October 2024 – All Finance Matters

New Local Lodging Regulations (AL) – Effective from November 1st, 2024

October 30, 2024

By Ricardo Chaves

New Local Lodging Regulations (AL) – Effective from November 1st, 2024

The Local Logding (AL) sector in Portugal is undergoing significant changes with the introduction of new regulations that come into effect on November 1st, 2024.

These changes, aim to address various issues within the sector and provide a more structured framework for short-term rentals.

This new decree changes some of the rules that came into force in October 2023, when the More Housing Law Package (Mais Habitação) started.

Revocation of Previous Measures:

One of the most notable changes is the revocation of Article 19 from the “Mais Habitação” law, which previously restricted new AL registrations.

From November 1, 2024, new AL registrations will be allowed across the country, except in certain Contention Areas. These areas, currently implemented in most of Lisbon and central Ericeira, will continue to have restrictions on new registrations.

We suggest that anyone looking to obtain a AL license to their apartment to act quickly. In fact this law decree attributed new powers to the municipalities, which means that in case the local council wants to restrict the touristic rentals, they may act quickly and determine contention areas within the council.

Transmissibility of AL Licences:

The new regulations also make AL licences transmissible under all circumstances, except in Contention Areas where municipal rules may differ. This change provides greater flexibility for property owners, allowing them to transfer their AL licences more easily. So from now on, it should be possible to transfer the rental license, when you are selling your apartment or villa.

Changes to Operational Limits:

For ALs implemented in primary residences, the previous limit of being open for more than 120 days has been removed.

This means that property owners can now operate their ALs year-round without any restrictions on the number of days they can be open.

Hostel Requirements:

Hostels will still require unanimous approval from the condominium to obtain an AL licence in horizontal property buildings.

This measure ensures that all residents in a building agree to the operation of a hostel, thereby reducing potential conflicts.

Municipal Oversight:

The municipality now has the authority to oppose the registration of ALs within 60 days (90 days in Contention Areas).

Additionally, property owners can request an inspection during the registration process if a licence is not granted. This increased oversight aims to ensure that all ALs comply with local regulations and standards.

Cancellation of AL Licences:

The new regulations also introduce provisions for the cancellation of AL licences. If a condominium votes by a majority (more than 50% of the total owner share) to cancel an AL due to proven and repeated acts of disturbance, the municipality can immediately cancel the licence. However, the licence holder has the right to reply in person, and any cancellation cannot exceed five years.

Capacity Limits and Additional Services:

The maximum capacity for ALs registered as Apartamentos or Estabelecimento de Hospedagem is now set at nine rooms and 27 guests.

Additionally, fold-up or extra beds may be installed as long as their number does not exceed 50% of the “normal” beds. ALs registered as Estabelecimento de Hospedagem may also implement other services such as the provision of food and drink.

Communication and Insurance Requirements:

The person responsible for the AL must communicate their telephone number and email address to the condominium administration.

Furthermore, the municipality may request that the AL licence holder provide the contract of the appropriate AL insurance within three days.

Contention Areas and Areas of Sustainable Growth:

Municipalities have the authority to create Contention Areas and Areas of Sustainable Growth. Contention Areas are defined as those having a surplus of ALs, while Areas of Sustainable Growth are monitored to prevent a surplus of ALs. These measures aim to balance the supply of ALs and ensure sustainable growth within the sector.

Taxation remains the same on operation and sale of the property:

These new Alojamento Local regulations effective from November 1, 2024, bring significant changes to the sector, by revoking previous restrictions, but please note that these changes do not bring any tax alterations. This means that the taxation of your AL operation remains the same as well as the CGT rules on the sale of the property.

If you personally own a property with an AL license and you are conducting the business directly (as a sole trader) the limit of 3 years remains. This means that you need to stop the activity and wait 36 months before selling, to be able to reduce your tax liability to the normal rules. If you sell with the AL or within 36 months of stopping the rental activity, you won’t be able to deduct any expenses to the capital gains liability and the tax will be assessed on 95% of the gain.

As this CGT rule penalises considerably the owners of property with AL, we urge property owners to plan ahead, meeting with us before placing the property in the market. There may be opportunities available to reduce the capital gains liability and we can help you to take advantage of these.

For personalized advice and to ensure compliance with tax regulations, please reach out to AFM at info@afm.tax or visit www.afm.tax.

Capital Gains: Rent with Purchase Option

October 17, 2024

By Ricardo Chaves

Capital Gains: Rent with Purchase Option

A taxpayer entered into a lease agreement with a purchase option. Can these rents be included in the seller’s capital gains calculation? How?

Rents as Advance Payments

In a non-residential lease agreement with a company, the rents were structured as part of the property’s sale price to the company. The taxpayer received the rents, issued receipts, and reported the amounts on their IRS return.

This year, the taxpayer sold the property to the leasing company. A question arises: Will the sale amount stated in the deed be taxed in full, or can it be reduced by the rents paid? Alternatively, can these amounts be treated as expenses? To clarify, the taxpayer requested a binding ruling from the tax authorities.

Capital Gains: General Rule

Generally, capital gains arise from the sale of real estate rights, unless the gains fall under business, professional, capital, or rental income.

