Portuguese property is an attractive investment because it can bring income as well as capital growth, making it potentially both a secure and profitable investment. However, with making money comes fiscal obligations.
Buy-to-let owners in Portugal are faced with new commitments and compliance requirements when sorting out their tax obligations on holiday property rentals.
If you are resident for tax purposes in Portugal, you need to report this income along with other sources in your annual individual income tax declaration.
Property lets are reported as part of Category F in IRS declarations. Deductible expenses include utilities paid by the owners, maintenance and repair expenditures as well as Municipal Property Tax (IMI).
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. You will be only taxable on 20 per cent of your gross invoiced income.
Rental activity (Category F) is exempt from VAT. Business income 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.
If you are letting as a business you need to register for Social Security. In the first year of business, the self-employed are exempt from contributions. This exemption does not apply if you were previously registered and are reopening an activity.
If your income fails to exceed six times the national minimum wage (2,248.20 euros in 2005), you are eligible for partial or dispensation from Social Security contributions.
Current recipients of Social Security benefits (i.e. old age pensioners), either in Portugal or in another EU country, may also apply for dispensation from contributions.
In order to grasp the full impact of different levels of taxation, let us compare some practical examples. A resident couple with 20,000 euros of pension income also has 2,000 euros in net rental income. Reporting this income works as follows (see table below).
To make a long story short, the greater your commercial income, the more attractive the business becomes from a tax point of view. In fact, a couple with holiday let income of 100,000 euros could have a gross tax due of less than three per cent under the Simplified Regime!
A one-time expense for a licence may prove to be a real bargain in the long run. On the other hand, if rental income is relatively low, self-catering lets may be more sensible.
SINCE NON-RESIDENTS are not eligible for the Simplified Regime, how do you best declare your rental income? The simplest way is under Category F, Rental Income, in the IRS individual income tax return.
The procedures here are identical to residents as described above. Since 2005, non-residents benefit from a special tax rate of 15 per cent for this type of income.
Whatever tax is paid in Portugal should be eligible for a foreign tax credit in the home jurisdiction. Compliance costs or mortgage interest should qualify as tax deductions. In other words, we are talking about a “nil” expense (unless you are trying to cheat both tax authorities). All the more reas