Just a few years ago you could rent out your property without too much bureaucracy. The rental income had to be declared on a yearly Portuguese tax return even if the funds were administered and received outside Portugal. In 2014 it became obligatory for properties to have an AL tourist license and then in 2015 property owners had to be registered as self-employed at the tax department and social security office, under what is known as Category B rental income, in order to run their ‘rental business’. Long term rentals are category F income.

Registered individuals must submit a tax return in Portugal even if no rental income was received and this situation is one of the few circumstances when a nil tax return can and must be submitted.

Sovereign register their clients for self-employment, provide them with the necessary accounting services and submit their tax returns.

However, there is one very important issue that property owners who rent their properties should be aware of.

For individuals registered before January 2021 there is a capital gains liability involved when individuals use their property as a touristic business under AL.

The Tax Law assumes that the property is transferred to the business and when the clients cancel their self-employment or sell the property there is a capital gain liability. This liability is in addition to the usual property sale capital gain that would be calculated separately.

Due to the 2021 alterations of the capital gains regime for properties under AL businesses, registered individuals must now choose between the old and new regimes. This choice can only be made in this year’s tax submission.

The tax implications can be significant and should be assessed on a case-by-case analysis.

The choice between the “old regime” and the “new regime” only applies to those who have had their rental business activity before January 2021. If you only started your business in 2021, the “New Regime” will be applied, and no option is possible.

A brief explanation:

“Old Regime”

Until January 2021, the rules were the following:

a. There was a capital gains liability upon cancellation of activity, even if the property was not sold to a third party.

b. The gain was calculated between the difference between the property’s market value at the registration of the business activity and the market value at the cessation of the business.

c. The Tax Authorities assume that the market value is the VPT (Value Patrimonial) of the property as can be seen on the IMI property tax bills.

d. The initial value is updated according to the yearly indexation coefficient table.

e. Certain improvements and costs can be offset against the gain.

f. A wear and tear depreciation is added to the gain.

g. Taxable income is 95% of the gain and the final rate for non-residents is 25%, whilst for residents, taxation is at progressive rates.

Under this regime even if the property was not sold, the taxpayer would be required to calculate and pay capital gains in the year of cancellation of their activity.

“New Regime”

From January 2021, the new regulations can benefit or have a negative impact on the taxpayer, depending on individual circumstances.

Under these new rules, the Government changed the CGT liability on the cessation of the business, instead, to the time when the property is sold.

There are two possible ways of calculating the gain:

1. If the property is sold 3 years after the date of cancellation of activity, capital gain is calculated as if the property was never under a business. All rules of private sale of property apply. Sovereign can provide further details in these cases.

2. If the property is sold within 3 years from the cancellation of activity, capital gains is calculated as a business. Similar rules as the “old regime” apply but with some differences as below:

a. Capital gains liability is only with the sale.

b. The gain is calculated on the difference between the purchase price on the initial deed of purchase of the property and the sale price.

c. The Market Values or VPT are no longer considered as the acquisition and sale values are the actual prices as per the notary deeds.

d. Improvements and costs cannot be offset against the gain.

e. The initial purchase is not updated according to the yearly indexation coefficient table.

f. A wear and tear depreciation is added to the gain.

g. Taxable income is 95% of the gain and the final rate for non-residents is 25%, whilst for residents it is the progressive rates.

Before your 2021 tax return is submitted you need to decide which option you want.

Sovereign’s team of fully qualified accountants can assist with this decision by providing a simulation for each different scenario.

Since 1999 Sovereign’s office in Lagoa has been meeting the growing demand for fiscal assistance from foreign investors, residents and retirees. With vast experience of dealing with the Portuguese authorities, Sovereign knows how to keep their clients safe and in full compliance with their taxes in Portugal, offering services such as fiscal representation, submission of tax returns and rental income accounting services for individuals or companies.

Additional specialist services from the Sovereign Group include, residence and immigration (Golden Visa and D7 passive income visa), wealth management, trust management, structuring of corporate entities (CSP), foreign property ownership, pensions, bespoke corporate and private client insurance, as well as yacht and aircraft registration ownership and management.

The Sovereign Group is proud to have a global reach from a local point of delivery so talk to the experts today on serviceinfo@sovereigngroup.com