Tax on property rental

[widge]

Not to my knowledge. I do give vent to the subject but have never stepped foot in Bar Talvez. Where is it & is it worth a visit ?

[EMM]

Talvez certainly worth a visit , Rachel and Sergio are probably the best bar owners in Carvoerio, it is opposite Indiano on farol.

[joeysoap]

This is a very interesting topic. I don't rent for a number of reasons and certainly the tax situation is one consideration. I am Irish so Irish tax laws apply to me and this is from the Irish revenue website regarding tax on overseas rental.

Where Ireland has a Double Tax Agreement with the country in which your property is situated you are entitled to a credit for the foreign tax paid on your foreign rental income against the amount of Irish tax you have to pay on the same income and up to the amount of the Irish tax payable on that income. How this works is illustrated below –

Step 1 – calculate Irish tax attributable to foreign rental income

Irish income (all sources) € 90,000
Foreign rental income € 10,000
Total income €100,000

In this example, the foreign rental income is one-tenth of the person’s total income so that one-tenth of the Irish tax liability is attributable to the foreign rental income. For simplicity, assume a tax rate of 40% so that the Irish tax liability on the total income of €100,000 is €40,000. Therefore, €4,000 (one-tenth) of this is attributable to the foreign rental income.

Step 2 – calculate Irish tax payable on foreign rental income

Irish tax attributable to foreign rental income €4,000
less foreign tax paid on foreign rental income (€3,500)
Irish tax payable on foreign rental income after
deducting foreign credit € 500

Step 3 – calculate final Irish tax liability on total income

Irish tax on total income €40,000
less Irish tax attributable to foreign rental income (€ 4,000)
Irish tax on Irish source income €36,000
plus Irish tax payable on foreign rental
income after deducting foreign credit € 500
Final Irish tax payable €36,500

from this it is clear that the Irish revenue expect you to have paid (Portuguese) tax on rental income prior to declaring it in Ireland. Taking 2013 as an example a renter would pay Portuguese tax @28% after expenses and the balance in Ireland if you are on a higher rate. And very likely have to employ someone to comlete the Portuguese tax form as well. Combined with water charges and electricity usage there would not be a lot of profit at the end of the day. Even if you were not on the higher rate of tax in Ireland (or UK) the Portuguese tax take of 28% is quite steep.

what would concern me is how the Portuguse are going to ascertain/prove who are renting and who not. In our development there are a number of full time renters and a few 'casual' renters together with a few of us who don't rent at all. Spain has a taxation system where you are 'deemed' to rent even if you don't. I for one hope they do not introduce such a system in Portugal.

[sam]

Taking 2013 as an example a renter would pay Portuguese tax @28% after expenses and the balance in Ireland if you are on a higher rate. And very likely have to employ someone to comlete the Portuguese tax form as well. Combined with water charges and electricity usage there would not be a lot of profit at the end of the day. Even if you were not on the higher rate of tax in Ireland (or UK) the Portuguese tax take of 28% is quite steep.

what would concern me is how the Portuguese are going to ascertain/prove who are renting and who not. In our development there are a number of full time renters and a few 'casual' renters together with a few of us who don't rent at all. Spain has a taxation system where you are 'deemed' to rent even if you don't. I for one hope they do not introduce such a system in Portugal.

We don't rent and do not have a mortgage on our CVO property. Unless you can guarantee a good rental there would be little profit. What with the above plus wear & tear, repairs, management time, hassle of bad tenants etc is it worth it? If they start taxing as if it is rented we shall have to reconsider - I suspect that would start a new influx of properties on the market.
I guess one way to prove/disprove how much the property is used is to look at utility bills and how often you are there. I suspect they will start trawling rental sites and checking rental agencies to see what see available for rent and compare it to their licence records. When the licences were first introduced they started that process.

[joeysoap]

I guess one way to prove/disprove how much the property is used is to look at utility bills and how often you are there. I suspect they will start trawling rental sites and checking rental agencies to see what see available for rent and compare it to their licence records. When the licences were first introduced they started that process.

Good point, but if you spent more time in cvo the readings would obviously go up. The official in the tax office, while changing my address, did enquire if I rented. I informed him that I did not rent, nor did I intend to rent. Interesting your point about taxing notional rental could trigger more properties onto the market. Never considered that but you could well be right. Hotels would not like that!

[widge]

Does anyone have any up to date information on how to calculate the tax payable in Portugal (not UK) on rental income? More specifically what expenses are you allowed to deduct before tax?

[James Faro]

Does anyone have any up to date information on how to calculate the tax payable in Portugal (not UK) on rental income? More specifically what expenses are you allowed to deduct before tax?

Sorry can't help! Now if you asked about tax on rental income on a property in the United States I may be able to assist! I have just bought a property out there; a house full of regular tenants and it should be mine in a few weeks time!

[RichardHenshall]

Does anyone have any up to date information on how to calculate the tax payable in Portugal (not UK) on rental income? More specifically what expenses are you allowed to deduct before tax?

My understanding is that we are still only able to offset properly documented property maintenance, IMI, Insurance and, if appropriate, condominium charges relating to common areas. The limited allowances are because this section of the tax code is really meant to be for long-term property letting rather than for occasional holiday rental.

