Rental income tax in Portugal – Taxes in Portugal
Income tax for foreigners in Portugal on property rental income
HOLIDAY LETTING OR LOCAL LODGING IN LISBON PORTUGAL
This document contains information about the tax treatment of letting out properties in Portugal to holidaymakers. This topic is even more pertinent today (November 2014) with the introduction this month of the new law governing Local Lodging (Alojamento Local). Let’s look at the various types of rental operations.
LONG-TERM RENTALS LISBON
Rental contracts for longer terms, i.e. more than 1 month, which must be registered at the tax office, fall under Rental Income (Category F). This also applies to property owners who rent out their holiday properties for a fixed sum per annum / holiday season to property developers/agents who in turn let them out to holidaymakers on short-term lets.
If your rental falls under the above category, and regardless of whether you are resident (and do not opt for the inclusion (aggregation basis) or non-resident, you are taxed at the flat rate of 28% on the rental income less the following deductible expenses:
- – Property services (cleaning, pool & garden maintenance, security, concierge)
- – Maintenance (insurance, painting)
- – Annual IMI and other municipal charges
- – Repairs (appliances, plumbing, gas, electrical problems)
If you are not resident in Portugal, this income may have to be declared in one’s country of permanent residence and any tax paid in Portugal claimed as a credit under a double tax treaty.
If you are resident in another EU country, although it is no longer compulsory to have a tax representative in Portugal, it may still be useful to have one in order to deal with the submission of your local tax return. In this regard, the Portuguese Tax Authority’s website does not have an English version of the annual tax return (Modelo 3).
SHORT-TERM HOLIDAY LETS LISBON PORTUGAL (INCLUDING HOSTELS)
Before the new Local Lodging Law, it was necessary to obtain a license from the local municipality and then register a business activity (Category B) at the tax office. As many property owners did not have such a license, they either did not declare the income from letting or else declared this as Category F income. With the steep increase in the taxation of Category F income (to 28%) in 2013, plus the introduction of the new legislation, it is advisable to register as operating a business activity (furnished accommodation for tourists – Category B): not to do so will result in steep fines (up to € 3,749 for individuals and between 25 and 35 thousand Euro for companies).
As mentioned above, for residents of other EU countries, it is not mandatory to appoint a local tax representative, although this may be advisable in order to handle all the bureaucratic issues.
When registering it is possible to opt for one of two tax regimes: the Simplified Regime or the Organized Accounting Regime.
Under the former, the record keeping is simpler. One is taxed on 15% of the total rentals received, with no allowable deductions. If you are non resident, the tax rate is 25%, making an effective tax rate of 3.75% of gross income – versus 28% under Category F income. If you are resident in Portugal, the tax rate depends on your general IRS rate bracket taking into account your other income. But even if you are in the 40% tax bracket, then the tax payable on holiday rentals is an effective 6%. Of course, it is necessary to issue invoices for the letting income and communicate those invoices every month to the Tax Authority. It may also be necessary to register for VAT purposes if the income exceeds € 10.000,00 in any year, although once you are registered for VAT, you can deduct the VAT on your expenses.
Under the Organized Accounting Regime, one must appoint a registered accountant to keep proper accounts and submit the periodic and annual returns. Under this regime, the property owner is taxed on the accounting profit i.e. rental income less business-related expenses, which include advertising, mortgage interest, building depreciation, accounting fees, repairs and maintenance, etc. One would typically opt for this regime when the amounts involved are significant and the tax saving warrants the cost of a statutory accountant (c. 1,000 euro/year).
In any event, registration of the commencement of business form is imperative this year and a prerequisite for application of the Local Lodging license under the new rules.
There are other formalities to be observed: the house or apartment must be registered with the local municipal council, by way of a prior communication to the addressed to the Mayor via the “Balcão Unico Electronico” (Single Electronic Counter) – which is free of charge. This may be followed by a physical inspection of the property to ensure it has the basic amenities – sanitation, running water, fire equipment, complaints book etc.
RENTAL OF ROOMS FOR TOURISTS (INCLUDING B&B’S)
A recent Tax Authority directive clarifies the tax treatment of this activity, even where no meals (including breakfast) are included.
Residential: letting out rooms to students – category B income, exempt from VAT;
Tourism: letting out rooms as part of a tourism / hotel-type activity – category B income, subject to VAT at the reduced rate.