Short-term lets to holidaymakers (by D. Green)

TWO SETS of legislation co-exist to regulate different types of rental activity.  On the one hand, holiday lets in Empreendimentos Turísticos (tourist developments) such as hotels, holiday complexes and camping facilities are defined and regulated under Decree Law nº 167/97, altered and republished under Decree Law nº55/2002, decentralising many responsibilities from the central tourism bureau (Direcção Geral de Turismo) to local town councils (câmaras).

On the other hand, general letting of residential property is governed by the Novo Regime de Arrendamento Urbano (general renting law), recently overhauled in 2006.  These statutes fully recognise temporary short-term letting, such as occurs with tourists, students, teachers and certain other professions. This particular form of rental merits special consideration in the statutes, to the degree that it is seen as an “exceptional” activity in that the law stipulates no minimum rental period (as normally would be the case in conventional residential lets), nor are contracts required when occupancy is less than six months.

If your letting is more commercial in nature rather than residential, a third option may be appropriate: Hospedagem (guest house).  In this case, you made need the property licence which permits both private use as well as commercial tourist lets. The type of property licence is defined in local council legislation and will vary from town to town.

None of these three options fully addresses the actual activity practised by most owners: letting of self-catering villas and apartments.  Given this basic inadequacy in the legislation, it should not come as a surprise that the ASAE inspectors have their own narrow reading of legislation, that often disregards not only the fundamental aspects of the law but also confuses central licence issues of the economic activity that they allegedly are trying to regulate. Therefore there is controversy.

However, if owners are guilty of other flagrant compliance violations (such as not presenting a Portuguese income tax declaration), threatened agents and owners may have difficulty mounting a proper defence and refuting the possible misinterpretation of the statutes.

In the following series of articles, we will analyse various aspects of the holiday let activity to help distinguish between “residential” offerings and more “commercial” tourist-related business.  As is to be expected, there is no one-size-fits-all solution; clear advantages and drawbacks exist to each option.  It is only by understanding your own particular situation, as well as the legislation involved, that you will achieve a viable and lawful solution.

When renting becomes a commercial activity

THE ACTIVITY of part-time letting of furnished accommodation to holidaymakers is viewed from two different perspectives in Portuguese legislation.

On the one hand, it is viewed as a commercial activity, regulated by article 79º of Decree Law 197/97, which governs the licensing and operating parameters of tourist developments.  On the other hand, it may also be considered a short-term residential rental activity, regulated under art. 1096º of the Civil Code as defined under the Novo Regime de Arrendamento Urbano of 2006, when exercised by an individual landlord who rents a property on an occasional basis within a fiscal year.

Unfortunately, Portuguese legislation fails to clearly sort out the obvious quandary: how to distinguish between a rental and a commercial activity? To help answer this pivotal question, let us examine the two extremes.

At one end of the spectrum, a tourist accommodation agency must itself be licensed through IMOPPI to conduct its business and should offer authorised properties because of the commercial nature of this business activity.  Therefore, if you use such an agency to market your property, you too may be seen to be conducting a commercial activity and will need either a moradia turística licence within tourist developments or one of the hospedagem (guest house) designations in other circumstances.

At the other end of the spectrum is the situation where the owner might make the house available to friends or acquaintances for a few weeks in any given year and they chip in a “little extra” for the inconvenience. Such a practice is unlikely to be construed as a commercial business activity and falls easily into the residential rental category.

Letting agent vs. villa manager

If you have an agent, whether in Portugal or abroad, who finds your holidaymakers, fetches them at the airport, hires the maid to make their beds and manages their stay, you are obviously involved in a commercial operation.  However, if you simply have a villa manager who takes care of your place while you are away, sorting out maintenance and repairs, this support in itself does not constitute a business activity.  We will explore these implications in greater depth in part four of this series.

Owner-defined solution

What happens in the broad grey area in between? Since objective criteria exist to readily delineate the difference, it is crucial not to overstep your bounds.  In essence, through informed choices, it is up to the property owners to define for themselves how they see their activity.  If commercial, you should obviously get a hospedagem licence.  When this option is not readily available in a given câmara, you will need to make certain adjustments to keep the activity legal. If seen as a residential let, you should take appropriate proactive steps to defend this position.  In other words, the nature of the activity needs to be owner defined and defended under the law. In the event of an inspection, the onus will then fall on the inspector to disprove your claim, rather than you merely responding to their accusations.

In the UK, letting is deemed to be commercial when the property is made available to the public at least 140 days a year and rented at least 70 day per annum.  Unfortunately, Portuguese legislation makes no such clear definition as to the threshold between these two types of activities.  In fact, contradictions abound.

In 2005, a special tax rate, lowering the previous 25 per cent levy to 15 per cent, came into effect with the declared intention of encouraging non-resident property owners to declare their residential rental income from occasional lets of their Portuguese properties.  In the same year, inspectors raided rental Agents in the Algarve, fining both agents and owners.  Since then, inspections have spread to other regions.

Commercial vs. residential renting

What guidelines exist to distinguish between commercial vs residential renting?  Let us examine several practical examples that might help sort out the wheat from the chaff.  Whatever the situation, it is always useful when the owners can also document the periods of personal use of the property.

