A New Chapter for Holiday Rentals in Portugal

For years, Portugal's short-term rental market — operating under the Alojamento Local (AL) regime — was caught in a storm of political uncertainty. Restrictive legislation, new taxes, and a near-freeze on new licences left many investors hesitant. That picture has now changed significantly, and the Algarve stands to benefit more than anywhere else in the country.

The CEAL Tax Is Gone — Retroactively

The most impactful change is the repeal of the Contribuição Extraordinária sobre o Alojamento Local (CEAL) — the 15% extraordinary levy that had been applied to coastal holiday rental properties under the previous government's Mais Habitação package.

Under the Luís Montenegro government, this contribution has been scrapped with retroactive effect from 31 December 2023. In plain terms: if you own or are considering a holiday rental property in the Algarve, you are no longer subject to this additional tax burden. The removal of the "age coefficient" from Municipal Property Tax (IMI) calculations for AL properties adds further financial relief.

What This Means for the West Algarve

The Algarve — and particularly the western stretch from Lagos to Sagres — has always been one of Portugal's most sought-after short-term rental markets. With average prices in Lagos already exceeding €3,100/m² and occupancy rates among the highest in the country during peak season, the removal of the CEAL tax directly improves the net yield equation for investors.

Key implications for West Algarve property owners and buyers:

• Higher net rental yields — without the 15% extraordinary levy eating into returns
• Improved investment case for villas and apartments in Luz, Burgau, Salema, and Lagos
• Renewed confidence among international buyers who had paused decisions due to regulatory uncertainty
• Stronger resale value for properties with active AL licences

New Rules: What Investors Must Know

While the tax burden has eased, the regulatory framework has been updated. Here is what matters most for investors in 2026:

• AL licences are back: The near-total ban on new licences under Mais Habitação has been lifted. Municipalities now control new licence approvals — meaning the Algarve's councils (including Lagos) can issue licences based on local conditions.
• Municipal powers expanded: Local councils can set capacity limits and operational conditions. Investors should check with the Câmara Municipal de Lagos for current rules in their target area.
• Tax options remain flexible: AL income can be declared under Category B (business income, with 35% of gross taxable under the simplified regime) or Category F (flat 28% rate on rental income). VAT exemption applies if annual turnover stays below €10,000.
• Registration is mandatory: All AL properties must be registered on the National Register of Local Accommodation (RNAL) and display their registration number on all platforms.

The Algarve Advantage in 2026

Unlike Lisbon — where the municipal assembly has moved to suspend new AL licences — the Algarve's tourism-dependent economy means local councils are far more supportive of the short-term rental sector. The region's 300+ days of sunshine, world-class beaches, and growing international connectivity through Faro Airport make it one of Europe's most resilient holiday rental markets.

For investors looking at the West Algarve specifically, the combination of reformed AL regulations, eliminated punitive taxes, and strong seasonal demand creates a compelling window of opportunity — particularly for properties in villages like Luz, Burgau, and Salema, where supply remains constrained and demand continues to grow.

The Bottom Line

Portugal's 2026 Alojamento Local reform is not just a regulatory update — it is a signal of intent. The government has chosen to support the short-term rental sector rather than restrict it, and the Algarve is positioned to capture the upside. For investors who had been waiting on the sidelines, the regulatory fog has lifted.

Want to explore holiday rental investment opportunities in the West Algarve? Get in touch with the VerLuz team for off-market listings and investment guidance.