Local Accommodation Taxation in Madeira is a topic of growing interest among property owners and investors in the region. With Madeira’s flourishing tourism sector and favourable tax conditions, many are considering how best to structure their local accommodation (LA), aka short-term touristic rentals, activity, whether as individuals or through corporate entities. Understanding each option’s legal, tax, and operational implications is essential for success.
Setting Up for Local Accommodation in Madeira
When one acquires a property in Madeira for local accommodation, the follow-up question is often: Should the activity be carried out as an individual or via a company? The answer largely depends on the intended use, expected turnover, and the investor’s long-term goals.
If local accommodation is the objective, the company’s articles of association must explicitly include this activity in its corporate purpose. Additionally, the correct Portuguese CAE (Código de Atividade Económica) must be registered—typically 55201, 55202, or 55204, depending on the specific accommodation type.
Local Accommodation as an Individual: Simplicity and Personal Responsibility
When operating as an individual (in your name), the activity is subject to Category B (Business and Professional Income) under Portugal’s Personal Income Tax (IRS). The commonly adopted simplified regime assumes that only 35% of gross income is taxable, with the remaining 65% treated as presumed expenses.
However, if annual income exceeds €27,360 (subject to annual updates), a minimum of 15% of actual expenses must be documented to maintain the benefits of this simplified regime. If not, the taxable base increases to 85% of gross income.
VAT exemption under Article 53 of the VAT Code is also possible, provided annual turnover remains below €13,500. This simplifies compliance but prevents the deduction of VAT on expenses. As such, voluntarily waiving the VAT exemption may be beneficial in cases of significant upfront investment.
Pros:
- Easier to manage
- Simplified taxation
- VAT exemption (under threshold)
Cons:
- Full personal liability
- Limited tax deduction options
- Higher effective taxation for high earners
Local Accommodation via a Company: Flexibility and Strategic Tax Deduction
Operating through a corporate entity introduces more complexity but offers excellent tax planning and asset protection flexibility. In Madeira, profits are subject to Corporate Income Tax (IRC), often at favourable rates, as low as 14.7% in the Autonomous Region. However, dividends distributed to shareholders are taxed separately, at rates such as 19.6% in Madeira, depending on the beneficiary’s status.
Companies must maintain organised accounts, which include hiring a certified accountant, but allow for full cost deduction, including:
- Depreciation
- Amortization
- Input VAT
In addition to accounting costs, there may be social security obligations if managing partners are remunerated and a potential Additional IMI (AIMI) burden if the company owns high-value properties. AIMI applies to the combined VPT (Taxable Patrimonial Value) of properties, with exemptions of up to €600,000.
Pros:
- Limited liability protection
- Full deduction of business expenses and VAT
- Potentially lower effective tax rates
Cons:
- Higher compliance costs
- Dividend taxation
- Possible AIMI exposure
Choosing the Right Structure: A Strategic Decision
Ultimately, the choice between individual operation and incorporation for local accommodation taxation in Madeira depends on multiple factors:
- Projected income
- Initial and ongoing expenses
- Risk appetite
- Desired asset protection
- Long-term investment plans
An individual setup may appeal to smaller-scale investors and property owners who value simplicity. Conversely, the corporate route offers better tax optimisation and asset and risk separation for those planning a more substantial or professional operation.
Conclusion:
Dealing with local accommodation taxation in Madeira requires a clear understanding of the Region’s legal frameworks and tax implications. Therefore, before launching or restructuring your LA activity, do consult with our legal and tax experts at Madeira Corporate Services, who are familiar with the matter. Whether you’re a seasoned investor or a newcomer to the island, choosing the proper structure is key to maximising returns and minimising risks.
The founding of Madeira Corporate Services dates back to 1996. MCS started as a corporate service provider in the Madeira International Business Center and rapidly became a leading management company… Read more
