Blessed with a superb coastline and some of the country s most beautiful beaches the Algarve continues to be one of the most popular holiday destinations in Europe. Over the past 5 years there are many new homeowners since the property market has been very active. Like many other second homeowners, you will want some rental income from your property to cover costs or, in the case of an investment, to maximize your return. You may be unfamiliar with the financial reporting requirements for short-term holiday rental accommodation under new rules of the Alojamento Local regime. Here is an update for 2026.
Short term holiday rentals are governed by the Alojamento Local laws. As one of the oldest property management companies in the East Algarve Happy Homes have assisted hundreds of clients getting up and running in a cost-effective manner, while staying in compliance with the law.
Happy Homes can obtain the rental license (licenca de Alojamento Local) on your behalf and open the rental activity in compliance with the law. You can file your rental income under the simplified regime, which means that you are only taxed over 35% of your income. The remaining 65% is exempt. Under the simplified regime there are no individual deductible items allowed; however you do benefit from the 65 percent exemption from income tax. Non-residents pay a flat rate of 25% over the 35% that is taxable. Residents add the rental income to their other income which is taxed at a progressive rate.
The 1st year of your rental activity you benefit from a further 50% reduction in tax, which in the 2nd year drops to 25%. You won’t have to pay tax over the full 35% until the third year. This is effectively 8.75% of your total rental income, which makes it easier to remember. If your rental income is above Euro 27.360, you will need to prove that you had 15% or more expenses. If you cannot prove this with invoices, your effective tax rate goes up.
Since the 1st of July 2025 all homeowners who are active in the short-term holiday rental business must include 6% VAT in the rent regardless of the amount of rental income. Before there were exemptions if income was below a certain threshold. In addition, you were automatically exempt from VAT for the first year of your rental activity. This is no longer the case. Its not all bad; the 6% VAT doesn’t count as income while you can off set the VAT against VAT paid. Most expenses carry a 23% VAT rate. Let’s explain this in more detail.
Under the VAT regime the VAT on rental income is charged at 6%. This can be compensated with the VAT paid on expenses therefore you should keep your invoices (with your name and fiscal number) in order to claim back VAT. You pay the higher rate of 23 percent VAT on most expenses, therefore in our experience, you will not pay any VAT because it balances out. VAT needs to be reported to AT (tax department) on a quarterly basis. If you have high expenses in a given year, the VAT can be carried forward and used to offset future VAT liabilities.
In addition, you are responsible for the reporting of your guests to SEF (border and immigration control), issuing timely rental receipts for your guests, and reporting monthly income to AT the following month. Some councils require you to charge your visitors a tourist tax, which you must pay to the council on a monthly basis. Only VRSA, Faro and Olhão in the East Algarve require homeowners to collect a tourist tax.
If you have previously rented out your property, you must first register your billing series with AT (tax department) before issuing any invoices. This is a new requirement that needs to be completed by the end of January of each calendar year. If you utilize a billing software program, it is not sufficient to just generate the new billing series for this year; it must first be notified to AT.
In addition you need to report to AT on a monthly basis, also if you had no rental income. An accountant annual tax filing of your rental income costs roughly Euro 90 (excl. 23 percent vat). There usually is a surcharge if you need to report VAT on a quarterly basis.
If you are using a rental portal for your bookings, be aware that you must provide your guests with a rental receipt that includes the commission the portal charges you. The VAT on this commission can be used to offset other VAT liabilities, but under the simplified regime, the commission itself cannot be deducted as an expense.
If you have a VAT credit it is possible to claim this back. However, you should be conscious that the tax department may scrutinize your rental activity. In case you have not been including the commission charge of a portal in the rental receipt for your guest and/or you are staying for a relatively long period in the property yourself, the VAT on expenses incurred during your own stay may not be allocated to your rental activity as it was for your own benefit.
Homeowners from the United Kingdom need to be aware that due to Brexit they will need to appoint a fiscal representative.
Happy Homes Algarve has many years of experience in dealing with all of these requirements on your behalf, making sure you are in compliance with the law and giving you peace of mind.
