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Holiday lets – rental income – Part 2

By DENNIS SWING GREENE features@algarveresident.com

Dennis Swing Greene is Senior Partner and International Fiscal Consultant for euroFINESCO s.a.

Letting to holidaymakers?  Confused by contradictory rumours?  The second part of our questions and answers should help clarify some your doubts and the disarray of conflicting information regarding Rental Income in Portugal.

What expenses are not allowable from rental income?

As a rule, capital expenditures may not be claimed against rental income.  Examples of non-deductible items include:

• Construction altering building’s structure

• Mortgage (sometimes deductible in the home jurisdiction)

• Installation of air conditioning

• Other capital improvements

• When correctly documented, you may enter capital improvements into the calculation of the taxable base for capital gains purposes.

Some trades people have not given me proper receipts. Can I still deduct these expenses?

No. All expenses must be documented by proper facturas, formal receipts stating the name, fiscal number of both the entity providing the goods or services as well as those of the taxpayer.  Value Added Tax (IVA) paid must also be included. Invoices should be sequentially numbered.  No invoice, no deduction.

If I can’t deduct capital improvements to the property, should I bother to save the invoices?

Yes. When properly documented, capital improvements made in the five years prior to sale may enter into the calculation of the taxable base of the building for capital gains purposes when the property is eventually sold.  

We plan to buy several properties and make a business out of our holiday lets. How should we get set up?

One alternative is to form a Portuguese property management company.  As a limited liability company, you can deduct mortgages, property depreciation, travel and any other legitimate expenses necessary to conduct your business.  After deductions, your company can benefit from the same 15 per cent tax rate on net income as do non-residents.  Profits can be reinvested into new properties or distributed to shareholders.

If such a business sounds potentially attractive, it would be worthwhile performing a cost-benefit analysis to determine at what level such an enterprise would become viable for you.

I was told that, as a non-resident, I need to have a fiscal representative. Why?

Under Portuguese legislation, non-residents owning property or with income arising in Portugal must have a fiscal representative. The purpose of this position is to assure that the non-residents meet their fiscal commitments in full. This may include:

a) Reporting annually rental income,

b) The biannual receipt of the Property Tax (IMI) demand as well as

c) The declaration of capital gains following the sale of a property

d)  Assuring subsequent payment of any taxes due.

The fiscal representative is your liaison between Finanças and the non-resident for any and all formal communications.

Last but not least, your fiscal representative is your source for clear, accurate information about Portugal in plain English.  Getting the right tax advice at the right time can mean many thousands of Euros in savings.

Private consultations can be scheduled at our offices in Guia (Albufeira), Lisbon (Chiado) and in Funchal (Sé), Madeira. In the Algarve, call 289 561 333, Lisbon at 213 424 210, Madeira at 291 221 095. Email info@eurofinesco.com or visit www.eurofinesco.com