Process: 364/2014-T

Date: December 19, 2014

Tax Type: IRC

Source: Original CAAD Decision

Summary

This case concerns whether the CAAD arbitral tribunal has jurisdiction to review an IRC withholding tax assessment following dismissal of an ex officio review request, and whether software licensing payments constitute royalties subject to withholding tax. The claimant, A... S.A., paid €33,695.61 in IRC withholding tax on payments to Irish company B... for software licensing, discovered during a 2010 tax audit for fiscal year 2008. After the Tax Authority dismissed the claimant's ex officio review request in January 2014, the claimant sought arbitration in April 2014. The Tax Authority raised a preliminary objection arguing the arbitral tribunal lacks material competence because the claim arose from dismissal of an ex officio review request, which itself was improper as no error was attributable to the administration. On the merits, the claimant argued the payments were for standardized software copies for end-use, not copyright transmission, and should qualify as business income under Article 7 of the Portugal-Ireland Convention rather than royalties under Article 12, thus not subject to Portuguese taxation. The claimant emphasized no reproduction or commercial exploitation rights were transferred. The Tax Authority contended the transaction involved partial transmission of software rights constituting royalties properly subject to withholding tax at the conventional rate. The case raises critical issues regarding CAAD's jurisdiction over decisions on ex officio review requests and the tax classification of software licensing payments under both domestic law and international tax treaties, particularly the OECD Model Convention Article 12 royalty definition.

Full Decision

Case No. 364/2014-T

I – Report

1.1 A…, S.A., with registered office at Avenida … (hereinafter designated as "claimant"), submits to the appreciation of this Court the legality of the decision dismissing the request for promotion of official review of the withholding tax act on Corporate Income Tax (IRC), in the total amount of €33,695.61, having, for this purpose, presented, on 30/4/2014, a request for constitution of an arbitral tribunal and for arbitral decision, in accordance with the provisions of articles 2.º, n.º 1, let. a), 3.º-A, n.º 2, and 10.º, n.º 1, let. a) and n.º 2, of Decree-Law no. 10/2011, of 20/1 (Legal Regime of Arbitration in Tax Matters, hereinafter designated as "RJAT"), in which the Tax Authority and Customs Authority (AT) is required as defendant, with a view to obtaining the "declaration of illegality of the indicated withholding tax act on IRC".

1.2 On 7/7/2014 the present Singular Arbitral Court was constituted.

1.3 Pursuant to article 17.º, n.º 1, of the RJAT, the AT was cited, as the required party, to present its response, in accordance with the terms and effects of the aforementioned article. The AT presented its response on 29/9/2014, having argued, in summary, the total lack of merit of the claimant's request. In the said response, it also raised an exception, namely: "material incompetence of the arbitral tribunal arising from the circumstance that the request for arbitral decision was formulated following the dismissal of a request for official review".

1.4 The claimant, notified of the AT's response, replied, in writing, to the exceptions raised, in a submission of 4/12/2014, which was notified to the respondent.

1.5 Considering that the claimant had already made written submissions on possible exceptions, the present Court considered, under article 16.º, let. c), of the RJAT, unnecessary the meeting provided for in article 18.º of the RJAT and that the proceedings should proceed to decision, having set the date of 19/12/2014 for the rendering of the same.

1.6 The Arbitral Court was duly constituted.

1.7 In its request for decision, the claimant invokes the "illegality of the [...] tax act of withholding tax on IRC, as maintained in the legal order by the decision dismissing the request for official review duly presented", on the grounds that, in summary: a) "the concept of royalties that emerges from article 12.º, n.º 2, of the Model Convention - and, consequently, that is implicit in n.º 3 of article 12.º of the Convention - only contemplates income arising from the transmission of copyright rights inciding on the program [...] [and], reflexively, are not to be qualified as royalties for purposes of applying the regime contained in [...] article 12.º of the Model Convention [...] income arising from the transmission of a copy of the program"; b) "the contract [concluded between the claimant and B...] constitutes a transmission of a computer program as a standardized product intended for commercialization with the end user - the now claimant - rather than a transmission of copyright rights inciding on the content of the said program and which allow its reproduction or manipulation for commercial purposes - generating royalties"; c) "the contract concluded between the claimant and B... entitles the acquisition of a predetermined number of standardized copies of the computer programs commercialized by B..., intended for professional use by the claimant, not allowing the claimant any possibility to adapt or reproduce them for commercial purposes [therefore] the payments made by the claimant under the contract concluded with B... are not susceptible to being subsumed in the conventionally relevant concept of royalties delineated by n.º 3 of article 12.º of the Convention [should rather] be treated as business income covered by article 7.º of the same Convention and, to that extent, not subject to taxation in Portugal". The claimant further alleges, in points 36.º et seq. of its request, the lack of merit of the arguments invoked by the AT in support of the legal compliance of the withholding tax act on IRC.

