Taxes on rental income in different countries: where is it more profitable to rent out real estate and how to avoid double taxation

Renting out a property abroad is not only a stable source of income, but also a serious legal and tax obligation: it is important to understand the tax rules, available benefits, and possible risks in order to avoid unpleasant surprises. The team of the international law firm Antwort Law has prepared a detailed guide for you that will help you understand the taxation of rentals at the international level, choose the most advantageous jurisdiction and avoid double taxation.

Legal risks associated with renting a property abroad: Renting a property abroad comes with a number of legal and practical risks that are important to consider in order to minimize possible losses and problems, such as:

• Improper execution of the lease agreement: if the contract is drawn up incorrectly or does not comply with local laws, it can lead to serious disputes with tenants. For example, the contract may not provide for the possibility of eviction of the tenant in case of violation of the terms or do not describe the procedure for making changes.
• Penalties for tax violations: In many countries, property owners are required to file tax returns on rental income. Errors in calculations, missed filing deadlines, or ignorance of local tax rules can lead to hefty fines or even litigation.
• Ignorance of local rules and laws: different countries have their own features of renting regulation. For example, some countries have strict restrictions on short-term rentals through platforms such as Airbnb (France, Barcelona). In the U.S., depending on the state or city, there may be maximum rental periods or limits on rent increases.
• Damage from unscrupulous tenants: In cases where the contract does not provide for a guarantee from tenants, the owner may face financial and material losses due to damage to the property or non-payment of rent.

What affects rental taxes:

Resident status:

• Residents are taxed on all their income, including those earned abroad.
• Non-residents, as a rule, pay taxes only on income received in the country where the property is located.

Tax rates:

• United States: For non-residents, the flat rate is 30% unless tax forms have been filed to deduct expenses.
• Germany: rental income is subject to progressive income tax (up to 45%), but significant tax deductions are possible.
• France: The rate for non-residents starts at 20% but can be higher for large incomes.

Tax deductions: many countries allow you to reduce the tax base by spending on:

• repair;
• depreciation;
• mortgage interest;
• utilities;
• real estate insurance.

Where it is more profitable to rent out real estate: some countries offer favorable tax conditions for property owners, which makes them especially attractive for investment.

UAE:

• Zero tax on rental income;
• No income tax for individuals;

Portugal: The NHR (Non-Habitual Residency) program allows non-residents to pay reduced taxes or avoid them altogether for a certain period of time.

Cyprus:

• Preferential rate of 3% on rental income after deduction of expenses;
• No capital gains tax on the sale of real estate.

Georgia:

• Flat rate of 5% on rental income for non-residents;
• Simple reporting system and minimal bureaucratic requirements.

Spain: Despite the high rate for non-residents (24%), the available tax deductions can significantly reduce the tax burden.

How to prepare for renting a property abroad: By following the step-by-step plan below, you will be able to consider key aspects related to taxation, legal nuances, and management.

1. Study the tax rates and available deductions in the country of rent:

• Find out how rental income tax is calculated. For example, some countries use fixed rates, while others use progressive rates.
• Find out what deductions are available: some expenses can reduce the tax base. As we described above, these can be:
• property repair and maintenance costs;
• property management fees;
• depreciation of the cost of the object;
• mortgage interest.

Example: In France, it is possible to deduct the cost of repairs from the tax base, which allows you to significantly reduce the tax.

2. Conclude a legally verified lease agreement: a properly drafted lease agreement will protect your interests and minimize the risk of conflicts:

• make sure that the contract complies with the laws of the country of tenancy, for example: in Germany, it is important to take into account the laws that protect the rights of tenants, including eviction restrictions.
• Write down the key conditions:

• the lease term, the amount of rent and the procedure for changing it;
• liability for utilities and possible damage;
• conditions for early termination of the contract.
• Provide a clause on the possibility of changing conditions when the market situation changes.

3. Find out if there are double tax treaties: if you are a tax resident of another country, your rental income may be taxed in both countries:

• Check for double taxation treaties between your country and the country of rent.
• Find out what taxes you can offset; which country to indicate when declaring income, what documents confirm the payment of taxes abroad.

Example: Russia and Germany have an agreement on the avoidance of double taxation, which allows you to offset taxes paid in Germany when declaring income in Russia.

4. Consult with a lawyer to draw up an individual tax optimization plan and who will help you:

• Minimize tax liabilities by using available tax benefits.
• Develop a strategy for generating income through legal entities, if it is profitable.
• Avoid violations of local laws, such as ignorance of reporting rules or failure to comply with obligations.

Example: In the United States, you can create an LLC (Limited Liability Company) to rent real estate, which will help optimize taxes and protect personal assets.

Antwort Law case: Alexander, a resident of Russia, owns apartments in Spain and Georgia, which he rents out and wants to minimize taxes.

Solution: Alexander files a tax return in Spain and uses deductions for repairs. Under the DTT between Russia and Spain, he offset the taxes already paid. In Georgia, rental income is taxed at 5%. In Russia, he is exempt from re-paying tax thanks to the DTT.

Renting out real estate abroad can be not only profitable, but also safe if you approach this issue competently. The Antwort Law team will help you understand all aspects, from drafting lease agreements to tax optimization. Contact us to get advice and protect your interests!

Lidia Ivanova

International lawyer
Antwort Law