Income tax shock for registered Alojamento Local owners

02 October 2016

The Government is pushing through a proposal to 'harmonise' the tax rates payable by those letting properties.

The current variation in tax rates has left an opportunity for the State to raise more money from those registered for Alojamento Local short-term property lettings.

Currently the tax payable on long-term lettings is 28% yet the rate payable on the income from short-term Alojamento Local (AL) registered properties is just 5%, a difference that the government wants to harmonise in next year’s State Budget.

The proposal is making its way through those ministries that have to approve such a hike with the Ministry of the Economy and the Ministry for the Environment approving the tax rate increase which also has support from the Left Bloc.

The proposal now sits with the Finance Minister, Mário Centeno, who is likely to approve the measure as it was his idea.

The government now has its eye on the lucrative short-term rental market where it has failed to gather significant tax income despite the boom in tourism.

About 705,000 visitors booked accommodation in Portugal during the summer months of 2016 using the online service Airbnb, there are many other website also operating.

This Airbnb increase is 76% up over the same period in 2015 but the government is losing out on an estimated 80% of the tax due from this boom in income as nationally only 20% of properties are AL registered, thus 80% of owners are omitting to declare this short-term rental income on their tax annual returns.

The government must by now have realised that the Alojamento Local scheme in its current form is a failure and will be seeking other ways to force compliance. With the tax rate going up to 28% it would be cost-effective to divert personnel to pin down tax evaders.

Those property owners who perhaps had the foresight to remain unregistered may soon have the choice of pulling out of the lettings market, opting for long-term rentals, continuing to let property illegally or joining the Alojamento Local scheme and paying the higher rate of tax.

The government has no interest in seeing the short-term rental market shrink as tourists visiting the country buy goods and services that attract a range of other taxes but if the AL-compliant property owners are faced with such a sharp tax increase next year despite having floowed the AL rules, the lettings market is likely to become rowdy and uncooperative requiring more and more resources to track down and prosecute tax evaders.

Had the government managed to produce an Alojamento Local scheme that was workable which the majority of owners joined, the currently proposed tax increase from 5% to 28% could have been proportionally smaller.

This was not the case, the 2014 AL scheme has received a huge ‘thumbs down’ from the market it was meant to be engaging with.

The inexperienced Secretary of State for Tourism, Adolfo Mesquita Nunes, who devised and launched the original AL scheme under the Passos Coelho government, is long gone.

The Alojamento Local Association in Portugal (ALEP) says that increasing the tax rate for this activity "is not the solution" and that "it would be a mistake" and that the association’s management is "open to discuss" changes in the AL regime.

ALEP stated that the short-term lettings business is a service activity which incurs costs such as for cleaning, commissions, check-in and check-out, electricity, water, gas and internet, and repairs whereas "long-term lets generate a passive income" where the costs are limited to IMI, condo fees and repairs.

The association also believes the proposed new tax rate is designed to stem the growth of short-term lets in Lisbon and Oporto but that the proposed hike will of course affect everyone in the country involved in AL lettings.

ALEP warns that, in fiscal terms, the number of people paying tax will diminish as people leave the market and the net result may be a lower overall tax take from short-term lettings.

The association also points out that a tax hike after less than two years of the AL scheme being launched, “would be seen as a trap and a blow to the credibility of the process" and "would encourage the thousands not yet legalised to remain informal and this could promote tax evasion."

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