Local Accommodation (summer letting) and the 2018 State Budget - Part I (income)
Renting rooms or houses in summer has been a constant practice in the Algarve.
It was a complement to the meagre income in which a family left their home to get paid for in the summer months, that the landlord, with several apartments available for rent in summer doubled (or more) his income for the rest of the year, the truth is that this was, and is, an Algarve reality (and not only).
In order to put a brake on this parallel bed market and the often consequent tax evasion that ensued, Local Accommodation licensing was established. I believe it was the intention of the law maker to create a facilitated and informal system for licensing these summer lettings, thereby attempting to tax those incomes received which were unreported.
But that was not the way it happened, or in practice how it came to pass. Perhaps it was our Romanic judicial roots that complicated what was meant to be uncomplicated, but the truth is that the rules were themselves regulated, and even more regulated by the most diverse entities.
Additionally, since 2008 the rules have multiplied, and the simplistic idea of regulating the parallel bed market died a slow death.
We knew already that the local accommodation letting required the start of fiscal activity. The citizen should start that activity as an individual entrepreneur (under income category B), and the property that would be used for this local housing activity should be linked to the business activity.
Therefore, the citizen who lets his apartment under such a local accommodation scheme will be registered as an entrepreneur obtaining income under Category B (article 3 CIRS). The rental amounts in this category are the "income" received under this activity, and we have two reporting possibilities: under the simplified regime or under organized accounting.
I will not dwell on organized accounting (which refers to the rules of art. 32 et seq. of the CIRC), but rather on the simplified regime.
The simplified scheme, as its name implies, is the simple application of a coefficient, indicated in Article 31 CIRS, to the income received to determine the taxable income of the tax payer. Contrary to the income of other categories, the taxable income is calculated by the mere application of a coefficient determined by law.
At least, that was the way but the Budget of 2018 came to create a complex web of deductions leaving the coefficient in reality as a limit to which the taxpayer could deduct any expenses.
Art. 31, paragraph 13 of the CIRS indicates which expenses can be deducted. Expenses, for example, with personnel, with the consumption of electricity and, in the specific case of local accommodation, 1.5% of the taxable property value of the property registered to the activity.
Another novelty of the 2018 Budget was the possibility of being able to choose, as far as local accommodation income is concerned , taxation as a business professional, under Category B, or as pure rental income under Category F.
This means that under the terms of article 28 (14) CIRS, the taxpayer may choose to have his income determined within the rules applied to pure rental income (category F), but still having to start fiscal activity and subjecting the property to that activity thus being taxed at 28%.
Optionally, it can be taxed according to the rules applied to business professionals (category B), starting fiscal activity and subjecting the property to that activity being taxed at 25%.
Ask yourself when you should choose one or the other option?
Given the new formula for calculating taxable business income (category B) established by the State Budget of 2018, it is always advisable that this should be analyzed on a case specific basis.
However, and in general, the tax payable will be lower if calculated by the property income rules under Category F, when the expenses able to be deducted (article 41 CIRS), correspond to more than 70% of the income.
For example, if the income is € 10,000 per year, the expenses should be in excess of € 7,000 so that the tax is marginally lower if taxed as rental income (category F) than if you reported it in accordance with the business income method under Category B.
Again, as said, there is no general rule and each case must be examined by its accountant taking into account the income and expenses to be deducted.
Portimão, 16 March, 2018 Marta Pargana Pereira Lawyer