NHR in Portugal vs. Spanish Tax Residency: A Growing Interpretative Conflict
António Pratas Nunes | Lawyer
Portugal’s Non-Habitual Resident (NHR) regime has long been celebrated for attracting high-net-worth individuals and skilled professionals with its favorable tax treatment. However, the growing scrutiny from Spanish tax authorities has sparked a complex cross-border dispute over tax residence interpretation, exposing a widening gap between Portugal’s generous exemptions and Spain’s stricter approach under the Portugal–Spain Double Taxation Agreement. For individuals leveraging the NHR, understanding these conflicting positions is now critical to managing potential risks and ensuring compliance.
Tax Residency Challenges under Portugal’s NHR Regime: Diverging Views from Spain
Since the introduction of the Non-Habitual Resident (NHR) regime, Portugal has positioned itself as a key destination for high-net-worth individuals and highly qualified professionals.
The combination of exemptions on foreign-source income and a flat 20% tax rate on certain Portuguese-source income has attracted thousands of individuals from around the world. However, this success has increasingly drawn the attention of foreign tax authorities - most notably in Spain.
This reform represents a structural shift in Portuguese tax law, as crypto-asset transactions are now expressly framed within the existing income tax categories, rather than being addressed on an ad hoc basis.
The Position of the Spanish Tax Authorities
In recent years, the Spanish tax authorities have intensified their
scrutiny of individuals who have relocated to Portugal under the NHR regime. In several cases, this relocation resulted in the
elimination or significant reduction of Spanish taxation, prompting a more aggressive stance.
More recently, the Spanish Central Economic-Administrative Court (TEAC) has reinforced a restrictive interpretation:
Even with a Portuguese tax residency certificate, individuals may still be treated as Spanish tax residents if they are not effectively taxed on their worldwide income in Portugal.
This is based on a specific reading of Article 4 of the Double Taxation Agreements (DTAs). According to the Spanish authorities, to qualify as a "resident" under a treaty, an individual must be subject to comprehensive taxation on their global income, rather than benefiting from broad exemptions.
The Role of Tax Residence Certificates
In practice, it is through tax residence certificates that taxpayers are able to ensure that the mechanisms provided under Double Taxation Agreements (DTAs) effectively apply.
In simple terms, the taxpayer requests a
tax residence certificate from their country of residence, which is then presented to the requesting entity of the other State (typically the source of the income). This confirms the individual is a
tax resident
in that jurisdiction and intend to declare their worldwide income there, particularly the source of income in dispute.
Upon receipt, the source State should apply the relevant provisions of the DTA - either granting an exemption or applying a reduced withholding tax.
However, Spanish tax authorities have begun challenging
these certificates.
They argue NHR beneficiaries, by utilizing the
exemption method, may not meet the residency requirements of article 4 of the DTA.
The Portuguese Tax Authorities’ Position
The Portuguese Tax Authorities addressed this issue in Binding Ruling no. 29111, explicitly rejecting the interpretation adopted by Spain.
According to the Portuguese authorities:
- The fact that certain foreign-source income benefits from an exemption under the NHR regime does not mean that the individual is not subject to comprehensive taxation in Portugal;
- A clear distinction must be made between non-taxation and tax exemption.
This follows long-standing Portuguese case law ((Supreme Administrative Court decision, case no. 0144/11, 25 January 2012), which clarified that:
- Non-taxation occurs when a situation falls outside the scope of taxation;
- Tax exemption applies where taxation exists but is waived by a specific legal provision;
- Under the NHR, foreign income is within the scope of Portuguese law but may be exempt "with progression"-meaning it is still factored in to determine the tax rate on other income.
Furthermore, there are clear instances of effective taxation in Portugal for NHRs on foreign-source income, such as:
- Capital gains, where NHR exemption requirements are typically not met;
- Pension income, which, for individuals becoming tax residents after 2020, is generally subject to a flat 10% tax rate.
The Core Issue: Interpretation of Tax Residence
The dispute goes beyond the income classification and lies in the interpretation of tax residence for treaty purposes.
Double Taxation Agreements do not autonomously define residence; instead, they rely on domestic law definitions, while providing mechanisms to resolve dual residence conflicts.
In such cases, Article 4 of the DTA establishes a "tie-breaker" hierarchy of criteria:
- Permanent home;
- Centre of vital interests;
- Habitual abode;
- Nationality;
- Mutual agreement between the States.
If the conflict cannot be resolved, taxpayers may resort to the Mutual Agreement Procedure (MAP) under Article 25 of the DTA — although this does not guarantee a binding outcome.
Conclusion
Although Spain has adopted a restrictive interpretation of the Portugal–Spain Double Taxation Agreement - particularly regarding the concept of tax residence in the context of the NHR regime - this position is not aligned with the interpretation of the Portuguese Tax Authorities.
As such, a clear divergence currently exists between the two jurisdictions, creating potential uncertainty and risk for taxpayers. In this context, careful structuring, consistency in tax reporting, and proactive advisory become essential to mitigate exposure to cross-border tax disputes.
For individuals considering Portugal’s NHR regime, or already benefiting from it - the differing interpretations of tax residency between Portugal and Spain may create uncertainty. Those seeking legal assistance or clarification on cross-border tax matters can consult our legal team through our contact form.
