Rental Income Taxation in Portugal: What Foreign Property Owners in the Algarve Need to Know
⚠️ Disclaimer: Portuguese tax regulations change frequently (annual budgets, circular updates).
The information below is for general guidance only and should not be considered legal or tax advice.
Always confirm your personal situation with a certified Portuguese accountant (TOC/ROC).
Algarve Coastal can connect you with trusted professionals for tailored support.
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Introduction
Renting out a property in the Algarve can be very profitable — but understanding how your rental income is taxed is essential, especially for foreign owners.
Portugal differentiates between long-term rentals (traditional leases) and short-term tourist rentals (Alojamento Local or “AL”).
In this guide, we explain how each type is taxed, what steps to take, and what every foreign investor should know before renting out a property legally and efficiently in Portugal.
Long-Term vs Short-Term Rentals
Long-Term Rentals (Traditional Lease)
If you rent your property on a yearly basis, your income is classified as Category F (rental income).
Non-residents are taxed in Portugal on income earned from Portuguese properties, usually at a flat non-resident rate. You may also need to declare it in your home country, but a double-tax treaty prevents double taxation through a foreign tax credit.
There is no VAT (IVA) on residential leases.
Deductible expenses generally include IMI (property tax), insurance, minor maintenance, and sometimes mortgage interest.
It’s a simple and predictable option, but it usually generates lower returns compared to short-term rentals.
Short-Term Rentals (Alojamento Local – AL)
If you rent to tourists through Airbnb, Booking.com, or other platforms, your income is considered commercial under Category B.
You must have an AL licence, comply with safety rules, issue invoices via the Portal das Finanças, and register all guests with SEF through the SIBA system.
There are two taxation methods:
Simplified Regime – taxation based on a fixed coefficient applied to your total annual revenue.
Organised Accounting Regime – taxation based on your actual profit (real income minus deductible expenses).
Depending on your annual turnover, you may be VAT-exempt or required to charge VAT (IVA) on each stay.
Steps Every Foreign Property Owner Must Follow
Obtain a Portuguese Tax Number (NIF).
Register your business activity (for AL) with the Portuguese Tax Authority (Autoridade Tributária).
Apply for the Alojamento Local licence at your local Câmara Municipal.
Check your VAT status (exempt or registered).
Set up invoicing via the tax portal or certified software.
Register guests via the SEF’s SIBA platform.
File your tax returns (income and VAT if applicable).
Consult the tax treaty between Portugal and your home country to avoid double taxation.
How Long-Term Rental Income Is Taxed
For long-term leases, your taxable income is the gross rent minus eligible expenses.
Example:
A two-bedroom apartment in Portimão rented for €900 per month generates about €10,800 per year.
If you deduct €350 in property tax (IMI), €150 in insurance, and €300 in minor repairs, your net taxable income is €10,000.
As a non-resident, you pay Portuguese tax at the flat non-resident rate and then declare the same income in your home country, claiming a foreign tax credit.
This is a simple, low-maintenance option — but it’s generally less profitable than short-term tourist rentals.
How Alojamento Local (Short-Term Rentals) Are Taxed
Simplified Regime
Under this system, you are not required to keep detailed accounting records.
A legal coefficient (a fixed percentage) is applied to your total annual income to determine how much of it is taxable — the remainder is considered to cover your expenses.
You then pay income tax on this taxable portion according to your non-resident status.
If your total annual turnover remains below the legal threshold, you can qualify for VAT exemption.
If you exceed it, you must charge VAT (IVA) on your invoices and file quarterly VAT returns.
Organised Accounting Regime
This regime is more complex but often more tax-efficient, especially for active investors.
You are taxed on your actual profit, meaning total revenue minus real deductible expenses.
Deductible costs typically include:
Cleaning, laundry, and property management services,
Platform commissions (Airbnb, Booking.com, etc.),
Utilities (electricity, water, internet),
Insurance and general maintenance,
Mortgage interest and depreciation (through accounting).
A certified accountant is required to manage your books and file returns, but this regime often produces lower taxable profit for owners with significant expenses or renovation projects.
If you are VAT-registered, you can also deduct VAT on eligible expenses such as renovations or appliances.
Individual vs Company Ownership
Foreign owners can operate either as individuals or through a Portuguese company (LDA).
Individuals are taxed under personal income tax (IRS). This is the easiest option for one or two properties.
Companies (LDA) are taxed under corporate tax (IRC). This may be advantageous for investors with multiple rentals, reinvestment goals, or future resale plans.
Some large investors use holding structures for asset protection or inheritance planning.
Keep in mind that high-value properties or portfolios may also be subject to AIMI (Additional Property Tax).
Social Security and Other Taxes
If you operate as a business under Category B (Alojamento Local), you may owe Social Security contributions (Segurança Social), depending on your personal circumstances.
Some municipalities charge a tourist tax, which must be collected from guests.
The IMI property tax is paid annually and is deductible either as a rental expense (for long-term leases) or as a business cost (for AL).
Compliance Checklist for Algarve Property Owners
To stay fully compliant in Portugal, you’ll need to ensure:
A valid Portuguese NIF (tax number).
Access to the Finanças portal.
Business activity registration (for AL rentals).
A valid AL licence issued by the municipality.
Use of certified invoicing software or the e-fatura system.
Guest registration with SEF via SIBA.
Annual income declarations (and quarterly VAT returns if applicable).
Property and liability insurance.
A simple spreadsheet to track income, expenses, and taxes.
Frequently Asked Questions
Do I need to charge VAT (IVA) on my rentals?
Long-term leases are exempt.
Short-term rentals may require VAT if your turnover exceeds the exemption threshold or if you provide hotel-style services like breakfast or daily cleaning.
Can I be taxed twice (in Portugal and my home country)?
No — Portugal has double-tax treaties with most countries that avoid double taxation by allowing foreign tax credits.
Which regime is better — simplified or organised accounting?
Simplified is easier for small owners with few expenses.
Organised accounting is more efficient for investors with high costs, renovations, or mortgages.
Do I need an AL licence if I rent only for a few weeks per year?
Yes. Any short-term tourist rental — even seasonal — requires a valid AL licence, guest registration, and tax compliance.
Example Scenarios
A non-resident renting a two-bedroom flat in Portimão long-term earns around €10,800 per year. After deductible expenses, they pay Portuguese tax on the net amount and declare it again at home with a credit for taxes already paid.
A non-resident renting a studio in Lagos under the simplified AL regime earns around €22,500 per year. Only part of that income is considered taxable, and VAT is generally exempt if the annual revenue stays below the legal limit.
Another owner renting a T2 apartment in Albufeira under the organised accounting regime earns about €32,000 per year. After deducting all real expenses — management, cleaning, maintenance, utilities — they are taxed only on the actual profit and may reclaim VAT on eligible expenses.
Conclusion
For foreign property owners in the Algarve, profitability depends on:
Choosing the right tax regime (long-term or AL).
Understanding your VAT status.
Staying fully compliant with Portuguese regulations.
Selecting the most appropriate ownership structure.
With the right setup, your rental can remain legal, tax-optimised, and highly profitable.
If you want help estimating your after-tax rental income or understanding which structure fits you best, Algarve Coastal can connect you with local accountants and prepare a personalised profitability forecast for your property.
