THIS IS the first in a seven part series on licensing requirements for holidaylets.
In the summer of 2005, Inspectors from the Inspecção-Geral das Actividades Económicas (IGAE) raided rental agencies in the Algarve, demanding to see letting permits. These permits/licences should have been issued by the local council in order for the accommodation to be rented to tourists, as required by law since 1997. Those practising this letting activity were often unaware of any such prerequisites and the inspectors proceeded to fine both agents (between 2,500 and 30,000 euros per infraction) and owners (from 500 to 3,740.90 euros). One agency was fined a total of 150,000 euros. These investigations were part of an overall strategy to tighten up procedures and law enforcement. According to the Direcção Geral de Turismo (Tourism Bureau), approximately 4,000 notifications were sent out to update registries, in addition to parallel inspections like those that occurred in the Almancil area. Throughout the 16 councils of the Algarve– the official entities charged by law to regulate and license the holiday letting practice – one would be hardpressed to count on the fingers of one hand, the licences actually issued since the current legislation came into effect in 1997. Owners and agents now find themselves penalised for not having a licence, which, in many câmaras, does not yet even exist. Given the “Catch 22” nature of the whole affair, confusion and consternation abound. Naturally, these events have brought an upsurge of alarm to the foreign resident community in the Algarve, reminiscent of the shock waves sent out when property reform legislation attacked offshore companies several years ago. Once again, understandable and necessary changes have been brought into place in a rather clumsy and poorly thought out process that rapidly turns intoa nightmare for all concerned.
The industry
Foreign investment in Portuguese real estate has been both popular and lucrative in recent decades. Over the long term, property is almost always an appreciating asset. Unless you buy at an overly inflated price, let the place fall into disrepair, or some kind of disaster besets the structure of the property, then you should eventually end up with a property worth considerably more than your purchase price. With foreseeable demographic pressures in Portugal over the coming years, demand for housing is set to boom. There is no reason to suggest that this long-term appreciation trend will change.
Income
Once purchased, many people manage to make a tidy income from renting out property. In popular tourist areas such as the Algarve, one or two week lets to tourists during the high season can prove a profitable enterprise. Often, it essentially becomes a business, and business activity has different regulations, as well as a specific tax regime. Unfortunately, over the years, the overwhelming majority have disregarded their compliance obligations. Whether due to ignorance (never an excuse) or greed, most fail to register their activity, license their property or declare and pay tax on the income.
Conflicting Legislation.
Unfortunately, current legislation does not contemplate precisely the arrangement that matches the most common practice: short-term furnished lets that occur sporadically during the year, with private usage during the remaining months. Nor is it easy to distinguish clearly the line between what constitutes a let to holidaymakers, falling into the category of property rental income, and tourist activity lets, seen as a commercial business. Two sets of legislation overlap to regulate these intersecting activities. On the one hand, tourist related business activities are regulated under Decree Law nº 167/97, introduced in 1997, shifting enforcement from the central Tourism Bureau to local town councils. One fundamental purpose was to bring order to an untamed activity with the intention of safeguarding health and safety concerns for tourists. Licensing and regulation were decentralised and put in the hands of local councils. On the other hand, property rental activity is regulated by the Regime de Arrendamento Urbano. A complete overhaul of this legal code was recently published in the Diário da República in February 2006. While normally requiring a contract for a minimum of five years, letting to tourists constitutes one of the exceptions with no stipulated minimum period under the law. If less than six months (almost always the case), no written contract is required either. However, in neither body of legislation is there any clear definition to distinguish the “commercial” practice from the “rental” process. Needless to say, in order to get it right, “the line must be drawn in the sand”. Algarve councils To add to the complications, each câmara appears to be a law unto itself. On-site visits to each of the council offices over a two month period in early 2006 revealed that no two were alike: each had different statutes, incompatible attitudes, conflicting rules. While many have statutes on the books, most have never implemented them until now.
Finding a solution.
