US Nationals and the NHR

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US Nationals and the NHR

by | Thursday, 28 April 2022 | Immigration, Personal Income Tax

The Portuguese Tax Arbitration Court organised at the Administrative Arbitration Center (“Centro de Arbitragem Administrativa”) has issued a pioneer and landmark decision (Processo 684/2020-T) a regarding United States of America (US) nationals residing in Portugal for tax purposes and benefiting from the Non-Habitual Resident (“NHR”) scheme who derive non-Portuguese-sourced capital gains on securities.

According to the applicable NHR regime rule, such foreign-sourced capital gains on securities acquired by NHRs (as well as any other foreign-sourced capital income or gains) are exempt from Personal Income Tax in Portugal if the income is taxable in the other Contracting State (no effective taxation required) under the terms of an existing Double Taxation Treaty.

The great majority of Portugal’s Double Taxation Treaties preclude the possibility of taxing this form of income in the other (foreign) Contracting State since the Double Taxation Treaties confer exclusive taxing rights on the State of Residence of the securities’ seller – in this case, Portugal. In most circumstances, such capital gains are taxed at a flat rate of 28 per cent in Portugal rather than being exempt. Hence the reason why many individuals benefiting from the NHR scheme and holding considerable financial portfolios considered income restructuring prior to relocation to Portugal.

However, article 1(b) of the Protocol to the Portugal-United States Double Taxation Treaty includes a “saving clause” under which the United States may always tax its citizens on their global income. This means that the said clause enabled potential taxation of the income in a foreign State (even if this State was not the State of the source of the income, but only that of the nationality of the seller) which qualified it for an exemption under the Portuguese NHR regime.

Given the above, the said Double Taxation Treaty’s “saving clause” is sufficient to determine the NHR exemption from Portuguese Personal Income Tax in a triangular case of capital gains on French securities derived by a US national residing in Portugal. The Portuguese Tax and Customs Authority took the opposite view concerning this case, sustaining that the “other Contracting State” that qualified income for an NHR exemption had to be the State of source and not nationality, making the capital gains on the French securities taxable in Portugal.

In the first known ruling on this subject (to the best of our knowledge), the Portuguese Arbitration Court, constituted of a panel of three separately chosen arbitrators, ruled entirely in favour of the plaintiff taxpayer.

The judgment is still appealable, meaning that no legal precedent has been established due to it. Due to the nature of the decision, it does not bind the Portuguese Tax Authority in comparable future cases brought up by other taxpayers. Nonetheless, the Court’s decision is highly persuasive, making a compelling case against taxing any form of non-Portuguese based capital income or profits at the level of US citizens resident in Portugal and benefiting from the NHR scheme.

This article is provided for general information purposes only and is not intended to be, nor should it be construed as, legal or professional advice of any kind.

Source: Centro de Arbitragem Administrativa

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