Local lodging – Killing the goose that lays the golden egg

Since the introduction of the Simplified Regime in 2001, taxation of income from tourism activities in Category B dropped from 20% to 15%. In contrast, over the same period, income from real estate leasing has been a yo-yo. Historically taxed at 25%, the levy on long-term renting dropped to 15% in 2001 where it remained until 2013 when it almost doubled, jumping from 15% to 28%.

If long-term vacancies are a scarcity in historic neighbourhoods, excessive taxation of landlords will do nothing to increase supply. Local incentives need to be found to resolve neighbourhood problems. Estimates show that only 8% of overall Local Lodging offerings in Portugal are in these historical localities. Penalising the other 92% does nothing to address the issue. To the contrary, it creates a new dilemma.

Comparison – Category F: bare walls rentals vs Category B: tourist services

In Category F – long-term leasing of immovable property – it is the empty space that is leased (“bare walls”). Beyond basic infrastructure, tenants meet their own needs independently. The relationship between landlord and tenant is contractual and occupation is full time. In Category B, occupation is variable and represents a major risk component, both absolutely and seasonally.

Local Lodging is based on tourist services as a business activity, not rentals per se. In addition to the space and basic infrastructure provided, the following services are included:

■ fully furnished and equipped
■ utilities included – electricity, water, gas, internet
■ reception and orientation services
■ cleaning services – maid service, pool cleaning, garden maintenance, etc.
■ safety standards – as per regulations

Decharacterisation of historical centres

One of the major complaints regarding the Local Lodging boom is the displacement of locals, replacing neighbourhood residents with an invasion of short-term tourist lets. While there is some truth to this observation, it would be erroneous to assume that before the arrival en masse of foreign holidaymakers, communities in historical districts enjoyed a healthy environment. Nothing could be further from the truth.

For decades, the reality has been urban flight. Ageing populations, vacant and abandoned buildings, deteriorating infrastructures have been the norm. Tourists arrived to fill a void. These visitors appreciate and value what locals have come to take for granted. Most would like nothing better than to share in sound, vibrant community living.

Commercial operators vs the peer-to-peer economy

One of the reactions to the 2014 legislative reform of Local Lodging was the across-the-board categorisation of all Local Lodging operations as commercial with the subsequent application of commercial rates to water and other municipal services in some districts. These higher charges are not only inconvenient to owner/operators, they can prove to be prohibitively expensive in some cases, driving some owners underground in their operations.

In fact, there is underlying statutory ambiguity regarding the status of Local Lodging establishments. On the one hand, the property being used in the business operations is registered as “residential” in the Land Registry (Registo Predial). On the other, the business activity being conducted with the property is classified as “commercial” by the AT (tax authorities).

There is little to distinguish between the small-scale endeavour operated under the principals of the “peer-to-peer” economy and a full-blown commercial operation with a multitude of properties being operated by a single commercial entity.
Many tourist developments offering hundreds of units to tourists have opportunistically embraced the AL classification to take advantage of the uncomplicated procedures and simplified regulations.

By Dennis Swing Greene
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Dennis Swing Greene is Chairman and International Tax Consultant for euroFINESCO s.a.