The impossible proof and the missing treaty protection

Portugal must end the contradiction between tax treaties and its domestic blacklist – continuing this impasse is not an option and will lead to litigation.

Reflections on CAAD Case No. 581/2023-T Involving Payments to Hong Kong

Tiago Cassiano Neves and Luisa Filgueiras, Kore Partners

This short article was prompted by a comment on a recent LinkedIn post that brought my attention to a Portuguese tax arbitration case 581/2023-T involving payments made to a blacklisted jurisdiction, namely Hong Kong.

The case illustrates the ongoing tension between domestic anti-abuse tax rules and international tax treaty obligations and non-discrimination provisions.

Portugal operates a national blacklist for tax matters that was last updated in December 2020 with the delisting of Andorra. This national list includes 80 jurisdictions (including Hong Kong) and is not connected with the EU list of non-cooperative tax jurisdictions, although it includes most of the jurisdictions included in Annex 1 (excluding the Russian Federation) and some of those included in Annex 2 of the EU list.

Portugal’s list has become more of a static legal fiction than a reflection of current international tax risk, especially as many listed jurisdictions now comply with OECD transparency standard. The fact that Portugal does not have a tacit delisting rule, similar to that of other EU jurisdictions, means that we may have jurisdictions (such as Hong Kong) that are in the list but also have an effective tax treaty with Portugal.  

Before addressing the technical issues, better outline the facts of the case, highlight what we believe to be the core issues, and reflect on a possible omission in the legal reasoning: the absence of a non-discrimination argumentation.

Arbitration Court Case 581/2023-T in Summary

1. A Portuguese company (“A Lda.”) challenged in Court a Corporate Income Tax (CIT) assessment that denied deductions along with application of autonomous CIT resulting from payments made to a company based in Hong Kong, a jurisdiction included in Portugal’s blacklist.
2. The payments related to the purchase of electronic cosmetic devices from a Chinese supplier (B Limited), who requested that payments be made to an affiliated entity (C Limited) based in Hong Kong to its bank accounts in Hong Kong and Singapore.[i]
3. The Portuguese Tax Authority (AT) disallowed the deduction of these costs and applied a 35% autonomous tax, on the basis that A Lda. had failed to prove that the transactions were genuine, not abnormal, and not inflated.[ii]
4. The Arbitration Court upheld the Tax Authority’s position, concluding that the taxpayer had not met the burden of proof and therefore the payments were not deductible and were subject to additional taxation.

The Impossible Burden of Proof: Is this a “Probatio Diabolica”?

The Court position is rooted in the presumption, albeit rebuttable, that any payments to entities in blacklisted jurisdictions are abusive, unless the taxpayer can prove otherwise. But what does actually “proof” mean here?

According to the Court:

• The law creates a double burden: the taxpayer must prove (a) that the operations were effectively carried out and (2) that they are neither abnormal in nature nor excessive in amount.
• This shift of the burden of proof displaces the presumption of truthfulness that normally protects taxpayers.[iii]
• As the Court noted, failure to rebut this presumption leads directly to denial of deduction and application of the autonomous taxation.

And here’s the problem: this is possibly a textbook example of “probatio diabolica“, the impossible burden of proving a negative.

• In cross-border trade, especially when the supplier has greater bargaining power (as was the case here), it may be impossible for a Portuguese company to obtain internal data from the foreign supplier, beyond the invoices and customs documents. Once the presumption is triggered, it flips the standard of proof and demands in practice a level of documentation that goes well beyond international commercial practice.
• Courts are often limited in their fact-finding powers in these tax cases and tend to adopt a conservative view, maintaining the presumption in the face of any glimpse of doubt. But this also places an impossible burden on the courts themselves turning this into a judicial trap, where the default outcome is the application of the presumption.

While in this case the taxpayer seems to have provided a considerable volume of documents, from invoices, shipping records, customs declarations, and even correspondence confirming the ownership structure of the Chinese and Hong Kong entities, the Court may have had its reasons to conclude that the legal threshold had not been met.  

The problem with this double effect is a disproportionately high effective tax rate on the taxpayer’s actual economic profit. Add to this the opacity and unpredictability of these rules that also create legal uncertainty, which may deter legitimate cross-border business activity, even when fully compliant.

What the Arbitration Court Didn’t Say: The non-discrimination argument

What’s perhaps is absent from the decision is any reference to the non-discrimination clause under the Portugal–Hong Kong tax treaty, which follows the Article 24 of the OECD Model.[iv]

Indeed, Portugal signed the treaty, which includes a standard OECD-style non-discrimination provision (Article 23 of the Portugal–Hong Kong tax treaty) that applies to all taxes, not just income or capital taxes.

In particular, Article 23(4) of that Treaty states that payments such as interest, royalties, and “other disbursements” made to residents of the other contracting state should be deductible under the same conditions as if paid to domestic residents (unless one of three limited exceptions applies, which in this case do not apply).[v]

So how can a payment made to a treaty-protected resident be denied deductibility and simultaneously be subject to a punitive autonomous tax that can even reach 55% if the payor has losses, solely based on the tax residence of the recipient? The answer is that in our humble opinion it should not. We explain below why.

