The tax treatment of security deposits received under lease agreements remains a source of controversy in Portugal, due to a divergence between the position taken by the Portuguese Tax and Customs Authority (“AT”) and the approach increasingly followed by arbitral case law.
The question is deceptively simple: should the amount a tenant pays as a security deposit be taxed as soon as the landlord receives it, or only if and when it stops being refundable and becomes definitively part of the landlord’s assets?
The Tax Authority’s position
For the AT, a security deposit received by a landlord constitutes taxable income from the moment it is made available.
The AT acknowledges that, under civil law, a security deposit exists to guarantee performance of the obligations arising from the lease. Even so, it takes the view that the tax concept of rental income is broader, treating the deposit as an increase in the landlord’s wealth linked to the lease — taxable as rental income in the year it is received.
The fact that the landlord may later have to return the deposit does not change this view: the AT accepts that the refund can be taken into account for tax purposes in the year it occurs. It has also adopted a similar approach under corporate income tax (IRC), treating security deposits received under lease agreements as taxable income at the time of receipt.
The arbitral courts’ position
Arbitral case law, however, has taken a different approach.
Starting from the legal nature of a security deposit as a guarantee of contractual obligations, decisions from the CAAD (Portugal’s tax arbitration centre) have held that, for as long as the obligation to return the deposit remains in place, the amount received stays tied to its guarantee function and does not become a definitive part of the landlord’s assets. On this view, simply having financial availability over the amount is not the same as a genuine, taxable increase in wealth.
Under this approach, taxable income only arises once the deposit is definitively appropriated by the landlord — for instance, to offset unpaid rent or damage to the property.
Where the divergence lies
The disagreement centres on when, for tax purposes, income is considered to exist:
- For the AT: making the deposit available to the landlord is enough to trigger taxation, without prejudice to a later adjustment if the amount is subsequently returned to the tenant
- For arbitral case law: for as long as the deposit remains subject to the obligation of return and keeps its guarantee function, there is no definitive increase in wealth to justify taxation
Practical impact for landlords
While this divergence between the AT and arbitral case law persists, landlords face a practical choice: tax the deposit at the time it is received, following the AT’s position, or take the view that no taxable income arises for as long as the deposit retains its guarantee function and remains refundable.
The second approach is supported by arbitral case law, but carries the risk of a contrary position from the AT and a subsequent tax adjustment. The decision should therefore be weighed against the specific circumstances of each lease and the level of risk the landlord is willing to accept.
How VCA can help
VCA follows this divergence closely and advises landlords and real estate investors on the tax structuring of lease agreements, including the treatment of security deposits in each specific situation. While the uncertainty persists, a case-by-case assessment of the tax risk is essential before deciding which approach to take.
Tax Department
João Valadas Coriel | Sofia Quental | Inês Grácio | Catarina Amaral