1.8 The now claimant concludes that the present Court should "declare the illegality of the withholding tax act on IRC [identified], thereby promoting the refund of the amount improperly withheld of €33,695.61 [...] plus the respective compensatory interest, calculated in accordance with let. c) of n.º 3 of article 43.º of the General Tax Law".

1.9 For its part, the AT alleges, in its defence, and in summary, that: a) there is "the exception of material incompetence of the present Arbitral Court to appreciate and decide the request" because the "request for arbitral decision sub judice arises from the dismissal of a request for official review of the withholding tax act, of tax on the income of collective entities (IRC), embodied in the receipt n.º ..., in the amount of €33,695.61"; b) "in the situation sub judice, the first time that A... came, before the administration, to question the validity of the withholding tax in question was when it presented the request for official review in accordance with article 78.º of the LGT and, then, even if the withholding tax act suffered from any error, such error would never be susceptible of being imputable to the Administration, therefore one would always have to conclude for the non-verification of a procedural requirement legally established for resort to the legal mechanism of official review, lacking, also for this reason, legal support the request made by A... to the Tax Administration for it to proceed with the official review of the withholding tax «on the grounds of error imputable to the services», in accordance with the second part of n.º 1 of article 78.º of the LGT"; c) "in the case at hand we are [...] before a partial transmission of software rights [therefore] the income sub judice could not legally cease to be treated as royalty and taxed as such"; d) "[there having occurred no error] the request for interest intended by the taxpayer cannot [proceed]."

1.10 The AT concludes that "the aforementioned exception should be judged to be well-founded, with the due legal effects" and that, "without conceding, should this not be understood, the request for arbitral decision should be judged to lack merit, for not being proven, absolving the Required Entity of the claims".

1.11 In June 2006, B... presented to the now claimant a proposal regarding "B... Software Licensing" (see doc. 5 attached to the case file), having, following the same, been concluded, between the said entities, a "software renewal contract".

1.12 On 7/7/2008, B... issued an invoice in the amount of €336,956.11 (see doc. 7 attached to the case file).

1.13 In 2010, within the scope of external audit action for the fiscal year 2008, the IT understood that the now claimant had not declared "in model 30 - Payments to Non-Residents, regarding payments of royalties to entity B..., nor made the respective withholding tax, having submitted the form certifying its fiscal residence" (see doc. 8 attached to the case file).

1.14 On 2/12/2010, still in the course of the aforementioned audit action, the claimant made the respective regularization, having delivered, for this purpose, the receipt n.º ..., relating to the withholding tax on payments of royalties to B..., in the amount of €33,695.61, corresponding to the rate of the Convention concluded between Portugal and Ireland. Payment of the withholding tax to the State occurred on the same day, via bank transfer.

1.15 On 3/7/2013, the now claimant came to request the official review of its withholding tax act, above referred. By order of 30/1/2014, the said request for official review was dismissed, on the grounds contained in Reports n.º …, both contained in the administrative file attached to the case.

1.16 On 30/4/2013, the claimant came to present this request for constitution of an arbitral tribunal and for arbitral decision, with a view to, in summary, obtaining the "declaration of illegality of the indicated withholding tax act on IRC".

II – Regarding the Exception of Incompetence Ratione Materiae

Having into consideration that the aforementioned exception was raised by the AT, it is justified, previously, the appreciation of the same, i.e., to know whether, as the now respondent alleges, the Court is materially incompetent by reason of the fact that the "request for arbitral decision was formulated following the dismissal of a request for official review".

Therefore, the Court must begin by determining whether this dispute falls within the scope of its material competence, as defined in article 2.º, let. a), of Ordinance no. 112-A/2011, of 22/3.

