By Dennis Swing Greene [email protected]
Dennis Swing Greene is Senior Partner and International Fiscal Consultant for euroFINESCO s.a.
Long-term property lets (usually having a rental contract between landlord and tenant) are included in Category F and are reported on Anexo F in the second filing period in April/May. Note that the fiscal year in Portugal corresponds to the calendar year.
When a rental agreement exceeds six months, a contract is required by law. At many levels, it is important to spell out expectations, rules and requirements during the renter’s stay in your property.
Everyone’s rights need to be protected and a written contract is a prerequisite to a satisfactory arrangement for all concerned.
With a proper contract, registered with Finanças, tenants should be eligible for a housing tax credit, much as they would as if they were paying a mortgage.
On Anexo F of the IRS Individual Income Tax Return, you report your fiscal number, registration details regarding the property, the total amount of invoiced income as well as any deductible expenses.
Finanças will add the net to other sources of income, such as pensions, interest, etc. Tax is calculated on total income at marginal rates (11.5% – 46%).
Rental Income (Category F) is taxable in Portugal based on income made available to the property owner and is not related to where payment may be made nor which currency used.
Even if holidaymakers contract abroad through a foreign agency and pay in another currency, the letting of a Portuguese property constitutes a chargeable event in Portugal because the business activity in question factually takes place in Portugal. Payments from Rental Income Guarantees are also taxable in Portugal as a capital gain.
Deductible expenses
The main categories of deductible expenses which reduce notional or actual rental taxable income for tax purposes are:
• Maintenance, e.g., interior and exterior painting
• Repairs, e.g., parts or repair of plumbing or electrical systems
• Condominium charges and, in apartment buildings, collectively shared expenses such as: doorman and common area cleaning costs, building security, elevators, maintenance, energy for lighting, heating and air conditioning of common areas.
• Rates (IMI or Municipal Property Tax) and other Municipal charges, such as sewage disposal, rubbish collection, etc.
• Insurance – Multi-Risk & Tourist Liability coverage.
Finanças has been tightening up on its procedures over the last few years, with more crossreferencing against different sources of information and a more concise interpretation of legislative guidelines.
As a consequence, the range of deductible expenses is significantly narrower than in previous years. The Tax Office also appears to perform more frequent audits than previously.
Should the inclusion of non-deductible expenses lead to an audit, this will (probably) result in a resubmission and other extra costs such as interest and fines.
Invoices (Facturas)
While you must be able to substantiate any amounts declared with proper invoices, these documents are not required at the time of submission.
Portuguese law stipulates that all documents must be kept for the following five years in the event of a tax audit. Allowable invoices (facturas) follow European Union rules.
They must be dated and numerically sequential; state the name and fiscal number of both of the provider and the recipient; list the nature and cost of the goods and services provided; specify the rate and amount of any Value Added Tax (IVA) paid.
VAT
Rental Activity (Category F) is exempt from Value Added Tax.
Dennis Swing Greene is Chairman of the Board and International Fiscal Consultant for euroFINESCO s.a. Private consultations can be scheduled at in Guia (Albufeira) 289 561 333, by email at [email protected] or internet at www.eurofinesco.com.
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