The non-habitual resident status (hereinafter referred to as “NHR”) is a well-known Portuguese special residence status that allows eligible taxpayers to access certain tax benefits. These benefits consist – broadly – of special flat rates on foreign-sourced pensions and certain employment/self-employment income of Portuguese source and the possibility of opting for the exemption method to avoid double taxation (potential or effective).
In simple terms, regular residents are subject to a mainly progressive system, having to resort to the tax credit method to avoid double taxation, whereas NHRs may benefit from proportional rates[1] and opt for the exemption method (which can ultimately lead to double non-taxation).
The extra-fiscal purpose of the NHR regime was to strengthen the Portuguese economy, by increasing fiscal revenue (property tax, property transfer tax, stamp duty, VAT) expected from the relocation to Portugal of qualified workforce, pensioners, and investors[2]. Regardless of relevant improvements in the application system, eligible taxpayers often endure significant distress with the NHR registration/application process, notably when the applications are rejected or take unreasonable time to be decided.
The reasoning behind the rejection or difficulties in the application processing are standardized: either the application was untimely or there was conflicting information in the official tax records. Faced with a formal rejection or in the absence of an express answer, it comes the time where the taxpayer has to file a personal income tax return, which will result in a tax assessment.
Upon receipt of a tax assessment where the NHR benefits were not considered due to the lack of registration as an NHR, eligible NHR taxpayers resorted to the Portuguese Arbitration Court for Tax and Administrative matters (hereinafter referred to as “CAAD”) to dispute such assessments with the tax authorities.
CAAD has been adopting a taxpayer friendly approach in respect of the effect of the NHR registration (or lack of) on the right to be taxed in accordance with the NHR regime.
According to several court rulings[3], the lack of registration as a Portuguese NHR does not preclude the right to be taxed in accordance with the NHR regime, if the taxpayer meets the NHR material requirements to be eligible for the taxation under such regime.
At present, those requirements consist of:
- Becoming a tax resident of Portugal, in accordance with the domestic tax residence criteria; and
- Not having been a tax resident of Portugal in any of the five years prior to becoming and registering as a tax resident of Portugal[4].
Essentially the two matters discussed within these kind of court disputes respect to CAAD’s (In) competence on deciding prior administrative acts autonomous to the tax assessment and the legal effect of the NHR registration (which depends on the prior qualification of the NHR as an automatic tax benefit or a tax benefit dependent on confirmation).
The tax authorities’ position is that the NHR regime is a tax benefit granted upon their confirmation. Such confirmation (or rejection) shall be deemed an autonomous administrative act, from which the taxpayer must appeal to a competent Administrative Court[5] (and not to CAAD). In the absence of appeal, the taxpayer would lose the right to be taxed under the NHR regime. Therefore, the registration as NHR should be deemed to grant the taxpayer the right to opt for the NHR regime features upon each annual personal income tax return. The non-registration would preclude said right.
Conversely, CAAD has consistently ruled[6] that the effect of the NHR registration is merely “declarative”, thus not granting the right to be taxed in accordance with the NHR regime. The right to being taxed under the NHR rules results from meeting the aforementioned material requirements, which are verified “automatically” and are not subject to a discretionary appreciation from the tax authorities. The application after the legal deadline should not be relevant for taxation purposes as long as the material requirements are met. Instead, the legal framework of untimely NHR applications should constitute a violation of a declarative duty and eventually result in the application of a penalty for late compliance.
Fortunately, for these bold NHR taxpayers, the court has decided in their favour. It will be interesting to see if there will be any changes on the CAAD tendency on deciding such cases. It would also be interesting to see whether the tax authorities will change their administrative practice, namely within administrative appeals against tax assessments where the NHR benefits were not granted due to the lack of NHR registration, if the taxpayer proves to meet the legal material requirements.
Diana Figueiredo
February 2023
***
DISCLAIMER: this article does not constitute legal advice. It reflects a personal opinion that does not bind any authority, court nor my employer.
[1] For instance, not all NHRs may benefit from the 20% flat rate on employment/self-employment income of Portuguese source. A case-by-case analysis is required.
[2] Cf. Grupo de Trabalho para o Estudo dos Benefícios Fiscais created by the Minister of Finance decision dated of 26th April 2018 (2019). Os Benefícios Fiscais em Portugal – Conceitos, Metodologia e Prática (published online). Displayed for public consultation at:
[3] CAAD’s rulings on case no. 188/2020-T, dated of 24th September 2021. Displayed for public consultation at:
https://caad.org.pt/tributario/decisoes/decisao.php?listOrder=Sorter_data&listDir=DESC&id=5647;
Case no. 815/2021-T, dated of 29th August 2022. Displayed for public consultation at:
Case no. 319/2022-T, dated of 2nd December 2022. Displayed for public consultation at:
https://caad.org.pt/tributario/decisoes/decisao.php?id=6804 ;
Case no. 782/2021-T, dated of 9th January 2023. Displayed for public consultation at:
[4] Cf. article 16, paragraph 8 of the Personal Income Tax Code.
[5] See the Portuguese Constitutional Ruling 718/2017, Case no. 723/2016, dated of 15th November 2017. Displayed for public consultation at: http://www.tribunalconstitucional.pt/tc/acordaos/20170718.html?impressao=1.
[6] See footnote no. 3.