A Tax Arbitration Panel Again Holds That Rental Deposits (Cauções) Are Not Income — but the Fisco Still Wants Them on Your IRS Return

If you rent out a home in Portugal, your tenant almost certainly handed you a caução (security deposit) when the lease was signed — usually one or two months' rent, held as a guarantee against unpaid rent or damage. A long-running question has hung over that money ever since: does the landlord have to declare it as income and pay tax on it? A tax arbitration court has now answered, again, that the answer is no — and the Tax Authority has, again, made clear that it disagrees.

The latest decision, reported this week, is the newest in a line of arbitral rulings that side with landlords over the Autoridade Tributária e Aduaneira (Tax and Customs Authority, universally known as the Fisco). The reasoning is consistent: a deposit is not, at the moment it is received, real income. It has no cause, foundation or purpose that adds to the owner's wealth, the arbitrators have held; it is a guarantee that the landlord is legally obliged to return once the tenant moves out having met the terms of the lease.

What the court actually said

The leading precedent is a ruling by the CAAD — Centro de Arbitragem Administrativa (Centre for Administrative Arbitration), the body that hears tax disputes as a faster, cheaper alternative to the ordinary courts. In process 85/2023-T, decided in October 2023, the tribunal concluded that a rental deposit does not immediately enter the landlord's assets — precisely because there is an obligation to give it back if the tenant honours the contract. On that view, the money only becomes taxable income in the year it is actually kept, for example to cover arrears or repair damage. Return the deposit at the end of the tenancy and, the court says, nothing was ever earned.

This week's decision follows the same logic. The very framing of the report — that the court has again contradicted the Fisco — captures the state of play: the arbitrators keep reaching the same conclusion, and the Tax Authority keeps declining to follow it.

Why the Tax Authority won't budge

The AT's position, set out in a binding ruling (informação vinculativa), is the opposite: a deposit is rendimentos prediais (property income) and falls under Category F of the personal income tax code. On that reading it must be declared in Anexo F (Schedule F) of the annual modelo 3 (Form 3) return in the year it is received. When the deposit is later handed back to the tenant, the AT's guidance lets the landlord record it as a deductible expense — effectively taxing the money on the way in and crediting it on the way out. The Fisco stresses that this is not a novel interpretation and that, because its guidance has immediate force, it is what tax inspectors apply when they check a return.

The bind this puts landlords in

Here is the practical difficulty. An arbitral ruling binds only the case it decides; it does not overturn the AT's general guidance. Until the Supremo Tribunal Administrativo (Supreme Administrative Court) settles the matter with binding case law, or Parliament amends the IRS code, the Fisco's position is the one that governs how declarations are assessed. A landlord who simply leaves the deposit off the return is betting it will not be questioned — and if it is, faces corrections, interest and possible penalties.

The flip side is that landlords who do get assessed have a strong, well-trodden route to challenge it. CAAD arbitration is relatively quick and inexpensive, and on this question taxpayers have been winning. Anyone confident enough to follow the case law rather than the AT circular should at least keep the paperwork that proves the payment was a guarantee — the deposit clause in the lease, and evidence of its eventual return — so the argument is easy to make if the return is flagged.

What to do in practice

For most small landlords the pragmatic path is still to follow the AT's guidance when filing: declare the deposit in Anexo F in the year it comes in, and deduct it in the year it goes back out, so the net tax over the life of the tenancy is nil. Keep in mind the one scenario everyone agrees on — if you keep all or part of the deposit at the end of the lease, that retained amount is genuine income and is taxable in the year you keep it. If you would rather take the position the courts have endorsed and not declare the deposit at all, do so with your eyes open, and with the documentation ready.

The deposit fight is part of a wider pattern of friction between the arbitration courts and the Fisco, which has dug in on several fronts even after losing individual cases. For anyone letting property in Portugal, the sensible reading is that the law is genuinely unsettled: the case law leans one way, the tax office leans the other, and the safest position is to understand both before you file.

For the mechanics of declaring rental income, see our guide to declaring rental income as a landlord; for the deposit's role in the tenancy itself, our guide to signing a rental lease; and for the other big property levy, paying the IMI municipal property tax.