• The blanket denial of deductibility and the application of CIT autonomous tax, in this context, are examples of functionally discriminatory provisions. The domestic rules impose a harsher treatment on payments made to Hong Kong entities than on equivalent domestic payments (where the recipient is a Portuguese corporate entity).[vi]
• The word “other disbursements” in the non-discrimination provision should be interpreted broadly to cover the case of payments for goods and services.[vii]
• The domestic rules are triggered purely by the tax residence of the recipient, which is precisely what Article 24 of the OECD Model was designed to prohibit. The domestic rules therefore fully ignore the existence of a tax treaty and treat treaty-partner residents as if the treaty didn’t exist.
• Even if the autonomous taxation levied on the payor (not the foreign recipient) could be construed as indirect discrimination falling outside the non-discrimination clause, the modus operandi of the non-deductibility clause seems to fall well within the language of 24(4) of the OECD Model.

The absence of an automatic delisting mechanism in Portugal’s implementation of blacklist rules means that treaty protections can be effectively bypassed by domestic law, leaving treaty overrides via the purview of anti-abuse provisions unchecked. One should argue that non-discrimination clause was included in tax treaties precisely to serve as a first line of defence against such unilateral derogations.

Is the actual discrimination saved by Article 27 of the Tax Treaty?

The Portugal–Hong Kong tax treaty includes a clause in Article 27 (Miscellaneous Rules) that states:

“Nothing in this Agreement shall prejudice the right of each Contracting Party to apply its domestic laws and measures concerning tax avoidance, whether or not described as such.” [viii]

At first glance, this appears to grant broad leeway to apply domestic anti-avoidance measures, even when dealing with transactions otherwise covered by the treaty. However, this provision should not be interpreted as providing a “blank cheque” to enforce discriminatory or overriding domestic rules that conflict with core treaty protections.

According to the OECD Model Commentary, if the application of domestic law and the tax treaty lead to conflicting outcomes, the tax treaty must prevail. This reflects the principle of pacta sunt servanda enshrined in Article 26 of the Vienna Convention on the Law of Treaties. Any anti-avoidance rule must also be compatible with the object and purpose of the treaty.

Portugal’s blacklist regime, which automatically denies deductibility and/or imposes autonomous taxation on the payor based solely on the recipient’s residence, goes far beyond targeted anti-abuse. It becomes systematically discriminatory, and this is exactly the type of treatment that Article 24 was designed to prevent.

Moreover, the domestic blacklist existed before the treaty was negotiated and signed, meaning that Portugal knowingly entered into the treaty without including any more specific carve-out for its blacklist rules. It instead chose the generic phrase “measures concerning tax avoidance”.

History also suggests that Article 27 was mainly intended to preserve legitimate tools such as general anti-abuse rules (GAARs) and controlled foreign corporation (CFC) regimes, in line with OECD recommendations-

In fact, clauses like Article 27 become increasingly common in treaties signed or renegotiated after the early 2000s, reflecting that trend toward protecting targeted anti-avoidance provisions. The inclusion of similar clauses in treaties with jurisdictions not included on Portugal’s domestic blacklist (e.g., Angola, Moldova, Ethiopia) further supports the view that these treaty provisions were never meant to validate or authorise all types of blacklisting related measures that operate on a strictly jurisdictional basis.

An Alternative Route: EU Law and the Limits of Blacklist-Based Taxation

In cases where treaty law provides incomplete or ambiguous protection, EU law may also step in as a safeguard, particularly via the freedom of capital movement under Article 63 of the TFEU. Indeed, a recent decision by the Portuguese Arbitration Court (Case 494/2024-T) highlights this same point.

The case involved UAE-based taxpayers, who were taxed at the elevated 35% capital gains rate solely because of their residence in a blacklisted jurisdiction, despite the existence of a tax treaty between Portugal and the UAE with an exchange of information clause. The Court held that:

• Mere residence in a blacklisted jurisdiction is not sufficient justification for discriminatory taxation;
• The 35% rate constituted a restriction on the free movement of capital under Article 63 TFEU;
• The restriction could not be justified under Article 65 TFEU because it lacked proportionality and necessity; and
• The exchange of information clause in the Portugal-UAE treaty significantly undermines any argument that capital gains earned by UAE residents are inherently more opaque or at higher risk of abuse.

As a result, the Arbitration Court annulled the assessment and affirmed the taxpayer’s right to equal treatment under EU law.

Whilst the CAAD decision in the Hong Kong case (581/2023-T) did not engage on EU law considerations as well, the reasoning in the more recent UAE case (494/2024-T) could offer also viable alternative route for similar disputes.

Several of the Portuguese blacklist regime connected measures could therefore possibly constitute a restriction on capital flows when applied to EU residents or residents of third countries investing in the EU.[ix] The same logic applies to payments made from Portugal to Hong Kong: to the extent that they relate to investments, services, or capital flows, and where no effective justification is offered, EU law may offer protection even when treaty enforcement fails.

