While much of the interest in the new legislation regulating Local Lodging has focussed on simplified requirements for owners, the most exciting news centres around the favourable taxation of this business activity in general, both for owner/operators as well as property managers.
Historically trapped in Category F (Rental Income), in 2013 this category was condemned to pay 28%. For non-residents, the majority of owners engaged in Local Lodging, this payment was final.
When treated as a business activity (furnished lodging for tourists) as is now compulsory, the picture changes dramatically. Under the Simplified Regime, this activity automatically receives an 85% exclusion and taxation is based on just 15% of invoiced income. For most, this reclassification reduces final assessment to under 4% rather than 28%, a sensational seven-fold reduction when comparing Categories B to F. While there is a small increment in related accounting costs, this increase is more than compensated by the tax savings.
However, the tax benefits are not limited to owners. Many owners let through agents. An alteration in status and outsourcing of bureaucracy may also imply a change for agents as well. When owners switch to a Category B business activity, they assume directly or outsource the following:
in order to qualify as a tourist activity, owners must invoice holidaymakers directly. As a corollary, agents have one less task to perform;
b) Withholding Tax:
Under Category F (rental income), agents normally had to withhold 25%, a somewhat timely and costly process. With owners now as independent businesses, no withholding is required.
under the new Decree-Law, the operator (agent) is liable for infractions – often caused by owners – with cumulative fines reaching as high as €270,000. Owners, who are normally individuals rather than companies, have fines at one tenth corporate levels. Needless to say, they are the ones who ultimately control the condition of the property they own so it is only natural that they assume responsibility.
Whether it be to the tax authorities (AT) or to Immigration and Borders Service (SEF), reporting requirements can now be outsourced by the owner and are no longer in the domain of agents.
e) Tax declarations:
With owners registered for business and tourist invoicing in place on a “demand” basis, annual tax declarations will automatically follow. Agents can be assured that their owners are fully compliant and are no longer at risk of being held accountable for tax omissions.
Many owners find outsourcing these issues to competent professionals to be both economical and efficient as well as a genuine relief to be rid of these headaches in Portuguese bureaucracy.
Moving from agent to manager
With agents switching their formal registered business activity to “manager” (providing support services to the tourist activity), their role otherwise remains the same, as do commissions. Fewer tasks mean greater productivity leading to enhanced profits. As stated above, owners make appreciable savings as well, so it is a win-win situation.
Taxation of property managers
The new tax treatment for managers couldn’t be better. Under the former legislation, managers were assessed based on 75% of their gross income under the IRS Simplified Regime. Starting in 2014, this percentage drops to just 10%. This leads to a final tax rate of only ±1%. It is hard to imagine a solution where compliance could be more favourable, both for owners and agents.
The following tables illustrate this dramatic difference available with minor restructuring and appropriate outsourcing. Not only does taxation drop to a negligible amount as a manager (whether as a sole trader or a company), workloads are also reduced, productivity increases, profits grow both for the owner and the manager. With greater levels of compliance, even Finanças benefits as well in the long run.
By Dennis Swing Greene
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Dennis Swing Greene is Chairman and International Tax Consultant for euroFINESCO s.a.