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The tax treatment of US Citizens in Portugal under NHR

We often write about the NHR regime. 

One of the peculiarities of the NHR regime and what makes it so complicated is that the exemption from taxation in Portugal of foreign-sourced income depends on whether a person who generates income in a country other than Portugal could be taxed in that country.

This applied to self-employment income, dividend income, capital gains and other types of income. 

As US citizens are painfully aware, the US is the only country in the western world that taxes its citizens wherever they live. This means that the US always has the right of taxation in relation to its citizens and this right is enshrined in the double taxation treaties that it is party to, including the one in Portugal. It's called "the saving clause". 

This leads to a unique outcome - US citizens under the NHR regime are generally exempt from Portuguese taxation for almost all types of their foreign income.

Below is what we believe to be the correct treatment of US citizens in Portugal on different types of income:  

Employment income 

Work done by a US citizen as an employee (W2) who is a resident in Portugal can be taxed in the US if the work is physically done in the US. If it is taxed in the US, it should not be taxed in Portugal. A remote worker working from Portugal should be paying tax in Portugal.

Self-Employment income, via Portuguese green receipts 

Work done in Portugal that is a high value activity would generally be taxed in Portugal (because it is not "foreign-sourced").

Work done outside Portugal should not be taxed in Portugal. 

Self-Employment income, as distributions from a US LLC that is taxed in the US as a partnership

Such income will generally not be taxed in Portugal if the clients are outside Portugal and the management of the LLC is outside of Portugal. Thus it is often very important to pay attention to the management. 

Capital gains 

Such income will generally not be taxed in Portugal. In one case, the Portuguese authorities tried to argue that the saving clause is insufficient to prevent Portuguese taxation and the court rules in favour of the tax-payer. 

Dividend income

Generally not taxed in Portugal.

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