Using Operators for Local Lodging
While some Owners create their own bespoke site to publicise their Local Lodging offering, most rely on the major websites that have become popular in recent years. However, not all Operators work in the same way. The nature of their business can influence the way the activity is classified by the taxman. While not always of direct concern to Owners, there are basic Double Tax Treaty issues that are important to understand.
Tax Treaty Doublespeak
While some people may be misled into thinking that Local Lodging might fall under “Income from Immoveable Property” (because of underlying letting), the article defining “Business Profits” is the relevant one. It is the overall commercial nature of tourism plus the fact that the short-term offerings are open to the general public that are applicable. Commercial activities have their base in what is called a “Permanent Establishment”, a fixed place of business which gives rise to taxable income in a particular jurisdiction. In general, it could be an office, a factory, etc. In the case of Local Lodging, it is the property. If a business has permanent establishments in more than one country, the rule to follow is that only associated income in the given jurisdiction is assessible therein. Instances of double taxation are normally eliminated through international tax credits.
Portuguese-based Agencies and Managers
The same basic principles apply to Portuguese-based Tourist Agencies and Property Managers using booking services from major websites. Income from immoveable property is attributable to business and professional activities and is also considered to be in Category B.
When conducting support services to a tourist business are eventually carried out in the name of the Owner, a charge is made. Whether this is a fixed amount or a percentage does not influence the nature of the activity nor how it is assessed. This type of business can take advantage of 90% exclusion under the Simplified Regime of IRS that typically reduces final tax to ±1%. Owners also continue to benefit from the highly favourable tax regime in Category B.
Under current legislation, it is no longer advisable for an Owner to report commercial income under Category F (long-term Rental Income). Tourism-based income is commercial, not residential, and must be reported in Category B (Line a, nº2, Art.3, CIRS).
If Owners are conducting the Local Lodging business, they invoice holidaymakers directly under CAE 55201 in Category B and enjoy an 85% exclusion on gross invoiced income. The balance is taxed at 25% for non-residents and at marginal rates for residents.
If the Owner assigns the tourist activity to an Operator (Cessão de Actividade), he still declares income to the Portuguese Tax Authorities in Category B. However, in this case, reporting is under CAE 68200 (Income from Real Estate) with only a 5% exclusion in the Simplified Regime. Tax is due on the remaining 95% at 25% for non-residents and at marginal rates for residents. When appropriate, an individual Owner can register under both Local Lodging (55201) and Assignment of Operation (68200) activities and report income respectively.
In either case, the following basic steps must be followed and completed:
a) The property must be duly registered under Decree Law 128/2014 of 29 August, either by the Owner or the Operator;
b) Owners must invoice using Electronic Green Receipts or the equivalent (either to Holidaymakers or the Operators, respectively);
c) Immigration reporting (“SEF”) is also mandatory. When the Owners conduct Local Lodging, they assume responsibility for reporting foreign guests. Otherwise, Operators must report.
d) Fines are the exclusive responsibility of the entity running the Local Lodging operation.
e) It is a basic requirement for Owners to submit an annual tax return including Annex B. It is also the responsibility of the Operators to comply with their tax obligations in accordance with their form of registration.
Dennis Swing Greene is Chairman and International Tax Consultant for euroFINESCO s.a.