We are living in difficult financial times. The tax burden in Portugal has risen over recent years as part of government imposed austerity measures. More and more companies are now obliged to make use of electronic billing software which must be certified by the Portuguese Tax Authority, the Direccao Geral de Contribuicoes e Impostos (DGCI). In addition to the details of the issuer (The Property Management Company) it also includes the details of the client (The Owner of the Property). When issued these electronic invoices are automatically submitted to the Portuguese tax authorities. This makes the lives of tax inspectors all the much easier where as in the past they had to leave their office for an audit. With regard to rental income from your property in Portugal, there are possibilities to lower your tax burden while still being in compliance with the law.

If you are the owner of a property and have rented it out in 2013, it is time to start preparing your tax return in Portugal. On all income earned in Portugal, tax must be paid. Rental income is no different. If you are a resident, the rental income is added to your worldwide income and charged at a progressive rate. As a non-resident you pay a flat rate of 28% of rental income after deductible items. Some of the more important deductible items are IMI (council tax), building insurance (excluding content) and condominium fees. This applies to long term rentals. Portugal has established double taxation treaties with most countries in Europe and the tax you pay here translates into a tax credit when you file your annual income return in your home country.

Many homeowners who rent out their property on a short term basis (short term holiday lets) mistakenly file their tax return under the above regime. This originates back to the days when it was not possible to obtain a rental license (Licenca de Alojamento Local) for reasons beyond the control of the owner, even though it was obliged by law.

This changed with amendments made in 2008 which at the same time simplified the registration requirements.

Regardless of paying your taxes, in order to rent out your property on a short term holiday letting basis you need to have a rental license (Licenca de Alojamento Local).

Once you have this license you can register the letting of the property at the local finance department as an activity. For the tax year 2014, this regime allows you to deduct 85% of gross income as operating expenses without having to proof (invoices) these expenses. The balance is taxable at 25%, effectively reducing your overall tax rate to 3.75% of gross rental income. Your tax assessment in Portugal is final, according to double taxation treaties throughout the European Union. In other words, you do not have to report this income again in our tax filing in your home country.

As with most cash strapped governments, Portugal needs to widen its tax net to reduce its ballooning budget deficit. Austerity measures implemented in 2012 and 2013 will be followed by additional austerity measures in 2014, but this will not be enough to bring down the deficit. Expect the government to clampdown on tax evasion more than ever before, they have already hired hundreds of new tax inspectors with more to follow.

At our sister company Happy Homes Algarve we specialise in providing full property management services for home owners from all around the world. If you rent out your property and are not sure if you are in compliance with Portuguese tax laws and/or would like to our discuss services for your property contact us, we would be delighted to explore how we can assist you.