NHR Exemption with Progression: A Misinterpreted Rule by the Arbitration Court?

Case 10/2025-T of 31 October 2025 delt with the exemption with progression for NHR and deserves a closer look.

Let’s try to tell the story in simple terms:

1. Our taxpayer in this case is yet another Non-Habitual Resident (NHR) in Portugal.

2. He received investment income in 2014 and 2015 dividends and interest from foreign sources (Germany, France, Spain, and US).

3. For reasons that remain unclear, the NHR exemption was not applied, and he ended up paying the standard 28% flat tax.

4. Unsurprisingly unhappy, he filed an administrative claim in 2016… which then took the usual two years to be answered.

5. When the answer finally arrived in 2018, the tax authorities had a surprise: they accepted that the dividends and interest were exempt, but insisted that this income still needed to be included (“aggregated”) with other income for the purpose of determining the applicable progressive tax rate.

6. At this point, the taxpayer likely couldn’t believe it. After all, his advisor had always told him that the so-called “exemption with progression” rule did not apply to investment income normally taxable at flat rates. The rule expressly excludes “income listed in subparagraphs c) to e) of paragraph 1 of Article 72”, which includes dividends and interest.

7. The next stop, almost ten years after the income was earned, was the Arbitration Court.

8. In the Arbitration Court, the tax authorities argued that the exception only applies when the income is actually taxed at 28%. Since these dividends were exempt, they claimed the exception does not apply. They also warned that the taxpayer’s position would create “double non-taxation,” meaning the income would be neither effectively taxed at source nor considered for rate-determination in Portugal.

9. The Arbitration Court (incorrectly, in my view) accepted the tax authority’s argument, without any clear textual analysis or justification for this new interpretative twist.

10. The Court concluded that investment income (dividends and interest) earned by an NHR and exempt under NHR must still be mandatorily aggregated for determining the tax rate applicable to the taxpayer’s remaining taxable income.

Kore Take

First, the Court completely ignored an earlier decision Case 1294/2024-T, which dealt with the exact same “exemption with progression” issue applied to exempt foreign employment income. In that case, the Court held unequivocally that Article 81(7) expressly excludes from aggregation the income covered by Article 72(10), i.e., employment and business income earned by NHRs in high value-added activities.

Second, the Court’s reading of the exception in Article 81(7) does not withstand even the most elementary application of the interpretative methodology. Interpretation must begin with the letter of the law but aim to reconstruct the legislative thinking within the limits imposed by the wording. Article 81(7) explicitly states that exempt income is aggregated “with the exception of the income listed…”. If the legislator had intended the exception to apply only when the income is actually taxed at 28%, it could have said, with perfect clarity, something like: “except when Article 72 applies.” But it did not.  The Court made a wrong reconstruction of a supposed legislative intent that finds no anchor in the actual wording.

Finally, a last remark to the tax authority’s warning about “double non-taxation” that should have merited a response of the court. The legislator deliberately adopted the “may be taxed” criteria for the NHR exemption method for investment income. This means that exemption applies when the income is merely liable to tax abroad, not necessarily taxed. To invoke “double non-taxation” as a reason to narrow an exemption reveals a fundamental misunderstanding of how the NHR rules more than 15 years later from their original drafting.

In the end, some Arbitration Court decisions remain a mystery, and this one certainly earns its place on that list.

© Kore Partners, 2025

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