As a background to this case, the Portuguese non-habitual
resident (NHR) regime was successfully introduced back in 2009
and provides special tax rules for a period of 10 years for
persons taking Portuguese tax residence.
The manner in which the NHR regime is designed provides that
a NHR qualifies as a full resident taxpayer for personal income
tax (PIT) purposes subject to the same filing obligations as
for regular residents (the fallback regime); nonetheless, they
are taxed favourably on certain items of income via either: (i)
application of an exemption with progression on qualified
foreign income; or (ii) application of a flat 20% tax rate on
qualified domestic income.
The Arbitration Court case deals with the workings of the
exemption method for passive income, in particular the
interaction under the NHR between the domestic and tax treaty
qualification of income.
Portuguese domestic law stipulates that for an NHR,
foreign-sourced investment income (category E) and capital
gains (category G) are exempt from tax provided that one of the
following conditions is met: (i) the income "may be taxed" by
the source state under the provisions of a tax treaty; or (ii)
the income "may be taxed" in another non-treaty state according
to the provisions of the OECD model, as interpreted in
accordance with the observations and reservations made by
Portugal and such income is not: (i) derived from a blacklisted
jurisdiction; (ii) paid by a Portuguese resident entity; or
(iii) attributable to a Portuguese permanent establishment.
In the case at hand, the applicants were NHRs seeking the
annulment of the 2016 tax assessment levied on the liquidation
proceeds received from winding up a Spanish limited liability
Portuguese taxation was being levied on the positive
difference between the value attributed to the share of assets
received upon liquidation and the acquisition value of the
respective shareholding. The liquidation proceeds were reported
to the Spanish tax authorities and taxed in Spain.
The applicant opted for the exemption method and considered
that the conditions to apply this exemption were fulfilled as
the Spanish liquidation proceeds were taxable in Spain pursuant
to paragraph 2(a) of the protocol to the tax treaty, which
provides that "with respect to Article 10, paragraph 3, it
shall be understood that the term 'dividends' includes the
profits from the liquidation of a company".
Under Article 10(2) of the tax treaty, as dividends may be
taxed in the state in which the company paying the dividends is
a resident (i.e. Spain), this would be sufficient to operate
the exemption method for the NHR and have 0% tax.
The Portuguese tax authorities argued that there was a lack
of evidence that in a winding-up of a Spanish company the
approach should lead to cumulative taxation rights for both
Spain and Portugal instead of exclusive taxation rights for
Portugal as set out in Article 13(6) of the tax treaty dealing
with capital gains.
The Arbitration Court favoured the taxpayer and reiterated
the functioning of the NHR exemption method by stating the
- For investment income or capital gains to
be exempt, it is necessary only to validate whether the
income may be taxed in the other source state in accordance
with a tax treaty (or the OECD model in its absence).
- The rule of the treaty applicable in this
particular case should not be Article 13 (capital gains), but
instead the "lex specialis" of paragraph 2(a) of the
protocol, which forms an integral part of the tax
The Arbitration Court concluded that the income derived from
liquidation proceeds arising from a Spanish-based company and
received by a Portuguese NHR should qualify as dividends, which
may ultimately be taxed in Spain and therefore qualify for no
taxation in Portugal (under the 10-year period available for
This decision is relevant because it correctly addresses the
functioning of the cross-border qualification of income derived
by an NHR in situations where there is a specific treaty clause
that allocates taxation rights to the source state. It is also
relevant because it reinforces the principle that a protocol is
considered to be a treaty in its own right that amends or
supports the existing tax treaty.
As the rule of NHRs for passive income is based on the 'may
be taxed' rule, the outcome under each of the applicable tax
treaties becomes particularly relevant, and there are some
nuances in each of them. We expect similar disputes to arise in
cases involving the disposal of real estate rich companies or
Tiago Cassiano Neves (firstname.lastname@example.org)
Tel: +351 231 821 200