In fact, and as the AT rightly recalls, "Law no. 3-B/2010, of 28 April (State Budget for 2010), contemplated, in its article 124.º, a legislative authorization relating to arbitration in tax matters as an alternative form of jurisdictional resolution of conflicts in tax matters, providing that it should constitute an alternative procedural means to the process of judicial challenge and to the action for recognition of a right or legitimate interest enshrined in the CPPT. In the use of such legislative authorization, Decree-Law no. 10/2011, of 20 January, was approved, which regulates tax arbitration (RJAT)."

According to the Preamble to the said RJAT, the scope of competence of the arbitral courts operating in the CAAD is perfectly delimited, having been fixed "with precision which are the matters on which the arbitral court may rule".

Thus, the said preamble states that are encompassed "by the competence of the arbitral courts, the appreciation of the declaration of illegality of tax assessments, self-assessments, withholding taxes and estimated payments, the declaration of illegality of acts of determination of taxable matter, of acts of determination of taxable aggregate and of acts of fixing of patrimonial values and, likewise, the appreciation of any question, of fact or of law, relating to the draft assessment, whenever the law does not ensure the faculty of deducting the aforementioned claim."

In concrete terms, the competence of the arbitral courts operating in the CAAD arises in article 2.º, n.º 1, of the RJAT, in the following terms:

Article 2.º
Competence of arbitral courts and applicable law

1 – The competence of the arbitral courts comprises the appreciation of the following claims:

a) The declaration of illegality of acts of assessment of taxes, self-assessments, withholding taxes and estimated payments;

b) The declaration of illegality of acts of determination of taxable matter, of acts of determination of taxable aggregate, of acts of fixing of patrimonial values;

c) The appreciation of any question, of fact or of law, relating to the draft assessment decision, whenever the law does not ensure the faculty of deducting the claim referred to in the previous letter.

Note, also, that the competence of the arbitral courts is limited by the terms in which the Tax Authority and Customs Authority (AT) expressed its will to bind itself to such jurisdiction, which it did through Ordinance no. 112-A/2011, of 22/3. Pursuant to n.º 1 of article 4.º of the RJAT, the binding of the AT to arbitral jurisdiction depends on acceptance, which shall fix the limits of such binding:

Article 4.º
Binding of operation

1 – The binding of the tax administration to the jurisdiction of the courts constituted pursuant to the present law depends on an ordinance of the members of Government responsible for the areas of finance and justice, which establishes, in particular, the type and maximum value of the disputes covered.

Pursuant to let. a) of article 2.º of Ordinance no. 112-A/2011, through which the tax administration bound itself to the jurisdiction of the arbitral courts operating in the CAAD, are expressly excluded from the scope of the AT's binding to the jurisdiction of the arbitral courts operating in the CAAD, the "claims relating to the declaration of illegality of acts of self-assessment, withholding tax and estimated payment that have not been preceded by resort to the administrative route in accordance with articles 131.º to 133.º of the Code of Tax Procedure and Process."

As recalled in Arbitral Decision (AD) no. 236/2013-T, of 22/4/2014 - which we have been following closely, as we agree with it, and given its proximity to the matter under analysis -, "the Dec.-Law that institutes arbitration in tax matters contains a provision for broad arbitration of tax matters. This provision has no immediate operationality, as it is conditioned by the binding of the AT. It is a reservation of the Administration. It is incumbent upon the Administration, represented by the Ministers of Justice and Finance, and only to it, to fix by unilateral act the limits of such binding. The binding of the AT to the jurisdiction of the arbitral courts is subject to a concrete limitation: claims arising from alleged illegality of acts of self-assessment, withholding tax or estimated payment are expressly excepted from arbitration, except if their illegality has been previously raised, in accordance with articles 131.º et seq. of the CPPT."

Also according to the said AD, "one should start from the broad provision of the Decree-Law, undoubtedly intended by the legislator, but one should also bear in mind that, also by will of the legislator, the AT was given the faculty of introducing one or more generic restrictions (general and abstract) to the scope of application of arbitration. And it should thus be found that, in that context and by initiative of the AT, the said Ordinance excludes from arbitration, expressly, all claims connected with acts of «self-assessment, withholding tax or estimated payment», to then admit only those claims that have been preceded by resort to the administrative route in accordance with articles 131.º to 133.º of the Code of Tax Procedure and Process."

For better clarification, see what articles 131.º and 132.º of the CPPT provide:

Article 131.º
Challenge in case of self-assessment

1 - In case of error in self-assessment, the challenge will be obligatorily preceded by an administrative complaint directed to the head of the regional peripheral body of the tax administration, within a period of two years following the filing of the return.