There is a procedure advocated by Eurofinesco, that suggests that this 'is a business' and should be set up as such and taxed under the simplified regime, which automatically allows 80% of 'sales' for expenses, so tax (@28%?) is paid on 20% of 'sales'. For this process to work, it seems to me that the 'business' has to be resident in Portugal (or have a fiscal representative) and will probably be required to account for Segurança Social and IVA (if turnover exceeds 10,000€). The need to deduct IVA from the difference between income and properly documented expenditure alone seems worth avoiding, let alone costs of accountants, fiscal reps, segurança social etc etc.

Unless, of course, anyone knows better?

[EMM]

I had a conversation with Sovereign when looking into various options regarding potential business in Portugal and it was the IVA issue that really affects anyone setting up as a new business.
The UK really does seem to be on its own in encouraging small business with its high turnover before VAT needs to be charged.
I have had discussion in Portugal and Sweden and in both countries they could not believe that it is possible to trade legally and not charge VAT.

[widge]

Does anyone have any up to date information on how to calculate the tax payable in Portugal (not UK) on rental income? More specifically what expenses are you allowed to deduct before tax?

My understanding is that we are still only able to offset properly documented property maintenance, IMI, Insurance and, if appropriate, condominium charges relating to common areas. The limited allowances are because this section of the tax code is really meant to be for long-term property letting rather than for occasional holiday rental.

There is a procedure advocated by Eurofinesco, that suggests that this 'is a business' and should be set up as such and taxed under the simplified regime, which automatically allows 80% of 'sales' for expenses, so tax (@28%?) is paid on 20% of 'sales'. For this process to work, it seems to me that the 'business' has to be resident in Portugal (or have a fiscal representative) and will probably be required to account for Segurança Social and IVA (if turnover exceeds 10,000€). The need to deduct IVA from the difference between income and properly documented expenditure alone seems worth avoiding, let alone costs of accountants, fiscal reps, segurança social etc etc.

Unless, of course, anyone knows better?

I don't know better but am interested in your observations.

If we take an example thus…………Declared rental income €24,000 - The owner now has to issue invoices for that sum & collect (finance) 6% IVA €1440
Tax payable to the Portuguese tax man is 28% of €4800 = €1344
Deductable expenses total €6000 inc IVA of €1122
The owner is retired & therefore not liable for Social Security payments but pays accountancy costs of €600 per annum to administer the business

In this example does the owner pay the difference in output & input IVA €96 + tax payable €1344 + accountant €600 = €2040 equivalent to 8.5% of rental income?

The output IVA on sales is of course fictitious - do you have to physically handover the cash or just account on paper for the difference between sales & deductible expenditure ?

Using the alternative formula €24000 income less deductible expenses €6000 = €18000 @ 28% tax = €5040

[RichardHenshall]

Is the output IVA definitely 6%? Does the concessionary rate for hotels really apply? The Portuguese have previously shown themselves capable of substantial changes to IVA (electricity, restaurant food to name two) so there's a risk of suddenly ending up in a new tax bracket.

[EMM]

I can remember a conversation with Sovereign when I was told that IVA would be the going rate at the time 23%.

[widge]

Latest advice / information I have is as follows.

The tax percentage on the 20% rental income if you are registered as a business is 25 % not 28 %.
You can claim the VAT back once a year or as soon as it comes above 3000 Euros.You pay 23 % on all bills but only charge 6% on your invoices for rentals. This means that you can claim back the 17 % VAT difference.

Lets imagine 20.000 Euros rental income plus 6% =21.200 Euros
Maintenance and other bills at 80% of rent =16000 Euros plus tax 23%= 19680 Euros
VAT: 3680 paid and 1200 received comes to 2480 Euros to claim back.
Tax to pay would be 25 % of 4000,00 Euros = 1000 Euros
You may have to pay c.€600 / €800 Euros for the admin/accounts service.

In comparison, the alternative current arrangement to this is that your rental income would be €20,000 Euros from which you can deduct IMI, and some other allowable maintenance costs (these are unlikely to come anywhere near to 80% of income) on the balance you will need to pay 28% tax. Even if deductible allowances came to €10,000 you'd still pay €2800 and no VAT to reclaim.

It seems as if all the expenses for water, electricity, gas, cleaning , publicity and admin/commissions cannot be deducted anymore. Garden and Pool maintenance is possible but not certain.

Looks like it might be a good idea to investigate further.

[RichardHenshall]

Expenses:

These are not 80% of income plus 23% IVA, they are only the actual (properly documented and allowable) expenses incurred. IVA will be reclaimable on some of this expenditure such as utilities, for example, but not on IMI on which IVA isn't paid.

IVA on electricity and telephone/internet is 23%, but only 6% on water charges. IVA will be 23% on most other expenditure; maintenance, gardening, pool cleaning, laundry etc but will only be re-claimable if properly documented.

I would suspect that, as with the UK tax system, there should be an adjustment for personal use. If so, you might only be able to claim IVA back on the utilities consumed while the property is rented or you might have to 'pay' a notional market rent to occupy your own property (and pay real taxes on that notional rent).

Your input IVA will be nowhere near €3,680. Based on our recurring expenses I would estimate it to be less than output IVA, except for occasional major items such as villa painting or re-roofing. I think IVA might be neutral, if IVA is only chargeable at 6%, but would have a big impact if chargeable at 13% or 23%.

[widge]

I think you have missed the point of registering your villa as a business !