The Affordable Rental Programme has been launched to enhance the supply of long-term residential housing at controlled prices. The initiative targets accommodations for individuals and middle-income families who now have difficulty in finding affordable flats, taking into account the inflated prices currently being practised in the marketplace. The premise is to create a win-win situation for all parties. Tenants should be able to find suitable housing at lower prices. Landlords can advantage of the new tax breaks that have been created for the new rental income they receive. Continue reading
Dennis was interviewed on Friday by “Dinheiro Vivo” about the NHR regime, the article is here:
If you meet any of the criteria to be considered resident for tax purposes in Portugal, you arew required to register with the tax authorities and submit annual tax declarations. Tax residents are liable to Portuguese taxation on worldwide income. When a taxpayer fails to report income that is the object of information sharing from any number of diverse sources, Finanças moves to coercive settlement of the assessment due. Continue reading
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.
A common situation arises where a UK employee wishes to continue to receive a salary from a British-based company but would prefer to provide the services virtually via the internet while residing in Portugal.
Unfortunately, there are significant obstacles to this type of arrangement:
- As an employee of a UK-based company, you cannot enrol nor make contributions to Social Security (National Insurance) in Portugal.
- If you continue to declare as a UK resident but, in fact, are living and working in Portugal, you will fail to meet the criteria of the UK Statutory Residency test requirements.
- To be employed by your UK company in Portugal, the Company would need to set up a subsidiary or branch office in Portugal. While this is possible, the process involves both initial start-up costs as well as ongoing overhead to the Company. This solution is unlikely to be cost effective for just one employee.
- Once a branch office is in place, Portuguese personal income tax (“IRS”) on a modest salary (€35,000) would be ±25%. In contrast, as a freelancer in Portugal, taxation on a similar amount would be just ±5% in year one, ±7.5% in year 2 and ±10% after that.
- Post Brexit (March 2019?), requirements could become more complicated. While not even insider political negotiators know how Brexit will turn out, there is no reason to expect anything less than a more complex state of affairs for UK individuals wishing to work abroad.
Working as a PT freelance contractor to the UK Company
The best solution to the dilemma is to be a Portuguese-based freelancer, contracting with the UK Company, rather than continuing to work as a UK salaried employee. By being registered as providing “other support services” from Portugal, you will be assessed on just 35% of your gross invoicing to the Company under the Portuguese “Simplified Regime”. Social Security deductions will be made on a similar reduced basis. As already mentioned above, the final tax due should be substantially lower.
The Company should also find this arrangement to be advantageous by eliminating UK National Insurance obligations, thereby lowering overhead. Payment of freelancer invoices can continue to be made to the sole trader’s local UK bank account if so desired.
The Company hires on a project-by-project basis; the freelancer earns more; the Company lowers risk. Shifting to an independent worker status based in Portugal can create a win-win situation for all concerned.
The recent wild fires in Monchique have brought to the fore questions regarding charity donations to local “Bombeiros” and other solidarity organisations giving support to the victims of the tragic blaze. Tax Credits for all charitable gifts from individuals are based on the “Estatuto de Mecenato” (Patronage Statutes), allocating contributions according to the nature of the receiving entity. Many taxpayers easily overlook these deductions when completing their “IRS” declaration. The following guidelines clarify what you can deduct and how you should proceed.
The first thing to know is that not all contributions can be taken off your “IRS”. Donations can only be made to recognised entities with social, environmental, cultural, technological, sports and scientific interest. You can consult the list of approved charity organisations on the following website:
Only gifts to Portuguese registered institutions qualify for a tax credit. International organisations must have a registered office in Portugal to be eligible. Certain entities, such as the State and associations of local parishes and municipalities, need no formal approval.
It is possible to deduct 25% of the amount donated to social institutions, up to 15% of your total “IRS” tax due. With donations to the State, there is no upper limit. Depending upon the type of charitable institution, your gift will also be enhanced by between 10% – 40%. This attribution is made automatically, based on the recorded nature of each charity.
The institution receiving your donation must issue a receipt containing the following information: the name of the institution, its fiscal number (“NIF”), the amount received along with the name and “NIF” of the donor. At the end of the fiscal year, the charity declares donations received to the “AT” (Autoridade Tributária) to be registered in your favour. You should keep the receipt(s) as proof of your gift.
To receive a tax credit corresponding to your donation(s), find Table 6B on Annex H of the “IRS” return and use the correct code indicated in the instructions. There are several codes, so be sure to read them carefully.
Deducting charitable gifts on your “IRS” declaration is not the only way to be supportive. The assignment of a small part of your tax due is based on donating 0.5% of your total assessment due which goes to your chosen charity. This gift comes at no additional expense to you, the taxpayer. The half-a-per-cent can go to one of the many authorised entities which can be found through the following link:
To select a given institution, you must use table 11 of your Modelo 3 declaration, identifying the receiving institution by its Fiscal Number (“NIF”), and marking “X” in the box that says “IRS” and the type of institution.
By following the correct procedures, you can maximise the contribution advantages to your favourite charity while locking in valuable tax credits for yourself: indeed a win-win solution.
The EU has put 17 jurisdictions on a blacklist: American Samoa, Bahrain, Barbados, Grenada, Guam, South Korea, Macau, Marshall Islands, Mongolia, Namibia, Palau, Panama, St Lucia, Samoa, Trinidad and Tobago, Tunisia and the United Arab Emirates. However, when contrasting the revelations in the Paradise and Panama Papers about international tax schemes, exposing some of the intricate ways that the world’s wealthy use to evade tax through offshore havens, it quickly becomes apparent that the EU has chosen to target countries with little economic or political weight. Continue reading
The State Budget for 2018 introduces important revisions to the Simplified Regime. The Secretary of State for Fiscal Affairs, António Mendonça Mendes, declared that the measures “do not impact” taxpayers on low and middle incomes. At the same time, the changes “do not allow wealthier service providers to manipulate the existing system to simplify, rather than lower taxes”. “Who truly must justify expenses are those who, earning more than €100,000, have chosen not to apply standard accounting”.