In order to avoid panic and to concentrate on the heart of the matter, let us examine the pieces of the puzzle with the goal of reaching a practicable solution. As we will see in this series of articles, while there is genuine reason for concern, several viable solutions exist that, in the long run, are surprisingly beneficial to all concerned.
AT FIRST glance, licensing may appear to be just one more imposition of bureaucracy.
However, regulations exist because of the negative consequences of past abuse. Put more simply, people can get hurt needlessly. A few minor precautions often avoid injury, and even death in extreme cases. From the owner’s point of view, it is an essential step in order to avoid being found criminally negligent in the event of an accident during the practise of one’s activity. Being found guilty could lead to considerable fines or even a prison term. Who can argue against safety? While an expense and a nuisance, licensing requirements should come as no surprise in the world that we live in. All legal businesses have overheads. Certification from the proper authorities is part and parcel of running any lawful business activity. Of course, we all know that these regulations often run rampant. Bureaucracy easily becomes a cancer that spreads rapidly and can get completely out of hand. While this may be a potential danger in the area of holiday lets, we are still at the other extreme of the spectrum. Thousands of property owners have been making money for years with no regulatory control and little or no taxes paid on the income.
Tourist lodgings in general
The law states that only lodgings registered with the local authorities may be commercialised, whether directly by their owners or via tourist agencies. The licensing process covers the following key areas:
Lodgings fall into two categories: Apartamentos Turísticos (Tourist Apartments) and Moradias Turísticas (Tourist Houses) which foresee operation on a full time basis.
Tourist apartments
As the characteristics below indicate, this solution is not intended for a single, isolated apartment but rather a group or block of apartments let out to holidaymakers. In other words, those falling into a spectrum above an individual flat, yet below an aparthotel.
They are classified between two and five stars in accordance with the quality of accommodation offered. Basic requirements are defined in Decreto Regulamentar nº 34/97 de 17 de Setembro, articles 39º and beyond. Among other prerequisites are the following:
Tourist houses
Tourist houses, a single family dwelling made available to holidaymakers, normally follow the same rules and procedures as tourist apartments, which are essentially the same as any hotel or tourist accommodation facility. They are ranked in two categories, 1st and 2nd class, according to appropriate characteristics, with complex licensing and inspection requirements. In short, they are designed to be part and parcel of a full time tourist accommodation business practice. In other words, the owner exchanges a habitation licence, authorising solely private residential use, for a business licence for tourism that is identical to a hotel.
At first glance, this alternative appears appropriate: the house (moradia) is genuinely being used for touristic purposes. However, the problem arises due to the fact that this legislation does not contemplate a property having two concurrent licences: either 1) a habitation licence for private use or 2) a tourist house permit for commercial activity. Given our mixed use model, either the tourists are illegal under a habitation licence or owner usage is forbidden under the tourist permit. “Damned if you do, damned if you don’t.”
An apt solution?
Despite the fact that this full time activity is not appropriate in many cases, this may be one of the few alternatives open to you in several key councils in the Algarve. Following inspections in Almancil last year, Loulé Câmara has dug in its heels, insisting on Moradia Turística licences. Why Loulé failed to adopt alternative Guest House Regulations in 2000/2001, when most other councils did, is a mystery.
With the whole question under formal review, both by the councils in the Algarve as well as at national level through the Direcção Geral de Turismo in Lisbon, change is more than likely in the coming months. Currently, each council is a world unto itself with diverse legislation, different attitudes, divergent solutions (or no answers at all). Needless to say, the powers-that-be will need to push for harmonisation in the regulations and practises that govern identical activities in different câmaras. In councils where few or inadequate solutions exist, options are under review and substantial change is in the wind.
The pressure is on for action. In mid March of 2006, the National Tourist Office held a training session for local câmara officials to help them fully understand current legislation and harmonise interpretations. Community as well as national leaders have gained awareness that this is an issue that can no longer be ignored and needs prompt resolution.
