Portugal and P.O.E.M.: The Road not taken?

Reflections on Ruling no. 26078 and its implications for determining the Place of Effective Management (POEM) of national and foreign-registered companies under Portuguese Law.

 

This short piece was brought to life after several discussions with a dear friend and fellow tax practitioner about a (then) new Ruling issued by the Portuguese Tax Authorities, Binding Information Request (hereinafter “Ruling”) no. 26078, dated 2024-07-20, sanctioned by the Director-General of the Tax Management Area – Personal Income Tax.

The referred ruling, as far as we are aware, is the first one[1] where the Portuguese Tax Authorities (hereinafter “PTA”) has shed a light on the criteria used to determine the Place of Effective Management (“POEM”) of companies with registered office in Portugal.

It does so by enumerating several questions that, according to the PTA, once answered, should reveal the POEM of a Portuguese company. As such, those questions serve as a “roadmap” for determining whether a company with registered seat in Portugal is, indeed, a Portuguese managed company.

Despite its usefulness and the unusual clarity provided by Tax Authorities by sharing their perspective on a highly subjective and case-to-case basis criteria such as “Effective Management”, the analysis therein is strictly applicable only to cases in which the Company under scrutiny has its registered seat in Portugal.

As such, we seek to explore the “road not taken”[2] by the PTA, or rather, what is not said: is this same criterion applicable when analyzing a company with registered seat in foreign company? If it is, should it be?

But before attempting to answer such questions, one should first summarize the case, the decision’s reasoning and its practical implications.

 

1. Ruling no. 26078 in Summary

• The case involves a company with its registered office in Portugal, but whose partners and main business activities are based in Austria.
• Under Portuguese law, a company is considered resident if it has either its registered office or effective management in Portugal, leading to possible double residency if Austria applies the effective management criterion.
• In situations of dual residency, the Double Taxation Convention between Portugal and Austria prioritizes the place of effective management to resolve conflicts.
• The Ruling outlines practical questions to determine where the company is actually managed and controlled, focusing on substantive, not merely formal, criteria.
• The tax authorities provided a detailed list of questions to guide the assessment of the place of effective management in such cases.

 

Reasoning

a) Consistency with AT Doctrine and Practice

The position expressed in this Ruling is in line with Portuguese tax doctrine and with previous decisions of the PTA regarding the tax residency of legal entities. The PTA has repeatedly maintained that having a registered office in Portugal is sufficient for tax residency, but it also recognizes the possibility of dual residency when another State applies the effective management criterion. This approach is consistent with Article 2 of the Corporate Income Tax Code (CIRC) and with the general framework of double taxation treaties signed by Portugal.

b) Comparison with Previous AT Decisions

As referred earlier, this decision is not the first, but the most detailed of its kind, going further than any other thus far further by providing a detailed list of practical criteria for determining effective management, which represents an advance in terms of clarity and operationalization of the concept, going beyond some previous decisions that merely referred to the DTC without specifying the factors to be considered.

c) Interaction with the MLI and Portugal’s Reservations

The Ruling demonstrates rigor in addressing the application of the Multilateral Instrument (MLI) and Portugal’s express reservation regarding Article 4, clarifying that, in this specific case, the effective management criterion of the DTC remains applicable. This position is legally sound and shows attention to the evolution of international tax law, as well as the need for harmonization with national reservations.

d) Conclusions

Under the rationale of the ruling in question, the PTA reaffirms its standing position that the “effective management” is not a merely formal criterion, but rather a factual and substantive concept, referring to the place where the company is actually managed, administered, and controlled—that is, where the most strategic and significant decisions are made.

As such, Ruling No. 26078 deepens the analysis of practical criteria for determining effective management, highlighting the need for a case-by-case and detailed assessment of the relevant facts, in line with tax doctrine and the applicable Double Taxation Conventions.

The Tax Authority’s decision also underscores the importance of prioritizing substance over form, reinforcing that the determination of the place of effective management must be based on a concrete analysis of the circumstances of each case, particularly regarding the place where decisions are made, the residence of directors, and the actual conduct of the company’s business.

 

2. The Road Not Travelled: what about foreign registered companies?

With the main facts and conclusions outlined, we can now get to what was not said by the PTA: does this reasoning apply to companies with a registered seat outside of Portugal as well?

In practical terms, the questions posed by the Tax Authority to determine a company’s effective management are as follows:

1. Where are the meetings of the Board of Directors held?
2. Where are the company’s most important decisions made?
3. Who makes the most important decisions?
4. Where is company policy set, and who determines it?
5. Are there other corporate bodies (e.g., advisory or supervisory boards)? What kind of powers do they have?
6. Does the Board of Directors receive instructions from third parties, resident in other States, to deliberate and execute its decisions?
7. Who enters into the company’s contracts? Are these contracts subject to prior approvals or subsequent ratifications?
8. Where are the company’s contracts executed?
9. Are there management contracts with third parties who are not the elected directors?
10. Where do the other directors reside?
11. Where is the economic and business activity carried out?

 

The Tax Authority also notes that other relevant questions may exist, so this is not an exhaustive list of factors to consider in the process of determining a company’s effective management. However, it reaffirms that “in principle, by answering this set of questions, it is already possible to determine, with an acceptable degree of certainty, the place where the company is actually managed.”

