In the first six months of 2018, holidaymakers in Portugal spent almost 7 billion euros, corresponding to 38 million euros per day. The figures represent an increase of 14% as compared to the same period last year. In the first half of 2018, Portugal received 9.6 million visitors. British, German and French continue to be the primary national groups to visit the country.
From March to October, tourists will be charged €1.50 per day, up to a maximum of seven consecutive days. Lisbon has also been negotiating to double its Tourist Tax to €2. The Algarve Tourist Tax is expected to yield 20 million euros per year to Algarve municipalities. These revenues are to be used in inter-municipal projects in the areas of tourism promotion, heritage rehabilitation and cultural interventions.
Local Lodging “has not been a problem for the Algarve. It’s being very positive for the economy and urban regeneration,” according to Faro mayor, Rogério Bacalhau. The Algarve’s municipalities have no plans to create quotas or “containment zones” for Local Lodging, a possibility opened by recent legislative reforms. The Algarve concentrates the majority of “AL” accommodations in Portugal, far outweighing Lisbon and Porto combined.
Estimates surpass a total of 27,000 foreign taxpayers in Portugal currently enrolled in the NHR programme. The latest developments come from Sweden, looking to broach negotiations of its tax treaty with Portugal. This initiative follows on the heels of Finland’s threat to tear up its tax accord with Portugal if the Portuguese legislature fails to ratify a newly negotiated settlement by the end of November. With changes validated, new rules could apply to Finnish residents in Portugal as of 2022.
Non-Habitual Resident migrants nearly double
Improved conditions and generous tax breaks have attracted more foreigners to Portugal in the last year and a half. The increase in the number of Non-Habitual Residents was 83% over the period, currently totalling 23,767 with NHR status. The rise is mainly from France, Italy and the UK. Emigrated Portuguese nationals are also returning but only account for 6% of the total.
Immediate money transfers (taking a maximum of 10 seconds to complete) have become accessible in the Portuguese banking system as of 18 September 2018 according to the Bank of Portugal. This new method can be used 24 hours a day, 365 days a year. The maximum amount to be transferred is currently capped at _15,000. This ceiling is defined at the European level and may change in the future.
Instant transfers are not limited to the Portuguese banking system. The new system allows for interbank and international transfers between all EU and EEU banks.
Current availability depends on each bank and the type of account held. At present, Santander Totta and Millennium BCP have already launched the service. The state-owned bank, Caixa Geral de Depósitos (CGD), has not. It is essential to consult your bank to determine pricing of any associated commissions as well as how to use the service. Also note that MB Way also allows for immediate transfers within the Multibanco network.
Due to a pending change in the French government’s interpretation of domestic law, national migrating pensioners may soon be classified as still being resident for tax purposes in France if they join the Non-Habitual Resident (“NHR”) scheme in Portugal. Under the new reading, the 10-year exemption granted to retirement pensions under NHR creates a double tax waiver that contradicts the application of the Double Taxation Agreement (“DTA”), thereby negating any change in French residency status. To avoid on-going assessment in France, French migrants should establish their “centre of economic interests” in Portugal as well as have other sources of taxable income in Portugal.
La France se prépare à attaquer l’exonération des pensions de la RNH
Grâce à un changement imminent dans l’interprétation de la législation nationale par le Conseil d’État, les retraités nationaux émigrés au Portugal pourraient bientôt être classés comme étant toujours résidents fiscaux en France s’ils adhèrent au régime de Résident Non Habituel portugais. Selon la nouvelle lecture, l’exonération de dix ans accordée aux pensions de retraite dans le cadre de la RNH crée une dispense fiscale qui contredit l’application de l’accord de double imposition, annulant ainsi toute modification du statut de résident en France. Pour éviter que les évaluations fiscales continuent en France, les migrants français devraient établir leur «centre d’intérêts économiques» au Portugal et disposer d’autres sources de revenus imposables au Portugal.
After the hubbub of the summer, many Local Lodging owners wish to book long-term rentals to assure low-season occupancy over the quieter winter months. As always, there are pros and cons, particularly when distinguishing between long and short term lets is not always easy.
Reporting Long-Term Rentals
Under current legislation, bureaucracy has mushroomed in recent years for long-term rentals:
- a) Registration of Rental Contract – Mandatory Rental Contracts must be reported via Modelo 2. This form identifies the parties, the property, the price and the terms of the agreement.
- b) Stamp Duty – Stamp Duty is due on the rental contract at the rate of 10% of one month’s income. Every time there is a change in the contract, Stamp Duty must be paid again so automatic renewals, if appropriate, should be included in the original contract to avoid repetitive payment of tax.
