A recent binding ruling issued by the Portuguese Tax Authorities has brought renewed attention to a debate between Portugal and Spain regarding the treaty residence status of individuals benefiting from Portugal’s former Non-Habitual Resident regime.
In Binding Ruling No. 29,111, issued on 16 January 2026, the Portuguese Tax Authorities confirmed that an individual registered as a Portuguese Non-Habitual Resident should be considered a tax resident of Portugal for the purposes of Article 4 of the Double Tax Treaty between Portugal and Spain. In practical terms, this means that, from a Portuguese standpoint, NHR taxpayers are not merely beneficiaries of a preferential regime: they remain fully tax resident in Portugal and should therefore be entitled to treaty protection.
The controversy arises because the Spanish tax authorities have, in certain cases, taken a more restrictive approach. Spain has questioned whether individuals benefiting from broad exemptions under the Portuguese NHR regime can genuinely be considered “liable to tax” in Portugal for treaty purposes, particularly where significant foreign-sourced income is not effectively taxed in Portugal.
This disagreement is important because it goes far beyond the former NHR regime itself. At stake is a broader question of international tax law: can access to a preferential tax regime undermine an individual’s qualification as a tax resident under a double tax treaty?
This is not merely a technical disagreement between two tax administrations. It reflects a wider tension in international taxation: how should treaty residence be assessed when a taxpayer is fully resident under domestic law but benefits from partial or significant exemptions on foreign-sourced income?
Portugal’s position: NHRs remain fully tax resident
From a Portuguese perspective, the answer is relatively clear. Individuals registered as Portuguese tax residents under domestic law, including those benefiting from the NHR regime, are subject to Portuguese personal income tax on their worldwide income.
The fact that certain categories of foreign-sourced income may benefit from an exemption does not mean that the taxpayer falls outside the Portuguese tax system. The NHR regime was never designed as a pure territorial regime under which Portugal only taxes Portuguese-source income. Rather, it operated as a preferential regime within the ordinary Portuguese personal income tax framework.
This distinction is essential.
Under the former NHR regime, foreign pension income could be subject to tax in Portugal at a specific 10% rate. Income arising from blacklisted jurisdictions could be taxed at aggravated rates. In addition, the exemption method available for certain foreign-sourced income was not automatic in all circumstances and depended, in many cases, on whether such income could be taxed in the source state under the applicable double tax treaty.
Therefore, it is imprecise to say that NHR taxpayers were not “liable to tax” in Portugal. They remained Portuguese tax residents, subject to Portuguese tax rules, filing obligations and worldwide income reporting. The exemption was a method of relief within the Portuguese tax system, not an exclusion from residence.
This appears to be the rationale behind the Portuguese Tax Authorities’ recent position: a Portuguese NHR should be treated as a resident of Portugal for the purposes of Article 4 of the Portugal–Spain Double Tax Treaty and should, in principle, be entitled to treaty benefits.
Spain’s challenge: is residence enough if effective taxation is limited?
The Spanish position introduces a more restrictive reading. Spanish tax authorities have questioned whether a taxpayer benefiting from broad exemptions in Portugal can truly be considered resident for treaty purposes, particularly where foreign-sourced income is not effectively taxed in Portugal.
This approach appears to be influenced by a more substance-based understanding of tax residence: not only where the taxpayer is formally resident, but whether that residence results in sufficiently comprehensive taxation.
However, this interpretation is controversial.
The standard treaty concept of residence generally refers to whether a person is liable to tax in a Contracting State by reason of residence, domicile, place of management or a similar criterion. It does not usually require that every category of income be effectively taxed. Many domestic systems provide exemptions, relief mechanisms or preferential regimes without necessarily depriving taxpayers of treaty residence.
If effective taxation were required in every case, the consequences would be significant. Taxpayers benefiting from participation exemptions, remittance regimes, territorial systems or special inbound regimes could see their treaty status challenged by other states. That would create uncertainty not only for Portuguese NHRs, but for many internationally mobile individuals operating under preferential regimes across Europe.
The risk: treaty residence becomes uncertain
The real concern is not simply whether Spain agrees with Portugal’s interpretation. The deeper problem is the possibility of unilateral challenges to tax residence certificates issued by another treaty partner.
A tax residence certificate should not be treated as an irrebuttable document in all circumstances. Tax authorities may legitimately examine factual residence, especially where tie-breaker rules under Article 4(2) of the DTT are relevant. For example, if an individual claims to be resident in Portugal but maintains their permanent home, centre of vital interests and habitual abode in Spain, a factual analysis is clearly justified.
But that is different from arguing that Portuguese residence should be disregarded merely because the taxpayer benefits from the NHR regime.
The first analysis concerns factual dual residence. The second challenges the legal nature of Portugal’s preferential regime. That distinction matters.
If a state can deny treaty residence solely because it disagrees with the other state’s domestic tax policy, the stability of double tax treaties is weakened. Taxpayers may be exposed to double taxation, conflicting administrative positions and prolonged disputes, even where they have complied with the residence rules of one Contracting State.
Beyond NHR: could IFICI face the same scrutiny?
Although the former NHR regime is now closed to new entrants, the debate remains highly relevant. Portugal’s new regime, the Tax Incentive for Scientific Research and Innovation, commonly referred to as IFICI or “NHR 2.0”, may raise similar questions.
The IFICI regime is more selective than the former NHR. It is aimed at individuals performing certain high-value activities connected to scientific research, innovation and economically relevant sectors. However, it also provides favourable treatment for most categories of foreign-sourced income, that tends to be broader and lead to an overall better result for many taxpayers as a result of the right to the exemptions not being subject to the provisions of the DTT and the right to tax of the country of source This is a key difference between NHR and IFICI.
This means that the same conceptual question may arise again: can a taxpayer benefiting from a Portuguese preferential regime still be treated as treaty resident in Portugal where foreign income is exempt?
In principle, the answer should remain yes. Preferential taxation does not, by itself, eliminate tax residence. But the Spanish challenge shows that the international environment has changed. States are increasingly alert to perceived double non-taxation, mobility-driven tax planning and preferential regimes that significantly reduce taxation on cross-border income.
IFICI applicants should therefore not look only at domestic eligibility. They should also consider treaty positioning, source-state taxation, factual residence, documentation and the risk of foreign tax authorities adopting a more aggressive interpretation.
Conclusion
The Spanish challenge to Portuguese NHRs is not merely a disagreement about one tax regime. It is a broader test of how preferential regimes interact with the traditional treaty concept of residence.
Portugal’s position is persuasive: NHR taxpayers were not outside the Portuguese tax system. They were Portuguese tax residents benefiting from a domestic relief mechanism. Exemption does not equal non-residence, and limited effective taxation should not automatically defeat treaty residence.
However, the controversy is a warning. Formal residence is no longer always accepted without scrutiny. Tax authorities are increasingly willing to look beyond certificates and examine whether a taxpayer’s residence, income and economic interests are aligned in substance.
For internationally mobile individuals, the lesson is clear: tax residency planning can no longer be limited to obtaining a Portuguese tax residence certificate or qualifying for a domestic incentive regime. It requires a coordinated analysis of domestic law, treaty residence, source-state taxing rights and the taxpayer’s factual connection with each jurisdiction.
Portugal may continue to offer attractive regimes for international talent, but treaty certainty will increasingly depend on substance, timing and careful cross-border structuring.
From a practical perspective, this debate also reinforces the importance of obtaining tailored tax advice before relocating or restructuring one’s affairs.
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