Next: Licensing requirements – presenting a plan
A COMPLICATION for registering your tourism activities lies in the regulations surrounding licensing. These are essentially identical to the requirements for any tourist hotel complex. Licensing begins with technical plans, as well as a safety project.
The plans originally submitted when requesting building permission for the property, are a good start. However, certain minimum criteria must be met in accordance with legislation, which may lead to certain adaptations and alterations to these drawings. Licensing costs vary enormously from council to council and can range from 50 to 500 euros.
Potential problems
To cut a long story short, obtaining a licence can be an expensive, time consuming procedure, requiring perseverance and patience. It goes without saying that if unauthorised changes and additions have been made over the years, these irregularities will need to be sorted out before permission is granted.
In this regard, it is easy to imagine three possible scenarios:
Safety project
You will need to have a safety project drawn-up, which includes plans showing the location of fire extinguishers, smoke alarms, emergency exits and the like. The project must be prepared by a technical engineer who is specifically trained in this area. One more expense.
Whether fully appropriate or not, the casa turística (tourist apartment/house option) may be one of the few that is open to you. Not all câmaras have adopted the same regulatory solutions.
If your activity is strictly commercial in nature because you place the property with a commercial tourist accommodation agency, for example, and intend to let it on a year-round basis, you will need to gear up for the Moradia Turística licence. On the other hand, if you plan a mixed usage, blending private use with occasional lets, then the guest house option (hospedagem) may be more appropriate. However, not all câmaras have adopted this legislation. Loulé and Portimão, for instance, are two notable examples of Algarve councils with very limited choices at present.
Condominiums and closed developments
A major problem area for changing from the standard habitation licence to a different form of commercial or semi-commercial permit can exist in condominiums and closed developments. In a nutshell, these urban compositions currently require the approval of fellow owners to modify usage. If all of the flats in an apartment building are designated for private residential purposes, with all of the other owners having bought under this understanding, there needs to be unanimous consent for one individual owner to alter his or her usage permit. Alternatively, the local council may also need to approve the change if a whole development was originally designed for private use only. Needless to say, this potential requirement could be a nightmare.
MANY FOREIGN homeowners wish to make extra income from their properties. While a few run rental activities from January to December, most prefer a mixed arrangement: for most of the year, private usage (typically out of season); for a few weeks or months and letting out to tourists (usually in the peak season summer months), on a weekly basis.
Within this hybrid category, some find their clients themselves, either through personal contacts or listing over the Internet. Others make arrangements with agencies (both in Portugal and abroad) who both find and manage the holidaymakers who will be using the property.
The guest house classification (Hospedagem) is intended for seasonal usage. Licensing contemplates both private usage by the owner, for part of the year, and letting out to tourists – by the house, apartment, or room by room. Regulations are far more basic than the hotel-style tourist houses, and the only real obstacles are the submission of technical plans and the defined inspection process.
Your alternatives
This solution contemplates three alternatives:
The Hospedagem classification has been adopted by many councils throughout Portugal. In the Alentejo, it is quite popular in rural townships to accommodate hunters during the hunting season. Many of the municipalities in the Greater Lisbon area embraced this solution to deal with the overflow during the European Football Championship, a few years ago. In the Algarve, however, only around half the councils have passed this alternative into local statutes. Many local officials see this option as a scaled down hotel or inn, and are uncomfortable with the concept of mixed usage. Only a tiny handful of these licences have actually been granted, mostly for new properties. Licensing changeovers (habitation to hospedagem) are still almost unknown.
Licensing
Like its cousin, the Moradia Turística, a guest house, also requires formal licensing. Unlike the elaborate regulations for full-time tourist houses, rules for Hospedagem tend to be simple and based on common sense. Once again, the main hurdles are the architectural project and the safety plan. While neither is formidable, both require qualified professionals to take technical responsibility for the projects as well as assure an absence of illegal modifications to the property.
