Tax on rental income in Portugal
As many of you rent out your property through our services it is maybe good to know if and what you have to declare to the Portuguese tax authorities (Finançes). It is known know that undeclared rental income is high on the list of the Finançes. All rental income either received inside or outside Portugal but related to in Portugal situated real estate is subject to either IRS (income) tax, for property owned in your own name or IRC (corporate) tax for properties owned by an offshore property company.
Rent can be achieved from rental out your property on a long term bases with an official rental contract signed between tenant and landlord and filed with the Finançes. This so called short term rental contract means a contract with a minimum time of 5 years! In case this is all done properly the owner will have to add the income to his IRS whilst the tenant, which in this case automatically becomes a tax resident in Portugal, is entitled to a tax credit.
The other form of getting rent is for property owners to let on a short-terms weekly basis during a certain period of the year – normally the period between April and October. When such an activity is conducted as a business, the taxpayer much register as such.
If the rental price is build up of rent to the landlord including a commission for an agency the only part to be declared is the rent minus the commission, as the tax authorities do not consider commissions to an agent as a deductible expense.
Which expenses are deductible
In fact 3 types of expenses are considered as deductible, thereby reducing the taxable income from rents:
- Manutenção (maintenance)
- Conservação (repairs)
- Contribuição Autarquica (rates)
Expenses which fall in the above-mentioned categories are for example:
- Painting of in- and exterior
- Repairs to plumbing, electrical systems, gas.
- Energy expenses for lighting, heating and/or Airco
- Building insurance
- Rates are now only considered as a deductible expenses whilst before it was a tax credit.
In case of apartments where a condominium is compulsory under Portuguese law some additional costs can also be deducted:
- Cleaning
- Security
- Condominium expenses
It is obvious that these taxes only can be considered deductible if documented by proper facturas and recibos, which have to state the name and fiscal numbers (NIP or NIPC) from the taxpayer and the entity providing the goods or services. In nearly all these cases IVA (VAT) should be included.
In certain cases tax is already withheld at source in which case this is considered as a tax credit. This for example happens if both provider and owner are registered as companies.
Non deductible expenses
Certain expenses are not deductible for the tax return on income:
- Construction which increases the or alter the structure of the building
- Installation of heating systems or Airco
- Improvements on garden and or irrigation
- Construction of a pool – jacuzzi
These expenses can be however later considered when properly documented as capital improvements and may enter into the calculation of the taxable base of the building for capital gains purposes when the property is sold.
How much tax to pay
Again we have to make a distinction between IRS (income) and IRC (Corporate) tax. The IRS is determined by a table of progressive tax rates:
| Tax Rate Taxable Income | Between | And | Tax Band Adjustments | Average % to pay |
|---|---|---|---|---|
| 12% | Under | €3.990,38 | €0 | 12,00% |
| 14% | €3990,39 | €6.035,45 | €79,81 | 12,6777% |
| 24% | €6.035,45 | €14.963,93 | €683,35 | 19,4333% |
| 34% | €14.963,94 | €34.417,05 | €1.982,02 | 27,6667% |
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rental income, tax, rental expenses