By: DENNIS SWING GREENE
International Fiscal Consultant for euroFINESCO
eurofinesco@portugalresident.com
This is the final article in a four part series examining different alternatives to Holiday Let Licensing:
1) Keeping your Habitation Licence
2) Organising under “RAU”
3) “Hospedagem”- the Hybrid Solution
4) Compliance – Getting it Right
IT SHOULD not come as a surprise that if you are renting out a piece of Portugal your first and foremost tax obligation will be to Finanças, the Portuguese tax authority.
The assessable nature of a chargeable event depends solely on: a) where the activity takes place and b) that income is made available to you – not where payment is made or the currency used. Non-residents will, in addition, need to report this income in their home jurisdiction. Any tax paid in Portugal should normally stand as a foreign tax credit, thereby eliminating any double taxation.
Resident taxpayers in Portugal
If you are resident for tax purposes in Portugal, you need to report this income along with other sources in your annual IRS individual income tax declaration.
Rentals
Property lets are reported as part of Category F of IRS. Deductions allowed include utilities paid by the owners, maintenance, repairs as well as IMI (Municipal Property Tax). The net income is then added to any other sources, such as pensions, interest, etc. Tax is calculated on total income at marginal rates (12 per cent – 42 per cent).
All deductible expenses must be documented by proper receipts, or facturas.
Holiday lets as a business
If you let out furnished accommodations to tourists on a licensed basis, you should be registered as a tourist related service business (Category B). This type of activity receives especially favourable treatment under the Simplified Regime. However, you will need to make Social Security contributions starting in your second year of operation. Count on minimum monthly payments of around 170 euros per month. Those already receiving a pension can apply for exemption.
VAT
Rental activity (Category F) for residential lets is exempt from VAT. However, business income (commercial) above 10,000 euros per annum falls into the VAT regime. For tourist accommodations, the lower rate of five per cent applies. On the positive side, the VAT on necessary business expenses, assessed at 21 per cent, now becomes deductible so your quarterly VAT filing could easily build up credits and even an eventual refund.
Non-residents and rental income
Non-residents are not eligible for the Simplified Regime so the simplest way to declare your rental income is under Category F in the IRS form. The procedures here are identical to residents as described above. As of 2005, non-residents benefit from a special tax rate of 15 per cent for this type of income.
Alternatively, you will need to form a Limited Liability Company, or Limitada. You will need to have a charted accountant to prepare your tax declaration and the business will be subject to Special Estimated Tax Payments (PEC). This solution is only practical when multiple properties are involved. Whatever tax is paid in Portugal should be eligible for a foreign tax credit in the home jurisdiction. Compliance costs and mortgage interest should also qualify as tax deductions. In other words, we are talking about a nil expense unless you try to cheat both tax authorities. All the more reason to go by the book!
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