Tax Treaty Case Law around the Globe 2024

12.1. Introduction

The Portuguese SAC (Supremo Tribunal Administrativo, or the Court) decided recently on the qualification of income arising from (i) inflation rate swap and (ii) interest rate swap agreements under the Conventions for the Avoidance of Double Taxation (CDTs) between Portugal and the UK, France and the US.

The main discussion concerns the reference made by the CDT provisions to domestic law and whether such a reference is limited by the wording of the CDT itself. The Court also addresses whether changes to domestic law which impact the allocation of taxing rights under the CDTs may be deemed treaty override or in breach of the principle of good faith.

12.2. Facts of the case

12.2.1. Applicable tax framework

Pursuant to the territorial provisions of the Portuguese CIT Code, non-resident entities without a PE in Portugal to which income is attributable are only subject to tax on Portuguese sourced income. For these purposes, “other income arising from the application of capital” and “income arising from transactions in financial derivative instruments” are deemed Portuguese sourced if the payment is made by a Portuguese resident entity or is attributed to the Portuguese PE...