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
• Dennis Swing Greene is an International Fiscal Consultant for euroFINESCO. Private consultations can be scheduled at our offices in Guia (Albufeira) and Lisbon (Chiado). In the Algarve, call 289 561 333; in Lisbon, call 213 424 210 or e-mail: [email protected]. Also visit www.eurofinesco.com
