Autoridade Tributária e Aduaneira
DOCTRINAL SHEET
Convention: Double Taxation Convention – United States of America
Articles: 19, 20 and 21
Subject: Pension income
Case No.: 6529/2020, ruling dated 28/10/2020, by the Director of International Relations Services.
Background
The applicant requested binding clarification regarding the legal tax treatment of pensions originating in the United States of America.
The applicant is resident in Portugal and receives a pension paid by the U.S. government (including a component related to the U.S. social security system).
The applicant therefore asked which country has the right to tax those amounts in Portugal, in light of the Double Taxation Convention between Portugal and the United States.
The applicant understands that, under the Convention (particularly Articles 20 and 21), Portugal does not have taxing rights over the income mentioned.
Tax assessment
The matter concerns the classification of pension income originating in the United States and the allocation of taxing rights under the Convention for the Avoidance of Double Taxation between Portugal and the United States.
Before determining the tax treatment, it is necessary to identify the taxpayer’s tax residence.
Public pensions (government service)
Under Article 21 of the Convention, remuneration or pensions paid by a Contracting State (or one of its political subdivisions or local authorities) in respect of services rendered to that State are taxable only in that State.
Therefore, if a person resident in Portugal receives a public pension from the United States, the taxing right generally belongs exclusively to the United States.
However, an exception applies if the recipient is both a resident and a national of the other State — in that case, taxation may occur in the State of residence.
In the case examined, because the applicant receives a public pension from the United States and is not a Portuguese national, the Convention rule giving exclusive taxing rights to the United States applies.
Social security benefits
With respect to social security benefits, Article 20 of the Convention provides that social security payments made by one State to a resident of the other State may be taxed in the State that pays them.
Thus, if the taxpayer resides in Portugal and receives U.S. social security benefits, the United States retains taxing rights over that income.
Portugal may apply mechanisms to eliminate double taxation if necessary, in accordance with Article 25 of the Convention.
Conclusion
For pensions originating in the United States:
- Public pensions paid by the U.S. government are taxable exclusively in the United States.
- U.S. social security benefits may also be taxed in the United States (paying State).
- Portugal applies the Convention rules to avoid double taxation where applicable.