Do You Have Something Against NHRs?
Let’s take a serious look at the latest ruling that denied the exemption method for income from the UAE based on a presumed case of abuse.
The tax authorities start on solid ground by recognizing that dividend income from the UAE received by an NHR should, in principle, benefit from the exemption method. They then correctly state that the exemption applies if the company distributing the dividends is considered resident and effectively managed in the UAE. So far, so good.
But then, the reasoning takes an unexpected turn. The tax authorities shift to Article 27 of the Portugal-UAE Double Tax Treaty (DTT) concerning treaty entitlement, arguing that:
“Because the taxpayer stated in the ruling request that, without prior confirmation that the exemption method would apply he would not proceed with the intended transaction (i.e., acquiring a UAE company), it is the taxpayer himself who describes this as decisive in his decision. As such, paragraph 3 of Article 27 of the DTT allows Portugal to deny the application of the dividend-related treaty provision and, consequently, the exemption method under the NHR regime.”
This approach is problematic for several reasons:
It contradicts a prior ruling.
The reference to Article 27(3) is incorrect. The DTT has been slightly modified by the Multilateral Instrument (MLI), which replaced Article 27(3) with a revised Principal Purpose Test (PPT). The new provision states:
“Notwithstanding any provisions of a Covered Tax Agreement, a benefit under the Covered Tax Agreement shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement.”
This raises important technical questions:
Can the tax authorities apply the PPT to override a domestic provision that refers to the tax treaty?
Tax treaties restrict domestic law; they do not impose tax. Such approach should only be possible via Portugal’s domestic GAAR (General Anti-Abuse Rule) rather than through a convoluted indirect application of the Tax Treaty PPT to domestic legislation.
Does the tax authorities' reasoning meet the standard required under either the domestic GAAR or (even) the PPT?
Both the domestic GAAR and the PPT require (amongst others) an analysis of all relevant facts and circumstances and the identification of a principal purpose (or main purpose). Yet, the ruling applies a simplistic syllogism that fails the legal and factual scrutiny expected of any anti-abuse analysis. Based on recent Supreme Court decisions on abuse, it seems highly unlikely that a court would uphold this reasoning.
A Broader Trend: The Restriction of NHR Benefits
If this ruling is legally flawed and inconsistent with prior decisions, the next question is: why is there a growing trend of rulings that appear designed to limit the NHR regime’s application?
As it stands, the NHR regime will only be still available until 31 December 2033 for those who became resident and qualify under the transitional rules in 2024. The new regime replacing NHR shifts to a foreign income exclusion method rather than an exemption method based on tax treaty allocation of taxing rights, so this points are not entirely relevant for the new regime either.
A client recently suggested that with the NHR set to phase out, the Portuguese tax authorities may be tempted to adopt more aggressive positions to accelerate its effective demise. If this trend continues, we would say yes. Ultimately, if the NHRs can no longer rely on clear and consistent tax treatment, who will want to stay?
© Kore Partners, 2025
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