invests in the construction, extension or conversion of another property in Portugal.
Freedom of movement
The European Court of Justice (ECJ) said that this particular law is against EC Treaty, because this did not guarantee the freedom of movement for European Community citizens to pursue an economic activity in another Member State. This was published in the Official Journal of European Union and is known as case C-345/05.
The Portuguese government has not changed the law, but the decision by the ECJ opens a door to all individuals selling their house, who want to buy a home in another country.
At the moment, there is also another case against Portugal regarding the taxation of gains on the sale of a property by non-residents, and a ruling is due later this year.
Please note that there are lots of different countries with different processes at the European Court of Justice, it is not just a Portuguese problem. You can take a look at the list of processes since 1989 at www.curia.europa.eu/en/content/juris/c2.htm.
In conclusion, international fiscal laws are very complex. Each case is different from another and the harmonisation of the law in the EC will take time. Meanwhile, we have to study Conventions between countries and have to be alert to the decisions of the ECJ.
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