Portugal – US nationals and the Portuguese non-habitual tax resident (NHR) regime

Under the non-habitual resident regime, capital gains from the alienation of movable property (personal property) - e.g., from selling stocks or other participations in companies or other legal entities -, are in general taxed in Portugal at a flat tax rate of 28% in personal income tax, except if the capital gains are earned by a company or other legal entity located abroad owned by the non-habitual resident individual in Portugal, or if the income arises from a permanent establishment he or she also owns abroad, e.g., like an office. 

Article 81.º, no. 5, § a) of the Portuguese Personal Income Tax Code clearly states that to «non-habitual residents in Portuguese territory who obtain, abroad, income of category […] G [capital gains], the exemption method applies, provided that [income] may be taxed in the other Contracting State, in accordance with the double tax convention concluded by Portugal with that State».

Therefore, Portugal will tax the capital gains from the alienation of movable property, except if they may be taxed abroad under the double tax convention, and even if the other State doesn’t effectively exercise its power.

At a first glimpse, the double tax convention Portugal signed with the United States of America predicts a similar solution in its article 14.º, where on its point 6 we find a default rule asserting that «gains from the alienation of any property other than property referred to in paragraphs 1 through 5 shall be taxed only in the Contracting State where the alienator is a resident».

Nonetheless, it happens that article 1.º, § b) of the Protocol to the double tax agreement adds that «notwithstanding any provision of the Convention […] a Contracting State may tax its residents, and the United States may tax its citizens, as if the Convention had not come into effect. For this purpose, the term citizen shall include a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of tax, but only for a period of 10 years following such loss».

This apparent contradiction was subject to an arbitral decision from the arbitration court in Lisbon “CAAD” because the Portuguese Tax Authorities wanted to tax the income, but the taxable person argued that the Protocol should be instead applied, meaning that the exemption predicted on article 81.º, no. 5, § a) of the Portuguese Personal Income Tax Code had its determination complied with.

Thus, in the words of the court, “in relation to income of category G (capital gains) from a North American source, the subsumption to § a), nº. 5 of Article 81.º of the Portuguese Personal Income Tax Code appears to be linear, since such income is, in accordance with the Convention, of which the aforementioned Protocol forms an integral part, taxable in the State of residence (Portugal) and, at the same time, in the State of nationality (United States of America)», meaning the exemption method should have been applied.

The decision may still be appealed, and there is no formal precedent deriving from it, which means that the Portuguese Tax Authority is not legally bound by it in similar future situations. Nevertheless, the Court ruling was unanimous, and it represents a first judicial case to prevent the taxation of any type of non-Portuguese sourced capital income or gains at the level of US nationals residing in Portugal and benefitting from the NHR regime.

Sérgio Varela Alves

Tax Consultant