The guidelines of the Doctrine Declaration (“Ficha Doutrinária”) dated 04 December 2017 clarify tax liabilities based on nº 5 of article 81º of the IRS Code. Assessment of income from foreign sources classified under categories E (capital), F (long-term rent) and G (capital gains) earned by taxable persons considered to be Non-Habitual Residents follows the exemption method where the source country has the power to tax this income under the applicable Double Taxation Agreement. This rule infers that the tax exclusion does not hold for jurisdictions without such an agreement in place. Tax-exempt income must still be reported annually in Portugal to determine the final tax rate to be applied to total aggregate income subject to assessment.
Local Lodging operators who opt to be assessed under the tax rules of Category F (long-term rentals) may deduct commissions from this income paid to online reservation platforms. However, those carrying out their tourist business under Category B as Sole Traders do not deduct specific expenses but rather are automatically allotted 65% from their gross “AL” income to cover operating expenses.
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.