The Ruling represents a significant step forward in clarifying the POEM concept for Portuguese-registered companies. However, the lack of equivalent guidance for foreign-registered companies remains a gap, potentially undermining legal certainty and the effective application of double taxation treaties.

We  are not aware of any decision in which the Tax Authority has addressed, with this level of detail, the determination of the effective management of a company with its registered office abroad.

This creates an undesired level of legal (un)certainty, as it is not rare that the PTA is called upon to determine the POEM of a foreign-based company, especially when the concept of Effective Management is crucial to attributing a certain tax benefit[3] or determining the application of a double tax treaty.

Although one could argue that these questions are perfectly suitable to assess the POEM of any company, be them foreign or Portuguese-based, it is important to recall that Article 68 of the General Tax Law, especially paragraph 14, restricts the binding nature of such Rulings solely to the tax administration itself and for a set amount of time and within the confines of the highlighted facts. Thus, these questions do not constitute, in our view, a uniform criterion for decision-making, for example, in the Portuguese Tax Courts and in situations where the company under assessment has its seat outside of Portugal.

Consequently, a taxpayer could not, in our view, use this ruling as binding precedent should its company not have its registered seat in Portugal.

Faced with this seemingly relevant “gap” in our law and jurisprudence, one is forced to look elsewhere for solutions.

In similar situations, such as determining whether a company is opaque or transparent, some leading scholars[4] have advocated for the adoption of a “principle of reciprocity,” anchored in the Double Taxation Conventions signed between countries and the idea of friendship and openness to foreign law.

We regard this position to be the right path to be followed when the PTA must rule on the effective management of a company that does not have its registered office in Portugal.

This is because, although the questions listed above are potentially applicable to any company, whether resident in or outside Portugal, the determination of the effective management of a company with its registered office abroad already interferes with the sovereignty of another State which, under its domestic law, considers that company as resident in one State or another. It is up to the Portuguese State, in accordance with the spirit of Article 8 of the Constitution of the Portuguese Republic, to accept that perspective.

In our view, this is the solution that would bring greater confidence and stability to the legal situations that arise in this area.  This position is based, first and foremost, on respect for foreign law, but also on the principle of greater proximity. In fact, there is, in principle, no compelling reason to prevent Portugal from recognizing and accepting the foreign regime, since accepting the legal solution established by foreign law in no way undermines Portuguese fiscal sovereignty or Portugal’s right to tax the income earned by resident individuals and legal entities, as well as Portuguese-source income obtained by non-residents.

 This acceptance of the foreign legal regime is also grounded in a notion of friendship and openness to foreign law, which favors a logic of reciprocity and, ultimately, a greater interpenetration between different legal systems (which merely represents the law’s recognition of economic reality).

As referred also by Miguel Teixeira de Abreu[5] this is also the position favored within the OECD Model Convention and was already reflected in the report on the taxation of partnerships. Although Portugal has made observations on the conclusions of the report and a reservation to Article 1(2) of the OECD Model Convention introduced in 2017, this is also the position of the Portuguese tax administration, at least in situations where Portugal is the source State (once again, within the debate of the taxation of transparent entities).

 

            Final remarks  

Like in Frost’s piece the PTA could not travel both roads, but, unlike the poem’s speaker, it does not seem to be sorry for it. Should the PTA choose to walk the other road, the one less traveled by, we argue that:

• The stance adopted for foreign registered companies should be one of openness and reciprocity with the foreign countries tax sovereignty.
• And, if not, at the very least, the applied criteria should be consistent with that of resident companies.

 

João Gabriel Gonçalves

June 2025

This is not legal advice. All views are my own and do not necessarily represent my employer.

[1] Although in earlier decisions, such as Ruling No. 2017 002, the AT had already emphasized the importance of the effective management criterion to resolve dual residency conflicts, referring to a case-by-case analysis of relevant facts (such as the place where decisions are made, the residence of directors, etc.). In other rulings concerning companies with non-resident partners and directors, the AT has also maintained that, in the event of a conflict, the Double Taxation Convention (DTC) prevails over domestic law, giving priority to the effective management criterion.

[2] A reference to American poet Robert Frost’s “The Road Not Taken”, published in 1916, a narrative poem that tells the story of a traveler facing a fork in the road, often understood as symbolizing life’s choices and the complexities of decision-making.

[3] For example, the Madeira Free Trade Zone Tax Benefits are limited to companies with effective management in Madeira. From our professional experience, in the wake of the European Commission’s decision to declare this special tax regime as Illegal State Aid, many of the tax inspections carried out by the Tax Authorities to recover the amounts granted under the regime used the effective management argument as one of the main points for sustaining their claims, both before the administrative procedures and Portuguese Tax Courts.

[4] Namely, Bruno Santiago and Ana Carrilho, “The tax transparency of foreign partnerships: analysis in light of Portuguese law,” Revista Fiscalidade, Year III, no. 1, 2021, available at: https://www.afp.pt/content/revistafiscalidade/ano3/2021/1/revafpanoiiin1transparenciapartnershipsbrunosantiagoana_carrilho.pdf

[5] Miguel Teixeira de Abreu, “Qualification of taxable entities and treaty protection”, IFA Branch Report (Portugal), cahiers de droit fiscal international, vol. 99b, 2014.