2 - In case of express or tacit dismissal of the complaint, the taxpayer may challenge, within 30 days, the assessment made by it, counted, respectively, from the notification of the dismissal or from the formation of the presumption of tacit dismissal.

3 - Without prejudice to the provisions of the previous numbers, when its basis is exclusively a matter of law and the self-assessment has been made in accordance with generic guidelines issued by the tax administration, the period for challenge does not depend on a prior complaint, and the challenge must be presented within the period of n.º 1 of article 102.º.

Article 132.º
Challenge in case of withholding tax

1 - Withholding tax is susceptible of challenge by the substitute in case of error in the delivery of tax superior to that withheld.

2 - Tax delivered in excess shall be discounted in subsequent deliveries of the same nature to be made in the year of the overpayment.

3 - Should the correction referred to in the previous number not be possible, the substitute wishing to challenge shall make an administrative complaint to the competent regional peripheral body of the tax administration within a period of two years from the end of the period referred to therein.

4 - The provision of the previous number applies to the challenge by the substituted of the withholding tax that has been made to it, except when the withholding tax has merely the nature of an estimated payment of the tax due at final.

5 - Should the administrative complaint be expressly or tacitly dismissed, the taxpayer may challenge, within 30 days, the overpayment made in the same terms as that of the assessment act.

6 - To the challenge in case of withholding tax applies the provision of n.º 3 of the previous article.

It happens, however, that the tax act in question was subject to appreciation and subsequent confirmation (tax act of 2nd degree), not on the basis of an administrative complaint, but rather within the scope of a request for official review, pursuant to article 78.º of the LGT - which was filed on 3/7/2013, when the period for assessing, on the basis of an administrative complaint, the alleged illegality had already expired.

Note, on the other hand, that let. a) of article 2.º of Ordinance no. 112-A/2011, in introducing the aforementioned exception, contains a broad expression (when it refers to "resort to the administrative route") and a restrictive and exhaustive specification ("in accordance with articles 131.º to 133.º of the Code of Tax Procedure and Process").

As the aforementioned AD states, and with special interest for the matter under analysis here, given that it is a matter of a request for arbitral decision regarding dismissal of a request for official review of a withholding tax act, "the normative text [of Ordinance no. 112-A/2011] does not therefore permit finding therein a minimum of verbal correspondence, albeit imperfectly expressed, with the possibility of, in any of the three situations referred to therein (self-assessment, withholding tax and estimated payments), being able to dispense with resort to an administrative complaint, strictly speaking, for arbitration of the tax claim, even though there has been some act of second degree and, therefore, a reappreciation of the tax act challenged by the AT has occurred, in the case at hand, following a request for official review filed by the taxpayer."

The said AD continues, which is again cited here with due deference: "and such conclusion is reached independently and without prejudice to the position one adopts regarding the equation of official review, by initiative of the taxpayer, to the procedure of an administrative complaint, for purposes of judicial challenge. This is by virtue of the said clarity of the binding provision, given the double negation contained therein: certain acts are not included in the object of binding (subjection), except if preceded by an administrative complaint («preceded by… in accordance with...», the law tells us). Faced with such crystalline formulation, it is not seen how the interpreter can reach a different conclusion, especially to extend the scope of the AT's subjection to an option of the taxpayer, subjection that the legislator intended to be concretely delimited by will of the AT itself, a clear reservation of the Administration in the matter of self-binding."

In echo of AD no. 236/2013-T, but also of AD no. 51/2012-T, of 9/11, it should be understood that, in light of the voluntary nature of arbitration, the interpretation of the binding of the AT "cannot, in any case, translate itself into a restriction of the sphere of freedom of the AT, as a party, to establish the limits of its binding. This would only not be so if its position implied the total frustration of the objective intended with the institution of tax arbitration, which is not the case", emphasizing that then, as also now, "the Court does not rule on the doctrinal construction on which is based the equation of the procedure of official review, by initiative of the taxpayer, to the procedure of an administrative complaint, for purposes of judicial challenge. It simply understands that from the principle of the consecration of the arbitral procedure as a means of resolution of tax disputes alternative to the process of judicial challenge, does not automatically follow the extension of the binding of the AT to all situations in which, doctrinally and/or jurisprudentially be considered admissible such challenge."

