• Losses may be deducted in subsequent years
If you incur losses in conducting your rental activity, they may be amortized over six years. This also applies to capital improvements in the property and, consequently, there were losses rather than profits. For losses to be distributed over future years, the building must be leased for at least 36 months, consecutively or not, over the following five years to those who directly benefit from the expenditures. The owner can do the work in a year when the property is not rented and present the spending up to two years later. However, as always, all expenses must still be documented with proper invoices.
• Registration of Rental Contracts (“Modelo 2”)
Rental contracts must now be registered using “Modelo 2”. In addition, each contract is assessed Stamp Duty of 10% based on the monthly rent. This 11-page form is somewhat complex and is available only in Portuguese. Professional help may be required.
• New Electronic Rent Receipts
Taxpayers who declare under category F are now required to issue electronic rental receipt for all rental income received from their tenants. This receipt is issued through the Finanças website in an online application created for this purpose. However, the use of the electronic receipt system only becomes mandatory as of November 2015.
• Annual statement of rental income (Modelo 44)
As an alternative to issuing electronic receipts, owners over 65 years of age may continue to use paper invoices but are still obliged to submit an annual statement with an annual breakdown of rents (Modelo 44 -”Comunicação Anual de Rendas Recebidas”). This form is available both in paper as well as in electronic form via the Finanças website.
• Cross check of utility bills to catch undeclared rental income
Utility providers for electricity, water, gas and telephone are now required to identify customer contracts as well as the Property Owner’s identity to the “AT” (Portuguese Tax Authority). When data does not correspond to declarations, Owners will be summoned to explain discrepancies.
• Short term lets under Category F
Certain forms of short term lets should be reported under Category F rather than as Local Lodging under Category B. For example, if you have an annual contract to the same party for repeated short-term use of a property (i.e. one weekend each month throughout the year), this rental contract falls under Category F (rental income) as opposed to tourist lets to random holidaymakers (Category B). Note that each tenant (when more than one) will require a contract and each contract must be registered via a Modelo 2 and pay the 10% Stamp Duty.
Conclusion
Beyond EU harmonisation, many of these changes have come about to counter rampant tax cheating that has existed over the years with rental income. On the positive side, the reform of long-term leasing should add new deductions that will reduce tax and increase profits for compliant landlords. Coupled with the additional reporting requirements and data verification, time will tell whether greater overall compliance will actually come as a result.
This is the second and final part in the series.
Dennis Swing Greene is Chairman and International Fiscal Consultant for euroFINESCO s.a.
www.eurofinesco.com