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Taxation of holiday homes in Portugal

Holiday homes in Portugal are administered under the Alojamento Local (AL) regime. This is a regime that regulates holiday homes. Registration is mandatory for this regime and the home must meet certain requirements such as shading on the windows, the existence of fire extinguishers and a self-aid kit.

Recently (in 2023), the socialist government in Portugal passed legislation with the aim of reducing the amount of AL properties in Portugal. Now, it is no longer possible to obtain an AL license for apartments in most of Portugal (it is still possible in the islands or some inland areas, but only subject to a consent of all other inhibitors of the building). Licenses for independent houses continue to be possible.

Income from AL is not considered rental income. Instead, it is seen as income from a business, which is classified as category B in Portugal. This means that operating an AL requires registration of a business in Portugal, but the business does not have to be a company. Individuals can register a business as well.

Running a short-term rental in Portugal is treated differently if the turnover is under 200,000 Euros a year or if it is more.

Under 200,000 Euros, an individual may opt for the “simplified regime”. Most people are
familiar with the concept of organised accounting, i.e. one collects their expenses and the expenses are reduced from the income, with the remaining profit being taxed. Portugal offers access to organised accounting, but the simplified regime offers an attractive alternative. Instead of deducting the expenses, a certain rate of expenses is assumed and with AL, it is 35%. The outcome is that only 35% of the income is taxed, but no expenses are deductible. 15% of the expenses still need to be proven/justified but this is normally a low hurdle to pass.

If the property is located in a containment zone, that is a zone with a high pressure on housing, then the coefficient is 50% instead of 35% (only 50% is assumed to be expenses). This is still a highly attractive rate.

So, the calculation of tax is taken as the variable tax rate (currently 14%-48% depending on the level of income) multiplied by 35% of the income. For small AL units, this tends to achieve a very low rate.

If the property is classified as a hotel or as a hostel and is not under the AL regime, the coefficient is even lower and is calculated at 15% (i.e. only 15% of the income is taxed).

Importantly, it is possible to opt for taxation of income in accordance with category F – Property Income. In this case, your income corresponds to the difference between invoiced results and expenses, which includes expenses with insurance, electricity, condominium expenses, IMI or works. You cannot deduct expenses related to bank loans, furniture, equipment, appliances or additional municipal property tax (AIMI).

Information provided by FRESH PORTUGAL, EXPAT LAWYERS in Portugal.

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