The Tax and Customs Authority has held for several years that a deposit received under a lease is category F property income, taxable in the year it is received. Recent decisions of the Centre for Administrative Arbitration point the other way, distinguishing a genuine security deposit, which performs a guarantee function only, from an amount that, whatever the contract calls it, corresponds in substance to rent or to another form of remuneration.
The distinction has practical consequences for landlords and tenants, and it becomes acute where the deposit is large, the lease is long, or the parties are related.
At a glance
The AT position is that a lease deposit is rental income taxable on receipt, reportable in Annex F of the Modelo 3 return, with a rent receipt to be issued. The CAAD has twice held otherwise, in case 85/2023-T of 30 October 2023 and in a decision of 9 April 2026, on the basis that a deposit subject to an obligation of restitution is not a definitive accretion to the landlord’s estate and is not consideration for the use of the property. This is arbitral case law, not harmonising case law of the Supreme Administrative Court, so the AT may continue to assess.
The position of the Tax and Customs Authority
The AT relies on Article 8 of the Personal Income Tax Code, which classifies as property income the rents of rural, urban and mixed buildings paid or made available to their holders. The same article contains a broad tax concept of “rent”, covering amounts relating to the transfer of use of the building and to services connected with that transfer.
On the AT’s reading, the deposit, although it performs a guarantee function as a matter of civil law, is connected to the lease, is delivered to the landlord and represents an increase in assets at the moment of receipt. It is therefore to be classified as property income in the year in which it is paid or made available.
That position was expressly restated in Ofício-Circulado no. 20256 of 7 June 2023 and in earlier binding information. The AT also takes the view that a rent receipt must be issued and that the amount must be declared in Annex F of the Modelo 3 return.
The same position was applied in a recent inspection concerning a deposit of EUR 358,800 received under a lease with an initial term of 15 years. The AT treated the amount as taxable property income in the year of receipt, with the corresponding reporting obligations.
Where the deposit is subsequently returned, the AT accepts that the landlord may treat the returned amount as an expense incurred and paid in the year of restitution. That is intended to correct, at a later date, the taxation that took place in the initial year. It can produce a considerable timing mismatch between the taxation of the receipt and the deduction of the return.
The distinction between a deposit and rent
Civil legislation distinguishes the advance receipt of rent from the provision of a security deposit. Under the lease regime, the deposit is intended to secure performance of the tenant’s obligations, in particular the payment of rent and the repair of damage caused to the property.
The distinction matters because rent is the consideration for the transfer of enjoyment of the property. A deposit does not directly remunerate that transfer. It operates as a guarantee, and it is to be returned if the tenant performs.
A receipt does not, by itself, mean that there is taxable income. What has to be determined is whether the amount received constitutes a definitive accretion to the recipient’s assets, or whether it corresponds to an obligation of restitution that continues to sit on the landlord’s side of the relationship.
CAAD decision 85/2023-T
In its decision of 30 October 2023 in case 85/2023-T, the arbitral tribunal considered a deposit received under a rural lease, with provision for restitution at the end of the term if the contractual obligations were met.
The tribunal upheld the taxpayers’ claim and annulled the additional IRS assessment. The decision carried a dissenting vote, but the majority held that a genuine deposit does not, by itself, constitute taxable income.
The reasoning rested on four propositions:
- The deposit is by its nature a guarantee of contractual performance.
- It is not consideration for the transfer of the property.
- For as long as the obligation of restitution subsists, it does not represent a definitive accretion to the landlord’s assets.
- Article 8 of the IRS Code should not be read as covering amounts that are not rents in the proper sense and that have no remuneratory character.
The tribunal treated the distinction between the deposit and rent as consideration for the letting as the decisive point, and referred to the differentiated treatment that deposits receive elsewhere in the legal and tax system.
The 9 April 2026 decision
The question returned to the CAAD in a decision of 9 April 2026, concerning a deposit received under a lease and subsequently taxed by the AT as property income.
The collective tribunal expressly adopted the solution reached in case 85/2023-T and stated that the receipt of an amount by way of guarantee of contractual performance does not fall within the concept of taxable income set out in the IRS Code, in particular in Article 8.
In its reasoning, the tribunal concluded that a deposit is not effective income where its cause, basis and purpose are not the definitive integration of the amount into the lessor’s estate. The deposit belongs to the guarantee relationship, not to the immediate object of the transfer of the property.
The tribunal upheld the arbitral claim and annulled the IRS assessment and the associated compensatory interest.
The decision carries weight because it confirms, in a collective tribunal with a different composition, the position already taken in 2023. It remains arbitral case law rather than harmonising case law of the Supreme Administrative Court. The AT may therefore maintain its administrative position and continue to argue for immediate taxation of deposits on inspection.
Substance decides, not the label
The 2026 decision contains a warning that landlords should read carefully: classification as a deposit does not depend only on the name used in the contract.
In the case examined, the taxpayers had used the amount received as a deposit to finance the acquisition of the leased property. The tribunal treated that circumstance as legally relevant and observed that using the amount for a purpose unconnected with the guarantee could raise further questions, including the possible application of the general anti-abuse rule or of the transfer pricing regime.
The tribunal nonetheless confined its decision to the ground actually invoked by the AT, which was the automatic classification of the deposit as property income. Since the AT had not based the assessments on simulation, abuse or invalidity of the transaction, those questions were not examined as an independent ground of decision.
