The NHR is quite nuanced and we’ve discussed it in literally dozens of videos here – https://www.youtube.com/c/TaxesforInternationalEntrepreneursandExpats/search?query=nhr
We probably have more experience in dealing with private client Portugal / US tax matters than most other firms.
Here’s the latest matter being debated = are capital gains from the sale of US situs movable property (personal property) exempted from taxation in Portugal under the non-habitual resident regime?
Let’s start with the basics. 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% — except if
- Capital gains are earned by a company or other legal entity located abroad owned by the non-habitual resident individual in Portugal, or
- 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».
And this is exactly where the contention begins.
Let’s look at article 14 –
ARTICLE 14 Capital Gains
1. Gains derived by a resident of a Contracting State from the alienation of immovable property (real property) situated in the other Contracting State may be taxed in that other State.
2. For the purposes of paragraph 1, immovable property situated in Portugal includes stock, participations, or other rights in a company or other legal person the property of which consists, directly or indirectly, principally of immovable property Situated in Portugal; and real property situated in the United States includes a United States real property interest.
3. Gains from the alienation of movable (personal) property forming part of the business property of a permanent establishment that an enterprise of a Contracting State has or had in the other Contracting State, or of movable property pertaining to a fixed base that is or was available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including gains from the alienation of such a permanent establishment (alone or with the whole enterprise) or such a fixed base, may be taxed in that other State.
4. Gains derived by an enterprise of a Contracting State from the alienation of ships or aircraft operated in international traffic or movable property pertaining thereto shall be taxable only in that State.
5. Gains described in the last sentence of paragraph 3 of Article 13 (Royalties) shall be taxable only in accordance with the provisions of Article 13.
6. Gains from the alienation of any property other than property referred to in paragraphs 1 through 5 shall be taxable only in the Contracting State of which the alienator is a resident.
The controversy starts with paragraph 6. which appears to give Portugal the priority in taxing the US income of a Portugal resident taxpayer
But we need to review 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 a decision from the arbitration court in Lisbon “CAAD” because the Portuguese Tax Authorities wanted to tax the income, but the taxpayer 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.
In the words of the court, “in relation to the 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, so don’t get too excited yet. Also note that the Portuguese Tax Authority is not legally bound by it in similar future situations.
Nevertheless, the Court ruling was the 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.