Tax and Legal Framework concerning Local Accommodation

Legal Framework – definition of “Local Accommodation”

Upon publication of the Decree-Law nr. 39/2008, of 7^th March, the new concept of “Local Accommodation” (AL - Alojamento Local) was introduced to mainly legalise and control the so-called “parallel beds”.

This Decree sets down that “local accommodation establishments are the villas, apartments and lodging establishments, with an habitation licence, which provide temporary accommodation services against payment but that do not meet with sufficient requirements to be considered a tourist development”, being “compelled to be registered at the local town hall”.

Nr. 4 of article 3^rd of the said Decree still refers that “only the local accommodation establishments registered at the local town halls can be operated for tourist purposes, whether by their owners or by travel and tourism agencies”. However they cannot “in any case, use the tourism and or tourist qualification, nor any other ranking system”.

Ordinance nr. 517/2008, of 25^th June, was issued to establish the “minimum requirements to be observed by the local accommodation establishments” and to set down the conditions necessary to apply for the registration, detailing as well the documents to be addressed to the Town Hall.

Thus, this is a question of a mere registration and not the granting of any permit.

The mentioned Ordinance still refers in nr. 5 of article 5^th that “the operating entities must provide the users with information related to the rules of operation of the local accommodation establishments” and in nr. 10 it states that “the local accommodation establishments must possess a complaints book pursuant to the terms and conditions laid out” in the applicable law.

Tax framework for Local Accommodation

The “Local accommodation” regulation gave rise to a new entity, whose tax framework depends on the type of owner (natural person or corporate body) and the way the AL is operated, if directly or through a travel or tourism agency.

Although the operation of the AL can be carried out in several ways, we will set out afterwards four concrete situations where we intend to determine the correct tax framework.

It is important to point out that the Local accommodation cannot be dealt with, for tax purposes, in the same manner as accommodation units of a tourist resort or of a development ranked by the Tourism of Portugal, which were granted a Tourist Use Permit (Alvará).

It is then a new reality.

These are the four examples of actual situations of Local Accommodation operation and our view on the corresponding tax framework.

Supposing that the property owner is a natural person, residing or not in Portugal, that have registered the property at the Town Hall as “Local Accommodation” and operates it directly, carrying out its advertising and ensuring the related sales, host, cleaning and maintenance services.

IRS Personal Income Tax: The income received through the AL operation is embraced by category B (Art. 3^rd, nr 1 a) IRS Code): “Professional and business income: a)results from the carrying out of any trading, industrial, farming, forestry or cattle breeding activity”.

When the property is owned by a non-resident individual in Portugal, and taking into account that a business activity is being carried out here under the management of the said owner, it means that this latter possesses a branch (art. 18^th, nrs. 2 and 3 IRS Code and art. 5^th IRC Code), being then subject to the rules ascribable to residents.

Before operating the AL, the property owner must submit to the Tax Office a statement of start-up of activity (Art. 112^th nr. 1 IRS Code) and, every year, submit the income tax return related to the income received, as per framework:

a)  Standard system, with an organized accounting scheme: it is possible to enter in the accounts the costs that are proved to be essential to get the chargeable revenue.

b)  Simplified accounting scheme (arts. 28^th, nr.2 and 31^st, nrs. 2 and 5, IRS Code): Does not deduct any charges, being taxed to the amount resulting from the application  of the coefficient 0,20 to the value of the services provided, with the minimum amount equal to half of the annual value of the minimum payment.

Taxation: The applicable rate is the one appearing in article 68^th IRS Code (General Rates).

VAT Value-added Tax: For the provision of the services, the requirements of article 36^th of the VAT Code must be complied (invoices’ issuance) and VAT must be charged at the rate of 5% (List I attached to the VAT Code: nr. 2.17 – Accommodation in hotel- type establishments).

When submitting the statement of start-up of activity, the property owner can be covered by the “VAT Exemption Scheme” – Art. 53^rd of VAT Code if the expected turnover is less than 10.000 Euros annual.

Complaints Book: Since the owner of the villa operates it directly, he/she is compelled to put at the clients’ disposal a Complaints Book.

Supposing that the property owner is a natural person, residing or not in Portugal, that have registered the property at the Town Hall as a “Local Accommodation” and has concluded a lease contract with a tourism or travel agency that operates it.

IRS Personal Income Tax: The income received from the AL lease is embraced by   category F (Art. 8^th, nr. 2 a) IRS Code): “Rentals are considered to be: a) the amounts of money related to the assignment of the property use or part of it and to the services connected to such assignment”.

Every year, the property owner must submit via electronic transmission, from 16^th April till 25^th May an Income Tax Return, form model 3 of the IRS, and state the rentals received in the annexe F (Prediais).

