Owners running an Algarve holiday let from outside Portugal often discover the income-tax side only after the first booking season has closed. The position changed materially during 2025, and the 2026 picture is no longer the one most cross-border owners signed up for. The interaction between the two relevant taxes is what tends to catch owners out.
The Two Taxes That Apply
Income from an Alojamento Local property is treated as business income under IRS Categoria B. It sits alongside IVA (Portuguese VAT) on the same revenue, under separate rules administered by the Portuguese Tax Authority.
- IRS Categoria B taxes the profit element at a flat 25% non-resident rate.
- IVA applies at the reduced 6% rate on the accommodation supply, with 23% on any ancillary services charged separately.
- The two filings run on different calendars and on different definitions of revenue.
The Simplified Regime and the 35 Percent Coefficient
Most individual AL owners sit inside the simplified regime of Categoria B, which presumes a fixed deemed-cost ratio rather than tracking real expenses. For standard apartment or villa AL revenue, taxable profit is set at 35% of gross receipts, with the remaining 65% treated as activity costs. The PwC Portugal IRS guide for 2026 sets out the full coefficient table.
Applied to a non-resident at the flat 25% IRS rate, the effective tax on gross AL revenue is roughly 8.75% in straightforward cases, assuming the property is not in a designated containment zone.
- The 35% coefficient rises to 50% in government-designated containment areas, which mainly affects parts of Lisbon and Porto rather than the Algarve.
- The simplified regime applies up to roughly €200,000 of annual turnover. Above that, organised accounting (contabilidade organizada) becomes mandatory and a certified Portuguese accountant is required.
- Categoria B income still has to be declared on the annual Modelo 3 return with Anexo B, even where the IRS figure is small.
What Changed on VAT in 2025
The VAT side is where the picture moved most. Until mid-2025, many non-resident AL owners relied on the small-business exemption in Article 53 of the IVA code, set at €15,000 of turnover. Decree-Law 35/2025 of 24 March removed access to that exemption for non-residents from 1 July 2025. The practical consequences for 2026 are:
- Non-resident AL owners must register for IVA from the first euro of bookings, regardless of how small the activity is.
- Guest invoices must carry 6% IVA on the accommodation line, with periodic IVA returns submitted on the standard schedule.
- Input IVA on AL-related costs is recoverable in principle, which softens the headline impact.
- The €15,000 turnover threshold continues to matter for Portuguese-tax-resident owners, but no longer for owners filing from abroad.
Fiscal Representation and the EU Split
The fiscal-representative requirement now mostly follows the owner’s country of residence rather than the size of the activity.
- Owners resident in another EU or EEA state generally do not need a Portuguese fiscal representative for AL purposes, although a local accountant remains useful for IVA filings.
- Owners resident outside the EU and EEA, including UK owners post-Brexit, are normally required to appoint one, with annual fees typically reported in the low hundreds of euros.
Owners outside the EU who opt in to electronic notifications from the tax authority can in some cases be released from the requirement. The detail is case-specific and worth checking with an accountant.
What the 2026 State Budget Did Not Change
The Orçamento do Estado 2026 introduced a reduced 10% IRS rate on certain long-term residential rental income at moderate rents, alongside a wider housing package. Short-term tourist rental income is explicitly excluded from that 10% rate.
The 2026 budget did not move the Categoria B coefficients for AL, the non-resident flat rate, or the €200,000 organised-accounting threshold, and the non-resident VAT change from 2025 carries forward in full. The direction is tighter compliance rather than lower rates, particularly in urban-pressure areas where new AL registrations remain suspended.
Practical Effect on the Algarve Operator
For a typical Algarve AL property held by a non-resident, the 2026 numbers usually settle around:
- An effective IRS charge in the region of 8.75% of gross AL revenue under the simplified regime, before treaty interactions.
- A 6% IVA charge on accommodation, with input IVA on cleaning, linen, platform commissions and maintenance available to offset.
- An annual Modelo 3 filing covering Categoria B income, plus periodic IVA returns.
- Fiscal-representative fees where the owner sits outside the EU or EEA, and certified-accountant fees once turnover crosses the €200,000 line.
Where Property Management Sits in This
None of the above is something a holiday-rental manager files on the owner’s behalf, since IRS and IVA are personal obligations. What good management does is make those filings cleaner and easier to evidence:
- A single managed income stream with monthly statements simplifies the IVA return and the Anexo B figures.
- Cost lines for cleaning, linen, platform commissions and maintenance arrive itemised, which supports input-IVA recovery and the eventual move to organised accounting.
- Registration with the Registo Nacional de Alojamento Local, guest reporting and tourist-tax flow are handled operationally.
- Introductions to Portuguese tax accountants and, where relevant, fiscal representatives can be made directly.
Summary
VAT and IRS on an Algarve AL in 2026 are workable, but the 2025 VAT changes mean non-resident owners can no longer assume the activity sits below a meaningful threshold. The simplified Categoria B regime keeps the IRS figure modest, while the 6% IVA charge is part of the ongoing admin from the first booking.
If you would like to discuss how a managed setup interacts with these obligations, the short-term rental management team at Resort Rentals is happy to talk it through.
