By: DENNIS SWING-GREENE
International Fiscal Consultant for euroFINESCO
Short term lets to holiday makers: Commercial vs. residential lets – Part Three
This is the third in a four part series examining issues concerning short-term lets to holiday makers:
Part one – Misinterpreted legislation
Part two – When renting becomes a business
Part three – Commercial vs. residential lets
Part four – Rental agent vs. villa manager
IN THE UK, letting is deemed to be commercial when the property is made available to the public at least 140 days a year and rented at least 70 days per annum. Unfortunately, Portuguese legislation makes no such clear definition as to the threshold between these two types of activities.
In fact, contradictions abound. In 2005, a special tax rate, lowering the previous 25 per cent levy to 15 per cent, came into effect with the declared intention of encouraging non-resident property owners to declare their residential rental income from occasional lets of their Portuguese properties. In the same year, inspectors raided rental agents in the Algarve, fining both agents and owners. Since then, inspections have spread to other regions.
Commercial vs. residential renting
What guidelines exist to distinguish between commercial vs residential renting? Let us examine several practical examples that might help sort out the wheat from the chaff. Whatever the situation, it is always useful when the owners can also document the periods of personal use of the property.
Example one – At one end of the spectrum is the case of the property owner who places his property with a holiday letting agent, registered as a commercial business with the stated purpose of renting accommodation to tourists.
The agent runs the activity from A to Z and eventually distributes the net proceeds to the participating owner. There would be little doubt that such an activity would fall under the commercial umbrella.
The income would be commercial (Category B) and the property would need to be licensed by the local council authorities.
Example two – On the other hand, a property owner lets directly to holidaymakers, yet uses the services of a villa maintenance company. Such professional services should not influence the residential nature of the rent, even if the owner subcontracts part of the rental administration to the company.
In fact, a professional maintenance service is almost a necessity for the non-resident landlord who is not physically present during most of the year to sort out upkeep and administration requirements. No new licensing should be necessary and income declared as Category F rents.
Example three – A third case occurs when the owners contracts for a fixed seasonal price with a commercial letting agency. This company subsequently sublets to individual clients, assuming the responsibility and risk of the activity. From the owner’s point of view, such an activity would fall under Articles of the Civil Code under the NRAU.
Even though the owner should declare the income in Category F (rendimentos prediais), the property might still require licensing (hospedagem) because of the commercial nature of the agency’s subletting activity.
Internet advertising considerations
Regardless of whether you exercise a commercial or a residential rental activity, you won’t have any holidaymakers unless they know that your property is available and suitable to their needs. Beyond word of mouth (always the best form of publicity), the internet is usually the cheapest yet most effective means for reaching potential holidaymakers.
Whether you run your own website or are part of a collective web service, it is imperative that you define terms and conditions. Beyond the nuts and bolts of the agreement, your offering should be clearly defined, citing the appropriate Portuguese statutes, so that no doubt will exist as to the nature of your activity.
It may also be advisable to have a disclaimer stating what you are not doing, so that there should not be a shadow of a doubt in eventual interpretations.
If you have not already done so, professional help is in order to ward off problems before they occur. A properly worded statement and agreed conditions could prove vital in preparing a comprehensive, well conceived defence in an eventual inspection process. “An ounce of prevention is worth a pound of cure.”
Next: Rental Agent vs. villa manager
Dennis Swing Greene is an International Fiscal Consultant and Senior Partner at euroFINESCOsa, with offices in the Algarve and in Lisbon. Appointments may be scheduled in Guia (Albufeira) at 289 561 333 or in Lisbon (Chiado) at 21 3424210.