Example number one

At one end of the spectrum is the case of the property owner who places his property with a holiday lets agent, registered as a commercial business with the stated purpose of renting accommodation to tourists. The agent runs the activity from A to Z and eventually distributes the net proceeds to the participating owner.  There would be little doubt that such an activity would fall under the commercial umbrella.  The income would be commercial (”Category B”) and the property would need to be licensed by the local câmara.

Example number two

On the other hand, a property owner lets directly to holidaymakers, yet uses the services of a villa maintenance company.  Such professional services should not influence the residential nature of the rent, even if the owner subcontracts part of the rental administration to the company.  In fact, a professional maintenance service is almost a necessity for the non-resident landlord who is not physically present during most of the year to sort out upkeep and administration requirements.  No new licensing should be necessary and income declared as “Category F” rents.

Example number three

A third case occurs when the owner contracts for a fixed seasonal price with a commercial letting agency.  This company subsequently sublets to individual clients, assuming the responsibility and risk of the activity.  From the owner’s point of view, such an activity would fall under Articles of the Civil Code under the NRAU.  Even though the owner should declare the income in “Category F” (rendimentos prediais), the property might still require licensing (Hospedagem) because of the commercial nature of the Agency’s subletting activity.

 Internet advertising considerations

Regardless of whether you exercise a commercial or a residential rental activity, you won’t have any holidaymakers unless they know that your property is available and suitable for their needs.  Beyond “word-of-mouth” (always the best form of publicity), the Internet is usually the cheapest yet most effective means for reaching potential holidaymakers.

Whether you run your own website or are part of a collective web service, it is imperative that you define “Terms and Conditions”.  Beyond the nuts and bolts of the agreement, your offering should be clearly defined, citing the appropriate Portuguese statutes, so that no doubt will exist as to the nature of your activity.  It may also be advisable to have a “Disclaimer”, stating what you are not doing, so that there should not be a shadow of a doubt in eventual interpretations.

If you have not already done so, professional help is in order to ward off problems before they occur.  A properly worded statement and agreed conditions could prove vital in preparing a comprehensive, well conceived defence in an eventual inspection process.  “An ounce of prevention is worth a pound of cure”

Part four: Rental agent vs. villa manager

THE GROWTH of self catering apartments and villas has proven a boon to the activity of villa management throughout Portugal. Despite some ups and downs in the past, a combination of ingredients makes this business highly promising in the foreseeable future.

In addition to the traditional factors of climate and political stability, new components, such as ever increasing demographic mobility within the EU and the advent of low-cost air travel, promise to make tourism a year-round phenomenon, rather than a 10 week season in the summer.

However, confusion generated around the holiday let licensing issue has led a number of agents to move their business operations outside of Portugal. Even so, the properties themselves cannot be moved and potentially remain vulnerable to attack, if not prepared. Smaller operators often cannot afford to take refuge abroad.

How villa managers can protect themselves against the pitfalls of licensing laws

In addition to the three C’s for the individual property owner (clarity, compliance and common sense), there are additional ways that villa managers can better organise themselves to defend against potential problems associated with tourist developments.

a) Separating services

It should be obvious that villa management is one activity and being a rental agent is quite another. The latter requires a real estate operator’s licence issued by IMOPPI. Although not incompatible, the two activities should best be kept separate. In registering one’s business with the Economic Activity Classification (CAE), it may be better described as property management rather than providing furnished accommodations for tourists.

b) Internet advertising

It is essential to be seen as a service provider, merely acting as outsourcing agent on behalf of the owner. Any advertising should make explicitly clear that the rentals are contracted directly between owner and holidaymakers.

The owner may outsource certain services, such as marketing and administration, etc. Nevertheless, the purpose and applicable legislation must be clearly stated. In a set of agreed terms and conditions for any lets, it is essential to be explicit regarding which legislation should apply. On internet listings, you should have a disclaimer in Portuguese, as well as in English, to clarify the intended statutory purpose of the listings.

c) outsourcing client accounts

Many villa managers run internal client accounts, where they collect money from the owners for expenses, as well as credit income from rentals. This in-house arrangement can work when the business is small, but often becomes stained as volumes grows and can easily spin out of control. More importantly, the practice blurs the essential distinction between villa manager and owner, by mixing accounts and monies together.

If, on the other hand, separate bank accounts were to be used by each owner, with the villa manager intervening to make and receive payments on behalf of the owner, the line of demarcation would always be clear. An owner’s funds go directly in and out of the owner’s bank account and villa managers would be paid separately for services rendered. This banking outsourcing arrangement can usually be set up without charge to villa manager and owner.

d) Villa management compliance

Not only do owners have to be compliant with fiscal representation requirements and filing of annual income tax returns, villa managers have their own compliance obligations to meet. The initial business registration (CAE) is only the first of a number of necessary steps when operating a business in Portugal. If your business is to be a true success, playing by the rules is essential in the long run.

If you act solely as villa manager or merely as an agent for the owner in administering holiday lets, being on solid and defensible ground is all important when facing a potential challenge from inspectors. As is always the case, clarity, compliance and common sense will provide an excellent foundation for any ongoing, successful business.