Non-Habitual Resident (NHR) regime tax disputes have been making headlines in Portugal, particularly regarding how the Portuguese Tax Authority applies progressive tax rates to income that should be fully exempt.
At the heart of the issue is whether certain foreign-sourced high value-added income, such as employment income (Category A) or professional/business income (Category B), should influence the progressive tax rate applied to other taxable income in Portugal.
The Law vs. the Tax Authority’s Practice
Under the NHR regime in Portugal, specific types of foreign income are exempt from Portuguese tax when they have already been effectively taxed abroad. This exemption is based on Article 81(7) of the Personal Income Tax Code (CIRS), which explicitly states that income taxed at special rates does not increase the progressive rate on other general income.
Despite this, the Portuguese Tax Authority has for years applied an incorrect methodology: using exempt income to increase the progressive rate applicable to non-exempt income. This practice can significantly raise the effective tax burden for NHR residents with Portuguese-sourced income that is not classified as high value-added.
A Landmark Arbitration Decision
A recent arbitration ruling confirmed that NHR exempt income should not trigger progression. The tribunal found the Tax Authority’s approach inconsistent with the law and highlighted that the authority had even referred to a legislative wording that does not exist in the applicable statute or in its official version of the CIRS.
This decision reinforces that the NHR exemption is full, not “with progression”, and puts into question the validity of the Tax Authority’s current IRS settlement system.
What This Means for NHR Residents
For taxpayers benefiting from the NHR tax regime in Portugal, the implications are significant:
- If you earn exempt high value-added foreign income, it should not increase the rate applied to your other taxable income.
- If your Portuguese tax assessment uses this income to raise your tax rate, you may have grounds to challenge the calculation.
- Arbitration and judicial rulings are beginning to align with the clear wording of the law, increasing the likelihood of successful disputes.
A Related Ongoing Dispute
Another active litigation concerns high value-added foreign income under the NHR regime that has not been taxed abroad, but is subject to Portugal’s special 20% flat rate. Even in these cases, the law dictates that such income should not cause progression on other taxable income, yet, in practice, it often does.
Final Thoughts
These disputes highlight the importance of professional tax advice for anyone under the NHR regime in Portugal. Taxpayers should review their IRS assessments carefully, especially where progression rates have been applied, and be prepared to challenge incorrect interpretations by the Portuguese Tax Authority.
For expatriates and investors under the NHR scheme, this serves as a reminder: while the regime offers significant tax advantages, ensuring those benefits are applied correctly requires vigilance and expert guidance.
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