The non-habitual resident (NHR) tax regime in Portugal is a special tax regime for individuals who become tax residents in Portugal and have not been a tax resident in Portugal in the previous five years.
Under this regime, eligible individuals can, namely, benefit from a flat income tax rate of 20% levied on certain types of income, such as employment or services income. Other types of income, such as dividends and rental income, may be exempt from taxation in Portugal under certain conditions, namely under article 81 of the Personal Income Tax Code (PIT Code).
In order to qualify for the NHR regime, a taxpayer must solely comply with two criteria (i) qualify as a tax resident in Portugal[1] and (ii) not having been a tax resident in Portugal in the previous five years[2]. If the taxpayer in question meets these criteria, then he/she shall apply in the Portuguese Tax Authority (AT)’s website to be registered as an NHR.
This regime is applicable for 10 consecutive years and, in case the taxpayer ceases to be a tax resident in any year of the given period, the NHR regime will not apply regarding that year, the taxpayer being able to be taxed as NHR in the remaining years, should he/she return to Portugal and again become a tax resident within the 10-year period (e.g. if an individual becomes a tax resident in Portugal and is registered as an NHR in 2012, the regime is applicable until 2021, but if the individual moves to another country in 2016 and stays there until 2020, he can only be taxed in Portugal as an NHR in 2012-2015 and in 2021 – the period in which the individual was a tax resident in another country leads to the NHR regime not being applicable in that specific time period).
However, the AT is of the opinion, in a rather curious way, that in cases where NHR regime is interrupted and then the individual returns to Portugal, it should jeopardize the new NHR application. In fact, resorting to a practical example if the individual moves abroad in the middle of the NHR regime (if the individual moves abroad in 2016, the NHR period being from 2012 to 2021), and returns to Portugal only in 2023 (when the first NHR term has already come to an end), can the same individual be registered again as an NHR in 2023, when the previous NHR period ended in 2021?
In this context, the relevant question is whether the interruption of the (first) NHR regime, even if lasting for more than five years jeopardizing the application for a new NHR regime?
Does the applicable law impose any limitation on the application of consecutive NHR regimes, provided both legal criteria are met??
The AT has considered that consecutive registrations cannot take place, that is, even in this curious (but rather real) hypothesis of an interruption of the NHR regime (lasting more than five years) and a return to Portugal afterwards, the individual has to wait five years since the end of the previous NHR term before applying again to be registered as an NHR, alleging that the ultimate purpose of the legislator, when designing the regime, did not foresee as acceptable any consecutive applicability (even if the applicant complies with both legal criterion the AT introduces a new unwritten criteria).
It is our understanding that the law is crystal clear – it states that the taxpayer, in order to be registered as an NHR, cannot have been a tax resident in Portugal in the past consecutive five years and is required to become a tax resident. In the example offered above, the individual had not been a tax resident in Portugal since 2016, and wished to be registered as a NHR again in 2023, when the former NHR term had ended in 2021.
There is not a single hint in the law whatsoever that provides for a prohibition of consecutive applicability of the regime. There are two single requisites: (i) fiscal residency in the year of the application and (ii) no fiscal residency in the previous 5 years. As long as the Portuguese Constitution is not changed, and the legality principle is still part of the rule of law, the AT cannot create additional criteria on the applicable law. The AT wishing to give way to a whole new requisite, without the slightest support in the letter of the law, is a mere restrictive administrative position, illegal and unreasonable, which is in violation of the exclusive competency of the Parliament to legislate on fiscal matters, and which is not in accordance with the basic elements of legal interpretation set out in the law, doctrine and case law.
The existent summa divisio between Private Law and Public Law in the Portuguese legal system provides for a fundamental and distinctive principle: in Private Law, “everything” is generally permitted, unless what the law expressly prohibits; in Public Law, only what the Law expressly allows is permitted to be pursued, namely by the Public Administration.
Thus, in making such restrictive and totally innovative interpretation, the AT is ultimately violating the principle of legality which is the backbone of the Portuguese legal system, and which legitimates (or prohibits) each and every public action by the Administration.
All in all, if the PIT Code does not provide for such a requisite of non-consecutiveness of the applicability of the NHR tax regime is a mere demonstration of the AT construing a legal regime in a distortive manner, creating legal rules which the law does not expressly or inherently provides for, intruding in a domain which is reserved to the Parliament, and violating the mandatory obedience of the Administration to the legislation in force. Now it is up to the Tax Courts to act as quickly as possible to quash this non sense AT interpretation of the law.
José Miguel Saraiva
March 2023
[1] Under Article 16 of the PIT Code
[2] Under Article 16, paragraph 8, of the PIT Code