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France and Portugal Implement LOB Provisions in Tax Treaty

Robert Sledz  

· 5 minute read

Robert Sledz  

· 5 minute read

On December 1, 2017, the protocol signed by France and Portugal in Lisbon on August 26, 2016, to amend their 1971 income tax treaty, entered into force, and applies from January 1, 2018. Article 6 of the protocol adds a new Article 31bis to the treaty, which introduces limitation on treaty benefits (LOB) provisions, subject to possible future modification by the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”) discussed below.

The OECD and G20 countries have committed to ensuring a minimum level of protection against treaty shopping (the “minimum standard”), and will implement this standard by including in their tax treaties either (1) the combined approach of an LOB rule and principal purposes test (PPT); (2) the PPT rule alone; or (3) the LOB rule supplemented by a mechanism for conduit financing arrangements, if not addressed by current tax treaties. The BEPS Action 6 final report recognizes that the LOB and PPT rules may not be appropriate for all countries. In addition, the domestic laws of some countries may include provisions that make it unnecessary to combine these rules to prevent treaty shopping.

BEPS Action 6 identifies treaty abuse, particularly treaty shopping, as one of the most important BEPS concerns. The report includes new anti-abuse rules that focus on situations where a non-resident person attempts to obtain treaty benefits that a state grants to its residents.

New Article 31bis of the treaty between France and Portugal contains a narrower version of the BEPS Action 6 PPT provision:

“The benefits resulting from any reduction in or exemption from tax provided for in this Agreement shall not be granted where the main purpose for entering into certain transactions or arrangements was to secure a more favorable tax position and obtaining that more favorable treatment in these circumstances would be contrary to the object and purpose of the relevant provisions of this Agreement.”

In other words, the protocol to the treaty between France and Portugal limits treaty benefits where “the main purpose,” as opposed to “a principal purpose”, of the transaction(s) is to obtain the benefits.


France and Portugal have signed the MLI, and both listed their 1971 tax treaty as a Covered Tax Agreement (CTA).

Both countries selected to apply the PPT in their CTA, which will modify new Article 31bis of their treaty with the PPT provision, once they ratify the MLI under their domestic laws.

On July 13, 2018, France published Law No. 2018-604 of July 12, 2018 in the official gazette, to ratify the MLI into domestic law. France must now deposit its ratification instrument with the OECD for the BEPS MLI to modify its income tax treaties. Portugal has not yet begun its ratification process.

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