As you may be aware by now, since the 27th of November there are tighter regulations with regard to private holiday lettings. The decree-Law 128/2014 recently published, created independent regulations for local lodging (AL – Alojamento Local) and some of our readers that were not aware of this, where caught by surprise and sent us some questions.
We will try in this article to clarify some of the main questions arising from this law and clear the subject a bit more.
First of all if you rent your property in Portugal that how income needs to be declared in Portugal is not a matter of personal preference but a matter of law.
Secondly, the Tax Authorities (Finanças) state categorically that Property Owners letting directly to holidaymakers (less than 30 days) are viewed as business activity and must be reported in Category B.
Despite several taxpayers have been declaring rentals on Category F, this should be reserved for either “long-term” rentals (more than 30 days) or “locação turística”, when the property owner makes a contract ceding the property to an agent for ongoing letting to tourists.
Please note that as we mentioned on previous article, the main reasons for you to comply with this new law, are:
- Fines are considerably high for those that do not comply with this law, both the property owners and property agents that advertise the rentals;
- Tax is considerably low if you are on this scheme, as a non-resident you pay 3.75% tax, instead of being taxed at 28% (this is not a typing error you read it correctly, 3.75% opposed to 28%)
So why take unnecessary risks and not obey the law? Please find below some questions and answers, to help you understand a bit more about the local lodging:
1) As a business, will there be complicated accounting/reporting requirements?
No, unless your income is over €200,000 per year, we will class you on the “Simplified Regime” and as the name says, everything will be simple.
2) What is the simplified regime and what expenses can I offset against my rentals?
Most of the Sole Traders in Portugal elect to operate under the Simplified Regime when opening their business activity. Under the simplified regime taxpayers cannot deduct professional and business expenses against their annual gross income. The taxable income of this category will be computed automatically, based on their income.
3) What is the tax payable on the simplified regime on my rentals?
The effective tax rate on Category B, in the simplified regime, for a non-resident Property Owner will be 3.75%. So for earnings of €10,000 the taxable income, equates to €375. Please note that under Category F, on the same income taxed autonomously at 28%, the tax liability would be €2,800, nearly 8 times more!
4) Do I have to issue invoices to holidaymakers?
Yes, you need to issue invoices, however this is a service included on our package, so we will do this for you. We will also simultaneous report the arrivals and departures to the Immigration and Borders Service (SEF) at no additional cost. This is also mandatory under the new law.
5) Will I need to be VAT registered?
You can be VAT registered by choice or when your income exceeds €10,000 per year. However as the VAT charged to holidaymakers is 6% as a tourist activity and as most of your operating expenses has VAT at 23% rate, normally you should be in credit in terms of VAT.
6) Do I have to pay Social Security contributions?
There are various full and partial exemptions that apply in most cases:
- a) many people are eligible for full Social Security exemption if they already contribute to or are beneficiaries of a National Insurance system anywhere in the EU and beyond;
- b) those earning less than €16,768.80 in Local Lodging income are also fully exempt;
- c) those who earn more have contributions based taxable income (15% of gross Local Lodging invoices) and should be eligible for partial reductions from the normal contribution of €145.
Amongst other goals, the Simplified Regime tax savings are designed to encourage and stimulate this newly recognised and important segment of the tourist industry. Creating a reasonable compliance environment with sensible taxation levels may come as common sense to some and revolutionary to others. Whatever your perspective, this is the system now in place and compliance is a must.
We strongly advise our clients to stay legal and compliant with these rules and regulations because not only the fines are very high (starting at 2.500€ for private individuals) but also because these law opens an opportunity to mitigate the tax currently paid on rentals. Rentals under this law will be taxed at 3.75% opposed to the normal 28% rate.
If you have any other questions, please feel free to contact us, we aim our expertise and know-how to work in your benefit, keeping you tax compliant while paying only the legal minimum.
Pass by our office for a friendly chat and find out more about the tax strategy that might be more effective on your specific situation.