Withholding Tax: The travel or tourism agency, whenever it pays or put at the owner’s disposal the rentals’ value, must effect a tax deduction at source at the rate of 15% (Article 101^st, nr.1 a) IRS Code), without prejudice to the owner being able to benefit from the exemption provided in article 9^th of the Decree-Law nr. 42/91, of 22^nd January. A receipt must be issued upon rentals’ payment.

Taxation: The applicable rate to the property income obtained by non residents is 15% (article 72^nd nr. 1 IRS code). To residents are applicable the rates of article 68^th IRS Code (General Rates).

VAT Value-Added Tax: The “immovable property rental” is referred in article 9^th, nr. 29 IVA Code, so the lease is exempt from VAT.

 Complaints Book: The travel or tourism agency that operates the villa is compelled to put at the clients’ disposal the Complaints Book.

Supposing that the property owner is a company, with the head office situated or not in Portugal, that has registered the property at the Town Hall as a “ Local Accommodation” and operates it directly, advertising it and ensuring the related sales, host, cleaning and maintenance services.

IRC Corporate Income Tax: A company (with the head Office situated or not in Portugal) that owns a property registered as “AL”, and since it operates it directly, carries out a business activity, being then subject to the taxation rules set down in the IRC Code.

In this context, the income received through the operation of the “AL” is a taxable income in IRC, the company that owns the property having to submit to the Tax Office a statement of start-up of activity before starting the operation (art. 126^th IRC Code) and still:

a)  Appoint a Chartered Accountant (Técnico Oficial de Contas);

b)  Open a bank account in the name of the company;

c)  The companies that do not have the head office in Portugal must appoint a tax representative (art. 126^th IRC Code).

The company is compelled to have an organized accounting scheme and to submit, every year, an income tax return related to the income received (arts 120^th and 121^th IRC Code). The costs that are proved to be essential to get the income liable to tax can be entered in the accounts.

Taxation: The applicable rate is the one appearing in article 87^th IRC Code: Up to €12.500: 12,5%; Over €12.500: 25%. (Except if applicable to the special systems, ex. interiority).

VAT Value-Added Tax: For the provision of services, the company must comply with the requirements of article 36^th of the VAT Code  (invoices’ issuance) and charge VAT at the rate of 5% (List I attached to the VAT Code: nr. 2.17 – Accommodation in hotel-type establishments).

Complaints Book: The villa owner operates it directly, he/she is compelled to put at the clients’ disposal the Complaints Book.

Supposing that the property owner is a company, with the head office situated or not in Portugal, that has registered the property at the Town Hall as a “Local Accommodation” and has concluded a lease contract with a travel or tourism agency that operates it.

IRC Corporate Income Tax: supposing that the company do not have a central management and control in Portugal and, as to the property at issue, only gets the rentals set down in the lease contract, not providing any services regarding the tourist operation (“AL”) of the property, which are fully ensured by the travel or tourism agency.

The income received with the lease is embraced by art. 4^th, nr. 3 a) IRC Code and a Receipt duly identified must be produced.

Before the lease contract, the company must submit to the local Tax Office a statement of start-up of the activity, being necessary to produce:

1.   The Certificate of Incorporation;

2.   Identification of the Legal Representative (Business Manager) (Identity Card or Passport and Taxpayer Number);

3.   To have a bank account(NIB);

4.   The companies that do not have the head office in Portugal must appoint a tax representative (art. 126^th IRC Code).

The company is compelled to state, every year (arts 120^th and 121^th IRC Code), the rentals received by means of the Income Tax Return, Form 22 of the IRC, and submit the Annual Declaration with annexe E, referring the property income received.

Withholding Tax: The travel or tourism agency, whenever it pays or put at the property owner’s disposal the rentals’ value, must withhold 15% (articles nr. 94^th, nr. 1 c) IRC Code and 101^st, nr.1 a) IRS code), except if the owner has “as object the management of his/her own property and is not subject to the fiscal transparency system” (art. 97^th, nr. 1, g) IRC Code).

Taxation: The applicable rate to the property income of a non resident company is 15% (article 87^th IRC Code). The applicable rate for companies with head office in Portugal is the one appearing in number 1 of article 80^th IRC Code: Up to €12.500: 12,5%; Over €12.500: 25%. (Except if applicable to the special systems, ex. interiority).

VAT Value-Added Tax: The “immovable property rental” is mentioned in article 9^th, nr. 29 IVA Code, so the lease is exempt from VAT.

Complaints Book: The travel or tourism agency that operates the villa is compelled to put at the clients’ disposal the Complaints Book.

This note is only for information and does not hold its divulgers responsible. For thorough information you must consult the Law.