- c) On-going Electronic Rental Receipts – Similar to Electronic Green Receipts, Electronic Rent Receipts must be issued in Portuguese in duplicate on a monthly basis via the Finanças Copies are issued to the tenant with a second copy retained for the landlord’s records.
- d) Annual Rental income summary – In the following January, landlords must declare an annual summary of rents received via Model 44.
- e) “IRS” Declaration – An annual personal income tax declaration will necessitate completion of Annex F. All claimed deductible expenses must be accompanied by original invoices that include both the name of the landlord and the corresponding tax number.
- f) VAT – On the positive side, long-term rentals are VAT exempt and require no VAT reporting, potentially saving time and money.
As a tourist accommodation, a Local Lodging unit must: a) be a furnished and equipped facility, b) be available to the general public, c) meet specific health and safety standards and d) limit stays to less than 30 days.
However, there is nothing improper about a guest checking out after a month, then checking back in for another 30-day period. If this procedure is adopted, the owner can continue the “AL” operation on a year-round basis, avoiding the additional bureaucracy associated with Category F. In addition, the on-going use of the property under Local Lodging avoids the overlap and potential contradictions of property usage in two distinct business categories within the same fiscal year.
Beyond Stamp Duty and VAT, the income tax calculation for each activity is substantially different. In Portugal, rental income is taxed residentially under Category F (Income from Immoveable Property) while Local Lodging is assessed commercially under Category B (Business Income).
For a Local Lodging activity, most owners are assessed under the “Simplified Regime” where they receive a flat exemption of 65% on gross income. Residents then add the remaining 35% to other taxable forms of income and are assessed at marginal rates. Non-Residents have the standard levy of 25%, leaving a final tax to pay of 8.75% of gross business income.
Under Category F (long-term rentals), Non-Residents are taxed at a flat 25%. Residents may elect to be assessed autonomously at a flat 28% or aggregate this income with other sources and be taxed at marginal rates.
There is no “one-size-fits-all” answer. Some owners will find rolling over a one-month winter “AL” let to be a straightforward solution. Others will be willing to endure the doubled-up bureaucracy of opening a new winter long-term lease as a solution that merits the extra time and effort. Faced with a difficult choice, professional guidance is always the order-of-the-day.
Many property owners who acquired their homes in Portugal in years gone by face a common dilemma: they bought at a time when real estate was dirt cheap. These houses were often primitive and in poor condition, requiring substantial renovations. In those days, it was common practice to do the work and worry about the formalities later: no building permits, no formal plans, no invoices issued or kept. In addition, the Rateable Value (“VPT”) remained low, sometimes too low to tax!
Today, the situation has inverted. Valuations and tax appraisals have skyrocketed. Unauthorised alternations require planning permission prior to sale. Low deed prices and low Rateable Values can mean a whopping Capital Gains tax assessment upon sale.
If you are resident in Portugal, there are two conventional assessment options for Capital Gains:
1) one half of the capital gain can be excluded. The other 50% of the adjusted net profit is added to overall income for the fiscal year and taxed at marginal rates. Properties purchased prior to 1989 are exempt for Capital Gains Tax.
2) Alternatively, the gain may be rolled over if another principal residence of equal or greater value is purchased between 24 months prior and 3 years after the sale. For newly acquired properties of lesser value, the gain is calculated on a pro-rata basis. The rollover can be anywhere in the EU, not just in Portugal, as long as it becomes your principal residence.
These options are not available to non-residents whose CGT is based on the full gain.
In some cases, the problem can be mitigated or completely resolved by “killing two birds with one stone”. First, have architectural plans drawn up and building permits issued for any unrecorded improvements. Then, upon “completion” and inspection, the old “matriz” (tax registration) can be struck off and a new one assigned, along with a revision of the property’s Rateable Value. This new “matriz” will serve as the base when you finally sell your property, substantially reducing your CGT liability as well as sorting out the bureaucratic “skeletons in the closet” that can make your property difficult to sell.
Example: The Smiths bought and renovated an old farmhouse in the mid-1980’s with little or no paperwork to show for the improvements that they made. While today’s selling price is €500,000, most of the proceeds of the sale will be seen as a Capital Gain.
To achieve a much-needed update in bureaucratic formalities and a significant “VPT” uplift, they apply for building permits and subsequent inspection. Their old “matriz”, with an original “VPT” of just €50,000, is struck off and a new registration approved at over €375,000, leaving them with a far more manageable CGT bill to settle.
Capital Gains Tax on property can be a complicated matter with many permutations. The basic guideline is quite simple: Plan Ahead! Leaving your queries to the last minute makes the worst case scenario an almost inevitable outcome. By anticipating possible events, you can take timely action to minimise your future assessment.