Final Thoughts: Substance, not Suspicion, reform is urgent

The key takeaways are four:

• First, the fight against tax abuse must be principled, not paranoid. Presumptions of abuse are valid tools, but only when they come with objective rebuttal criteria and treaty-consistent safeguards. Portuguese tax authorities should immediately issue guidance on the application and set a concrete objective criteria restricting the inherent subjectivity of the rule.
• Secondly, whilst most tax treaties signed by Portugal in the last 20 years preserve the application of domestic anti-avoidance measures, this should not be interpreted in a way that nullifies core treaty guarantees, such as the deductibility of payments and equal treatment of cross-border transactions.
• Thirdly, the convergence of treaty-based and EU law-based arguments underscores a growing legal reality that blanket anti-abuse measures are no longer immune from challenge and Portuguese tax system should aim to have a higher standard of proportionality and transparency.
• Finally, Portuguese courts should also begin to apply non-discrimination provisions of tax treaties in this framework and importance of good faith in interpreting tax treaties as a reflection of the shared intent of the signatory states. It is important to recall that some of these rules undermine not just economic logic, but also Portugal’s own treaty obligations.

In the end, Portugal must choose between either realign its domestic rules with its international treaty commitments or reassess the continued relevance of these tax treaties with countries in the domestic blacklist, where they are not being meaningfully observed. Maintaining the current contradiction with Hong Kong, UAE, Bahrain, Qatar, Barbados, Kuwait, Oman, Panama, San Marino and Uruguay is simply not possible.

Tiago Cassiano Neves and Luisa Filgueiras

May 2025                                                                                 

                                                                                       ________________

[i]  It is worth noting that, in the inspection, the Portuguese Tax Authority also sought to apply the blacklist rules to payments made to entities based in Singapore, that is not in the list and has a tax treaty with Portugal. This position was later reversed and the respective adjustments to taxable income and autonomous taxation were annulled. Only the payments to Hong Kong remained in dispute.

[ii] Basically the Portuguese tax authorities sought to apply to the taxpayer Article 23-A(1)(r) and Article 88(8) of the Corporate Tax Code (CIRC).

[iii] Somewhat controversially, the Court refers to Article 75(1) of the General Tax Law (LGT) – which presumes that taxpayers’ declarations and accounting records are truthful and made in good faith – only to conclude that the mere involvement of a blacklisted jurisdiction is sufficient to override that presumption. In our view, there is a clear distinction between requiring the taxpayer to substantiate a transaction with documentation and allowing the tax authorities to dismiss all submitted evidence as inherently unreliable. The latter approach effectively creates an irrebuttable presumption, which is neither supported by the letter of Article 75 nor consistent with its protective rationale.

[iv] Whilst it is unclear whether the taxpayer raised the technical issue, the Court could have considered the relevance of the Portugal–Hong Kong tax treaty’s non-discrimination clause, given that courts may apply applicable legal norms ex officio under the principle ofiura novit curia.

[v] It should be noted that unlike the Portugal–Hong Kong treaty, for example the non-discrimination clause in the Portugal–Kuwait treaty does not include a provision comparable to Article 24(4) of the OECD Model, which ensures the equal deductibility of payments made to residents of the other contracting state. As such, the treaty offers weaker protection against domestic rules that deny deductions or impose punitive tax treatment on cross-border payments based solely on the recipient’s tax residence.

[vi] Conceptually, one could argue that the denial of deductibility constitutes a case of overt (direct) discrimination, as it explicitly imposes a more burdensome tax treatment on disbursements solely because the recipient is tax resident in a blacklisted jurisdiction. In contrast, the autonomous taxation — although formally imposed on the payor is triggered by the tax residence of the recipient and therefore operates as a form of covert (indirect) discrimination, targeting cross-border transactions.

[vii] Pursuant to Article 3(3) of the Portugal–Hong Kong Double Taxation Agreement, terms not defined in the Convention — such as “other disbursements” or “importâncias pagas”, must be interpreted according to the meaning they have under the domestic tax law of the Contracting Party applying the Convention, unless the context requires otherwise. In Portuguese tax law, this term is generally interpreted broadly, encompassing a wide range of outbound payments, including those made for commercial transactions, services, and other contractual obligations.

[viii] This provision is found in other tax treaties. For example, the UAE–Portugal treaty’s Article 27 has a similar formulation than the one in the Hong Kong treaty, stating that “It is understood that the provisions of the Convention shall not be interpreted so as to prevent the application by a Contracting State of the anti-avoidance provisions provided for in its domestic law.” This provision is found in many tax treaties signed by Portugal.

[ix] It is important to note that the so-called “grandfather clause” under Article 64(1) TFEU would likely not apply in this case. That provision would permit Portugal to maintain pre-existing restrictions on capital movements to or from third countries, but only if such restrictions were in force as of 31 December 1993. Portugal’s first official blacklist was released by Ministerial Order 377-B/94 of 14 June 1994, i.e., after the relevant cut-off date. As such, Portugal should not be able to rely on Article 64(1) TFEU to justify restrictions on outbound payments to blacklisted jurisdictions like Hong Kong, UAE and others.