An article by Eurofinesco
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.
Rentals
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.
VAT
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.
Social Security
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.
Practical Examples
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 reason to go by the book.
Minimising rental income tax
If the various one or more properties are held via a commercial Property Administration Company, this Portuguese “Limitada” can manage the property lets under the Simplified Regime with only a five per cent net tax liability. Since the company is a resident entity, there are no international double taxation worries.
In the future, this company could also provide a flexible yet tax-efficient tool for on-going property investments that could help to defer, reduce or even eventually avoid altogether numerous forms of taxation both in Portugal and abroad.
Fiscal Representation
Fiscal Representation should be, in fact, a simple and straightforward matter. However, while relatively easy and painless, it could easily turn into a high risk area if left neglected. Here are three sound reasons why you need to have a qualified Fiscal Representative.
1) Legislation
Having a Fiscal Representative is a matter of law. The Fiscal Authorities (Finanças) require a resident representative to meet all accessory tax compliance obligations for the non-resident taxpayer with property or income arising in Portugal. You should demand someone who does more than forward “rates” bills to you. You want a Fiscal Representative to defend you and your interests, someone with broad experience as well as an excellent rapport with local, regional and national Finanças offices to help sort out any problems that may arise.
2) Nil cost
All taxes paid in Portugal as well as necessary expenses for Fiscal Representation will serve as either tax credits or deductions in the home jurisdiction. As a result, these fees and costs should be a nil expense at the end of the day. Likewise, it is important to understand that with property, the principle of Situs is almost universal. Each country sees itself as sovereign and wants to have the final say when you own a piece of that country.
3) Access to information
Portugal is a difficult country to find sources of reliable, accurate information. Your Fiscal Representative should be your link to sound information, not only about tax and legal matters but also about how things work in general in a strange country in plain English.
Without a qualified Fiscal Representative, you may be placing your valuable investment needlessly in jeopardy and, at the same time, miss out on an invaluable ally to make the most of your investment in Portugal.
This article is written and provided with permission by Robert M.L. Snapper, fully licensed real estate agent in Portugal.