Moreover, as pointed out by Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, in Lei Geral Tributária Anotada e Comentada, 4th Ed., 2012, p. 120, in annotation to article 11.º of the LGT, "one cannot, in interpretation, transcend language, the linguistic construction (syntactic-formal) to affirm a meaning that does not result expressed. There is therefore an essential connection between expressive language and expressed content. Whatever the object that is intended to be attributed to the norm, when it does not result expressed in the logical-literal context or when it does not appear sufficiently definable on the basis of the context itself, the object should be considered not signified".

In the same sense, also points out Jorge Lopes de Sousa, in Código de Procedimento e de Processo Tributário, Anotado e Comentado, II Volume, 6th Ed., 2011, p. 420, that, "in accordance with the provision of article 2.º, let. a), of Ordinance no. 112-A/2011, of 22 March, regarding withholding tax acts, the Tax Administration only bound itself to the jurisdiction of the arbitral courts if the request for declaration of illegality of a withholding tax act has been preceded by resort to the administrative route, that is, by an administrative complaint. For this reason, if the taxpayer wishes to opt for the arbitral route, it will always have to make use of an administrative complaint".

In summary: it not being possible to submit to arbitration the dispute relating to the claims referred to in article 2.º (object of binding) of Ordinance no. 112-A/2011, of 22/3, by not having been preceded by an administrative complaint, it appears unquestionable the incompetence, ratione materiae, of the present Arbitral Court.

Therefore, and in line with what was also concluded in AD no. 236/2013-T, it will be said that we are faced with a reservation of the Administration, as results from the regulation referred to, which means that the judicial power (common or arbitral courts) must strictly respect the decisions of the Administration, and that, in this case, what is at stake is the interpretation of an ordinance (generic administrative act) where the Administration (represented by the Minister of Justice and the Minister of Finance) decides to bind itself to the jurisdiction of tax arbitration, in the terms aforementioned above.

One is not, therefore, before a mere interpretation of a regulatory norm contained in an Ordinance. For that reason, and because it is, rather, the interpretation of a manifestation of will, albeit made in terms of a generic provision, the powers and duties of the Administration must be respected, in the exact terms that result from the regulation that led to self-binding.

On the other hand, in the accomplishment of this last interpretation, what is provided in article 9.º, n.º 2, of the Civil Code (CC) must be respected - according to which the legislative thought that does not have in the letter of the law the minimum of verbal correspondence cannot be considered by the interpreter - and in article 9.º, n.º 3, of the same Code - in accordance with which, in fixing the meaning and scope of the law, the interpreter shall presume that the legislator adopted the most appropriate solutions and knew how to express its thought in adequate terms. This n.º 3 is especially relevant, as it precludes the possibility of corrective interpretation - which has implications for the matter under analysis, given that, to include in the scope of the cited Ordinance the provision of article 78.º of the LGT (a completely different statute), such would constitute a case of evident corrective interpretation.

In the same sense, see the aforementioned AD no. 51/2012-T: "The request for review may be alternative to the complaint, may be complementary, may even in the review procedure the claim of the taxpayer have been appreciated but considering the voluntary nature of arbitration, the interpretation adopted cannot, in any case, translate itself into a restriction of the sphere of freedom of the AT, as a party, to establish the limits of its binding. This would only not be so if its position implied the total frustration of the objective intended with the institution of tax arbitration, which is not the case."

Thus, it is concluded that this Court is materially incompetent to appreciate and decide the request object of the dispute sub judice, pursuant to the provisions of articles 2.º, n.º 1, let. a), and 4.º, n.º 1, both of the RJAT, and of articles 1.º and 2.º, let. a), of Ordinance no. 112-A/2011, which constitutes a dilatory exception preventing knowledge of the merits of the case, pursuant to article 576.º, n.os 1 and 2, of the CPC, by virtue of article 2.º, let. e), of the CPPT, and article 29.º, n.º 1, let. a) and e), of the RJAT, which bars knowledge of the claim and leads to the absolution of the AT from the instance, pursuant to articles 576.º, n.º 2, and 577.º, let. a), of the CPC, by virtue of article 29.º, n.º 1, let. a) and e), of the RJAT.

Accordingly, the exception of incompetence raised by the AT is judged to be well-founded, therefore the respondent is absolved from the instance, thus rendering moot the knowledge of the question on the merits and other related questions.

III – Decision

In view of the above, it is decided:

  • To judge well-founded the dilatory exception of incompetence of this court ratione materiae raised by the respondent;

  • To absolve the respondent from the instance (articles 96.º and 278.º of the Code of Civil Procedure, by virtue of article 29.º, n.º 1, let. a) and e), of the RJAT).