Calculation: For these cases, the capital gain subject to IRS is the difference between the sale price and the acquisition cost. Note: Although the sale price (referred to as the realization value) typically equals the consideration paid, if higher values were used to determine IMT (or what should have been calculated if IMT were applicable), those values prevail.

Charges: The law specifies certain expenses and charges relevant to capital gains calculation, including:

Costs for property improvements incurred within the last 12 years (e.g., renovations);
Necessary and actual expenses related to acquisition and sale (e.g., notary fees);
In certain situations, compensation paid for relinquishing contractual rights related to the property (e.g., position transfer).

Do Rents Paid as Advance Payments Fit These Concepts?

Rents Not Covered: According to the AT, there are no provisions in the relevant norms for deducting received rents.

Total Capital Gains: Therefore, for the AT, the sale value used to calculate capital gains is the amount stated in the deed, and rents cannot be deducted as expenses or charges. This results in double taxation (first as rents and then as part of the sale).

But There’s a Solution!

In the binding ruling, the tax authorities proposed a solution:

Convert Rents into Payments: To include rents as part of the sale price, the AT suggested the taxpayer should appeal the IRS assessment for the past 2 years and initiate administrative litigation. Important: During this process, the taxpayer must prove that the received rents were an advance payment towards the sale price.

From Category F to Category G: If the taxpayer can prove during administrative litigation that the rents were an advance payment for the sale price, they will be reclassified from Category F to Category G in the IRS. In practice, this means the rents will be integrated into the sale price.

Taxpayers with lease agreements featuring a purchase option can request a review of declared rents in the IRS, incorporating them into the sale value.

For personalized advice and to ensure compliance with tax regulations, please reach out to AFM at info@afm.tax or visit www.afm.tax.

Exemption from Capital Gains: What if Only One Room is Used for local lodging (AL)?

October 15, 2024

By Ricardo Chaves

Exemption from Capital Gains: What if Only One Room is Used for local lodging (AL)?

A property owner seeks to obtain IRS exemption on the capital gains resulting from the sale of their permanent home. However, complications can arise if part of the property, such as the ground floor, is designated for Alojamento Local (AL) — even if it’s just one room.

Monetizing a Portion of the Property:

The surge in tourism and the need for additional income have prompted many homeowners to rent out parts of their permanent residences through local accommodation. But could this create complications?

Ground Floor concerns: A taxpayer expressed uncertainty about the implications of selling their permanent home, particularly regarding the reinvestment of profits into another property. With the ground floor utilized for AL, they wondered if they would have to pay capital gains tax. Therefore, they requested a Binding Information from the Tax Authorities
Single Room for Rent: Another taxpayer faced a similar dilemma, but in this instance, only one room was used for AL activities, accounting for less than 10% of the property’s total gross area. This taxpayer also requested Binding Information.

Capital Gains Tax Exemption Conditions:

In their responses to the Binding Information requests, the Tax Authority (AT) reminded that the exemption from capital gains applies to the onerous transfer of properties that serve as the taxpayer’s or their family’s permanent residence, provided that the following conditions are cumulatively met:

The selling price, minus any loan repayment for acquiring the property, must be reinvested in the purchase of another property, in land for construction, or in the expansion or improvement of another property with the same purpose.
The reinvestment must occur within 24 months before and 36 months after the date of sale.
The taxpayer must express the intention to reinvest, even partially, specifying the amount in the income declaration for the year of sale.
The property sold must have been used as the taxpayer’s or their family’s permanent residence, proven by the respective tax domicile in the 24 months prior to the sale (this period will soon change to 12 months).
Taxpayers cannot have benefited from this exclusion regime in the year they realized the gains and in the three previous years, except in exceptional circumstances.

Important Note: This exemption does not apply if the reinvestment in another property is not intended for the taxpayer’s or their family’s permanent residence within 12 months from the date of reinvestment.

Understanding Permanent Residence:

Permanent residence is defined as the location where the taxpayer organizes their domestic life in a stable and lasting manner, including where they sleep, eat, and receive family and friends. Key characteristics of permanent residence include habituality, stability, and the establishment of the center of domestic life organization. However, challenges arise when this situation intersects with economic activity.

Local Accommodation on the Ground Floor: The AT determined that the fact that part of the property is used for AL indicates that it is not exclusively intended for the taxpayer’s permanent residence (even partially, there is an allocation to the AL activity).
Local Accommodation in the Room: Similarly, the AT considers that if the property is used for AL in the form of “Rooms,” it will also not be exclusively allocated to the taxpayer’s permanent residence since there is a partial allocation.

Responses from the AT:

In both scenarios, the AT determined that the conditions for exemption were not met, resulting in the taxpayer’s ineligibility for capital gains tax exemption.

Important: In practice, this means that the taxpayer loses the right to the exemption provided by law, and the profit from the sale of the property will be subject to the general rules of taxation under the IRS.

Conclusion:

Even allocating just a portion of a house, or a single room, to Alojamento Local can disqualify the property from IRS exemption, regardless of its status as a permanent residence.

Legal Basis: Binding Information nos. 25217 and 26330.

For personalized advice and to ensure compliance with tax regulations, please reach out to AFM at info@afm.tax or visit www.afm.tax.