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 from rentals and selling properties, come some legal concerns and obligations. So, many questions arise regarding rentals and taxation of properties owned by foreigners in Portugal.
Typically there are 3 different of situations for homeowners that wish to make extra income from their properties:
- a) The rental activities done by foreigner homeowners on a yearly basis from January to December.
- b) The rental activities done by professional agencies (both in Portugal and abroad) who both find and manage the holidaymakers who will be using the property.
- c) The seasonable rental for those homeowners that use their properties for most of the year (typically out of season), but for a few weeks or months are letting out to tourists (usually in the peak season during the summer months).
The first two categories are considered as being commercial in nature and are subject to a formal rental contract and taxation. The major difference is that in the first category no license is required, no permission needed from the neighbours or the condominium and no mandatory registration has to filled with the Câmara or the Tourist Office.
Non Commercial Activities
In the third category you only have to sign a rental contract and pay the necessary income taxes.
In some specific case this situation could fall under the guest house classification (Hospedagem). Under article 1093º do the Portuguese Civil Code, you don’t need any contract if you have in our property our family or up to 3 guests, even if you provide them services for an for an agreed price.
Portugal has a New Urban Lease Regime. It was enacted by Law no. 6/2006, of 27 February 2006 and entered into force on June 28 last.
Under the new Portuguese rental Law Nº 6/2006, de 27 de February we have now a bipartition, between housing and non-housing lease contracts.
In the non-residential rent contracts, the parties are free to determine the terms of the contract, viz. its duration, termination rules and opposition to renewal. However, if the parties omit references to any of the above, the general provisions of the law for residential contracts shall apply, and the contract shall be considered a fixed-term 10 years contract. In this case the tenant will not be able to serve a notice of termination less than 1 year before the date sought for such termination. Therefore you should have your contract made a professional attorney or solicitor, despite of the minutes provided by agencies and accountants.
Taxation for residents and companies
The resident taxpayers in Portugal need to report income made by renting the properties along with other sources in the annual IRS individual income tax declaration.
Property rentals 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).
The good news is that rental activity is exempt from VAT. However, if your rental activity or company generates 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.
In addition, all rental contracts for the owners exempt from VAT have to pay stamp duty. The duty is charged at a 10% fixed rate of the monthly value of your rent.
To fill and send your annual application you need an accountant.