The value of the case is set at €33,695.61 (thirty-three thousand six hundred ninety-five euros and sixty-one cents), pursuant to article 32.º of the CPTA and article 97.º-A of the CPPT, applicable by force of the provision of article 29.º, n.º 1, let. a) and b), of the RJAT, and article 3.º, n.º 2, of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

Costs charged to the claimant, in the amount of €1,836.00 (one thousand eight hundred thirty-six euros), pursuant to Table I of the RCPAT, given the aforementioned exception, and in compliance with the provisions of articles 12.º, n.º 2, and 22.º, n.º 4, both of the RJAT, and the provision of article 4.º, n.º 4, of the cited Regulation.

Notify.

Lisbon, 19 December 2014.

The Arbitrator

(Miguel Patrício)

Text prepared by computer, in accordance with the provision
of article 138.º, n.º 5, of the CPC, applicable by referral of article 29.º, n.º 1, let. e), of the RJAT.

The drafting of this decision is governed by the spelling prior to the Orthographic Agreement of 1990.

Frequently Asked Questions

Automatically Created

Does the CAAD arbitral tribunal have jurisdiction to review decisions on ex officio tax revision requests?
The Tax Authority argued that CAAD lacks material competence to review decisions dismissing ex officio review requests under Article 78 of the General Tax Law. The AT contended that since the claimant first challenged the withholding tax validity through the ex officio review process, and no error was attributable to the administration (as the taxpayer self-regularized during an audit), the procedural requirement for ex officio review was not met, making the arbitral tribunal incompetent to hear the subsequent challenge. However, the text does not reveal the tribunal's final ruling on this jurisdictional exception.
How are software licensing payments classified for IRC withholding tax purposes under Portuguese tax law?
Under Portuguese tax law and the Portugal-Ireland Convention, software licensing payments may be classified as either royalties (subject to IRC withholding tax) or business income (not subject to Portuguese taxation). The classification depends on whether the transaction involves transmission of copyright rights allowing reproduction or commercial exploitation (royalties under Article 12), or merely acquisition of standardized software copies for end-use (business income under Article 7). In this case, the Tax Authority classified the payments as royalties subject to withholding tax at the conventional rate applicable between Portugal and Ireland.
What is the distinction between royalties and product sales for IRC withholding tax on software transactions?
The key distinction lies in what rights are transferred. Royalties under Article 12 of the OECD Model Convention involve payments for the use of, or right to use, copyrights including software copyrights that enable reproduction, adaptation, or commercial exploitation. In contrast, product sales involve acquiring standardized software copies for personal or business end-use without rights to reproduce, modify, or commercially exploit the software. The claimant argued its contract with B... was a product sale providing predetermined standardized copies for professional use without adaptation or reproduction rights, while the Tax Authority maintained it constituted partial transmission of software rights qualifying as royalties.
Can a taxpayer challenge an IRC withholding tax act through arbitration after an administrative review denial?
Yes, a taxpayer can challenge an IRC withholding tax act through CAAD arbitration, even after administrative review denial, though jurisdictional issues may arise. In this case, the claimant sought arbitration under Articles 2(1)(a), 3-A(2), and 10 of the Legal Regime of Arbitration in Tax Matters (RJAT) after the Tax Authority dismissed its ex officio review request. However, the Tax Authority raised a preliminary objection arguing the arbitral tribunal lacked material competence when the claim arose from dismissal of an ex officio review request rather than direct challenge of the tax act, particularly when no administrative error existed to justify ex officio review.
How does the OECD Model Convention Article 12 definition of royalties apply to software payments in Portugal?
Article 12 of the OECD Model Convention defines royalties as payments for the use of, or right to use, copyrights including literary, artistic or scientific works (including cinematograph films and software). In Portugal, this definition is incorporated into bilateral tax conventions. The application to software payments depends on whether the transaction involves transfer of copyright rights enabling reproduction, adaptation, or commercial exploitation (qualifying as royalties) versus mere acquisition of standardized copies for end-use (qualifying as business income under Article 7). Portuguese tax authorities and courts examine the specific contractual terms and rights transferred to determine the proper classification, as illustrated in this case where the parties disputed whether the B... software licensing agreement transferred copyright rights or merely provided standardized product copies.