Next: Renting – O Arrendamento Urbano
UP TO this point, we have only discussed options that are considered as being commercial in nature. A completely different vantage point exists with regard to making your property available to holidaymakers: renting to tourists. Simply put, you authorise someone to live in your house for a specific period of time in exchange for an agreed price. No licence is required. No permission needed from the neighbours. No mandatory registration with the câmara or the Tourist Office.
Potential drawbacks
While renting is quite simple and straightforward, there are potential drawbacks. Under the Regime de Arrendamento Urbano, the Portuguese body of law that governs rental activity, the minimum rental period contemplated is normally five years. Where tenants decide to stay on, you may find that you are hard pressed to get rid of them. Historically, legislation and the courts have been heavily slanted in favour of tenants.
Realistically, these circumstances are unlikely to occur in holiday lets (most holidays do come to an end, usually far too soon). In fact, while the five year minimum does exist, the law does allow for three exceptions: professional motives (such as a short-term work contract), education (for example, student accommodation) and finally, tourism. From this point on, the law is ambiguous in its silence, and fails to specify any minimum period of time. So hypothetically, one could rent out for a day, a week, a month or whatever the two parties agreed upon. The law also states that when the period is six months or less, no written contract is necessary. So far, so good.
When does renting become a business?
More importantly, legislation fails to 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 of a continuum, where little doubt exists. At one end, a tourist accommodation agency can only offer licensed properties because of the legislatively defined commercial nature of this business activity. Therefore, if you use such an agency to market your property, you too will be seen to be conducting a commercial activity.
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 easily falls into the 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
Owner-defined solution
What happens in the broad grey area in between? Few objective criteria exist to readily delineate the difference. Therefore, it is up to the property owners to define for themselves how they contemplate their activity. If commercial, you should obviously get a licence. If seen as a rental, 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 his accusations.
Next: Compliance – Getting it right
LET US begin by stating the obvious: there is no “one size fits all” solution to this problem. To best understand how to proceed, we must next examine the tax implications of different alternatives.
It should not come as a surprise that if you are renting out property in Portugal, then 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 nor 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 individual income tax (IRS). Deductions allowed include owner paid utilities, maintenance, repairs as well as Municipal Property Tax (IMI). The net income is then added to any other sources, such as pensions, interest, and so on. Tax is calculated on total income at marginal rates (10.5 per cent – 42 per cent).
All deductible expenses must be documented by proper receipts (facturas).
Holiday lets as a business
If you let out furnished accommodation 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 receive an exclusion of 80 per cent and are only taxable on 20 per cent of 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 accommodation, 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.
Non-residents and rental income
Portuguese property is attractive because it can bring income as well as capital growth, making it potentially both a secure and a profitable investment. However, together with making money, come fiscal obligations. Non-residents in Portugal will be faced with new commitments and bureaucratic demands regarding property rentals.
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. 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 follow the practices of Standard Accounts. In this category, you must have a charted accountant to prepare your tax declaration and the business will be subject to Special Estimated Tax Payments (PEC).
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!
Practical examples
In order to grasp the full contrasting 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:
Tax on pension income only: € 85
Tax on pension + rental income (Cat F): € 325
Tax on pension + business rent (Simplified Regime): € 325
If net rental income were to go up to 15,000 euros, then:
Tax on pension + rental income (Cat F): € 2,675
Tax on pension + business rent (Simplified Regime): €460
Were net rental income greater (30,000 euros), the difference would be more pronounced:
Tax on pension + rental income (Cat F): € 6,450
Tax on pension + business rent (Simplified Regime): € 830
To cut a long story short, the greater your commercial income, the more attractive the business becomes from a tax point of view. A one-time expense of a few thousand euros for a licence may prove to be a real bargain in the long run. On the other hand, if rental income is low, there may be little tax savings in the licence.
Next: Conclusion – Not so bad after all
This article is written and provided with permission by Robert M.L. Snapper, fully licensed real estate agent in Portugal.