While more and more tourists are visiting Portugal it is worth considering renting your property as a way of reducing the annual costs of owning a holiday home. Currently there are nearly 42 thousand rental licenses registered in the Portuguese Portal of Tourism, but this number is growing every day, for instance a year ago there were around 30 thousand licenses issued, which means an increase of nearly 850 new licenses each month.
If you are considering renting your property, there are several questions that you need to be aware of in order to avoid any problems with the Portuguese licensing and tax departments.
First of all, you need to bear in mind when you rent your property in Portugal, that irrespective if you are a tax resident or not, the rental income will always need to be declared in Portugal.
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 “long-term” rentals (more than 30 days). Only the “locação turística”, when the property owner makes a contract ceding the property to an agent for ongoing letting to tourists, may be taxed under category B or F.
The main reasons for you to comply with this new law, are:
- ASAE and the tax authorities are checking the rental portals (air bnb, hollidaylettings, etc), to make sure that the properties advertised are all legal and the owners are fully compliant. Fines are considerably high for those not advertising the AL license number;
- Tax is considerably low if you are on this scheme, as a non-resident you pay as little as 8.75% tax, instead of being taxed at 28% (this is not a typing error you read it correctly, 8.75% opposed to 28%). The tax is even lower, for hostels, guesthouses and other properties where you can rent a single room, instead of the whole property: 3.75%.
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 8.75%, for apartments and villas and 3.75% for hostels, etc. So, for earnings of €10,000 the taxable income, equates to €875 in a villa or apartment. Please note that under Category F, on the same income taxed autonomously at 28%, the tax liability would be €2,800, 3 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 €7,222.22 in Local Lodging income are also fully exempt (16.852€ in case of an hostel);
- c) those who earn more, have contributions based in their taxable income (35% of gross Local Lodging invoices) and should be eligible for partial reductions from the normal contribution of €145.
7) How long does it take to get this rental license?
Depending on your urgency, we can complete the registration at the tax office and the application to the tourism office, in 48hrs allowing us to have your AL number in 2 days! The AL license is valid for 10 years.
8) Do I pay capital gains if I decide to stop renting?
In most cases you won’t have a problem with the capital gains. However is advisable to seek personal advice, so you can plan ahead a future sale of the property.
9) What do I need to report to SEF?
All property owners need to report to the SEF (Emigration Office) the entry and exit of all guests with non-Portuguese nationality.
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.
Contact our office and book an appointment to find out more about the tax strategy that might be more effective on your specific situation.