Under the Non-Habitual Resident (NHR) tax regime, capital gains from the disposal of movable assets — such as shares or other company participations — are generally taxed in Portugal at a flat rate of 28% under IRS rules. However, there are notable exceptions, particularly for U.S. citizens residing in Portugal, which may impact how these gains are taxed.
General Rules and Double Taxation Agreements
Article 81, paragraph 5, subparagraph (a) of the Portuguese Personal Income Tax Code (CIRS) stipulates that NHR residents in Portugal are exempt from Portuguese taxation on foreign-sourced capital gains, provided these gains can be taxed in the other contracting state under the applicable double taxation treaty (DTT).
For gains sourced in the United States, the Portugal–USA Double Taxation Treaty (DTT) includes a default provision in Article 14, paragraph 6, stating that “gains derived from the alienation of any property, other than those referred to in paragraphs 1 to 5, shall be taxable only in the contracting state of which the alienator is a resident.”
The Protocol’s Exception for U.S. Citizens
However, the Protocol to the Treaty introduces a crucial exception. According to Article 1, paragraph (b) of the Protocol, “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.” This provision explicitly allows the United States to impose taxes on its citizens, even when they are residents of Portugal, creating a potential overlap in taxation rights.
A Key Legal Decision
This apparent contradiction between the DTT and the Protocol was addressed in a recent decision by the Lisbon Arbitration Tribunal (CAAD). The Portuguese tax authorities sought to tax capital gains, while the taxpayer argued that the exemption under Article 81(5)(a) of the CIRS, as aligned with the Protocol, should apply.
The Tribunal ruled that capital gains from U.S. sources fall within the scope of Article 81(5)(a), as such gains are taxable in both the state of residence (Portugal) and the state of citizenship (United States), per the Treaty and its Protocol. Therefore, the exemption should have been applied.
Implications and Limitations
While the Tribunal’s decision represents a significant precedent, it remains subject to appeal and does not create a binding rule for the Portuguese Tax Authority in similar cases. Nevertheless, it marks an important step in clarifying the treatment of foreign-sourced capital gains for U.S. citizens under the NHR regime.
This decision is particularly relevant for American expatriates in Portugal who benefit from the NHR status, as it could limit the potential for double taxation on U.S.-sourced capital gains.
Conclusion
Navigating the intersection of Portuguese tax law, NHR provisions, and the Portugal–USA DTT requires careful planning and expertise. This case highlights the importance of understanding both local tax rules and international treaty implications to ensure tax efficiency and compliance.
For further guidance on capital gains taxation under the NHR regime, contact our team of tax experts today.
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