Portuguese Tax Arbitration Court rules in favor of tax-free capital gains for USA citizens
The rules in debate
Portuguese tax resident individuals are liable to Personal Income Tax on their worldwide income.
The Non-habitual Resident (“NHR”) residency regime allows for an exemption on many, but not all, types of foreign source income. This exemption is based on the interaction of domestic legal provisions with Portugal’s network of Treaties to Avoid Double Taxation (“Tax Treaties”) or with OECD’s (Organisation for Economic Co-operation and Development) model tax convention.
Under the NHR regime, capital gains on the disposal of securities are usually taxable in Portugal at 28% or 35% (for securities issued by entities in blacklisted jurisdictions).
Effective taxation of capital gains occurs in Portugal because Tax Treaties allowing for taxation of capital gains at source are rare.
However, the Tax Treaty entered into with the United States of America (“USA”) is unusual. It includes a Protocol with a savings clause, allowing the USA to tax its citizens on their worldwide income.
The ruling
In March 2022, the Portuguese Tax Arbitration Court ruled that US citizens’ capital gains derived from the sale of US securities are tax exempt in Portugal due to the existence of a savings clause.
The Portuguese Tax Authorities are not bound by precedent. Therefore, each NHR taxpayer (and a USA citizen) will be forced to uphold his/her rights in court or via administrative litigation.
This ruling opens the possibility of reviewing the last four year’s tax returns to get a tax refund.
Our Tax & Litigation teams can assist you in reviewing your past tax return filings and file all necessary petitions to recover tax paid in excess.
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