The practical conclusion follows: a deposit formally provided for in the contract may not be accepted as such if, in reality, it operates as financing, as advance rent, as a disguised distribution of value, or as another form of remuneration.
What to examine in each case
Assessment of the nature of the amount received should take account of, among other elements:
- a clear contractual obligation of restitution;
- express provision for the situations in which the landlord may draw on the deposit;
- correspondence between the amount of the deposit and the obligations actually secured;
- accounting separation between the deposit and the rents;
- the absence of freedom for the landlord to use the amount definitively;
- documentation relating to the restitution or to the application of the deposit;
- consistency between the amount of the deposit, the duration of the lease and the applicable civil regime;
- the absence of special relations or of circumstances that reveal an economic purpose other than contractual guarantee.
The larger the deposit is relative to the rent and to the obligations secured, the greater the need to demonstrate its economic substance and the objective reason for the amount fixed.
Withholding and reporting
On the AT’s position, if the deposit is classified as property income then the applicable reporting obligations must be met and, where the payer is legally obliged to do so, withholding must be operated. The AT has also taken the view that property income is as a rule taxed autonomously at 28 per cent, save where the option for aggregation is available and exercised.
By denying that a genuine deposit is income at all, the CAAD case law removes the premise for both the withholding and the reporting as property income. Until there is a legislative change or a harmonising decision that settles the question, a taxpayer who adopts that position may face a correction on inspection.
A decision not to declare a deposit as income should therefore be supported by solid documentation: the contract, the restitution clauses, the accounting records, the bank evidence, and the elements that demonstrate that the obligation of restitution subsists.
Where this leaves landlords and corporate tenants
The AT position is clear: deposits received under leases are property income subject to IRS in the year of receipt. The recent CAAD case law is to the contrary, on the basis that a genuine deposit, performing a guarantee function only and subject to restitution, is neither consideration for the transfer of the property nor a definitive accretion to the landlord’s assets.
The question is open. The stronger position in any given case will depend on proof of the economic reality of the transaction and on the distinction between a genuine deposit and an amount that, under that name, functions in substance as rent or as another transfer of value.
For landlords and corporate tenants, the prudent course is for the lease to describe precisely the purpose of the deposit, the regime governing its restitution, the conditions under which it may be drawn on, and the documentary and accounting treatment to be observed. In tax matters, what determines the outcome is the function the amount actually performs, not the description the parties adopt.
MCS can assist with the review of lease deposit clauses, with the documentary and accounting arrangements that support a guarantee characterisation, and with the response to an inspection or the contestation of an assessment, subject to a case-by-case analysis of the contract, the amounts and the relationship between the parties.
Frequently asked questions
Is a rental deposit taxable in Portugal? The AT’s position is that it is: a deposit received under a lease is category F property income, taxable in the year of receipt, reportable in Annex F of the Modelo 3 return. The CAAD has held in two decisions that a genuine deposit subject to restitution is not taxable income. The two positions have not been reconciled.
What did the CAAD actually decide? In case 85/2023-T (30 October 2023) and in a decision of 9 April 2026, the arbitral tribunals annulled IRS assessments on deposits, on the basis that a deposit guarantees performance, is not consideration for the transfer of the property, and does not represent a definitive accretion to the landlord’s assets while the obligation of restitution subsists.
Does the CAAD case law bind the Tax and Customs Authority generally? No. It is arbitral case law, not harmonising case law of the Supreme Administrative Court. The AT may maintain its administrative position, restated in Ofício-Circulado no. 20256 of 7 June 2023, and continue to assess deposits as income on inspection.
Can a deposit be reclassified as rent? Yes, in substance. The 2026 decision noted that where the amount is used for a purpose unconnected with the guarantee, further questions may arise, including the general anti-abuse rule and the transfer pricing regime. A deposit that in reality funds the landlord, or replaces rent, is exposed.
What happens when the deposit is returned? On the AT’s approach, the landlord may treat the returned amount as an expense incurred and paid in the year of restitution. Where the deposit was taxed on receipt under a long lease, the deduction may fall many years after the tax was paid.
Is withholding required on a lease deposit? On the AT’s position, where the deposit is property income and the payer is legally obliged to withhold, withholding applies, with property income taxed autonomously at 28 per cent unless aggregation is available and elected. The CAAD case law removes the premise for that treatment in respect of a genuine deposit.
What should the lease say? It should state the purpose of the deposit, the conditions under which the landlord may draw on it, the restitution regime, and the documentary and accounting treatment. The amount should bear an objective relationship to the obligations secured.
This article is provided for general information purposes only and reflects the position as at the date of publication. It does not constitute legal, tax or accounting advice and does not substitute an analysis of the concrete circumstances of each taxpayer, contract or transaction. The subject matter is contested: the administrative position of the Tax and Customs Authority and the arbitral case law of the Centre for Administrative Arbitration are not aligned, arbitral decisions bind only the parties to the proceedings in which they are given, and no harmonising decision of the Supreme Administrative Court has been identified. Adopting a position contrary to the published administrative doctrine may result in an additional assessment, compensatory interest and penalties. Madeira Corporate Services accepts no liability for any action taken, or omitted, on the basis of this article. Readers should obtain specific advice before acting.
Ambrosio Jardim has, since 1998, worked mainly in the areas of commercial law (corporate, mergers and acquisitions, joint ventures, restructuring and planning), national and international tax law and real estate…. Read more
