6% VAT on residential construction

Decree-Law No. 97/2026 of 20 May added item 2.42.1 to List I annexed to the Portuguese VAT Code, introducing a specific regime for contracts for the construction or rehabilitation of properties intended for use as the owner’s main and permanent residence or for residential letting. In mainland Portugal, qualifying transactions now benefit from the reduced VAT rate of 6%, subject to particularly strict eligibility, timing and documentation requirements.

The regime, authorized by Law No. 9-A/2026 of 6 March, was subsequently corrected by Rectification Notice No. 26/2026/1 of 13 July and clarified in three administrative circulars issued by the Portuguese Tax and Customs Authority (AT): Circular Letters Nos. 25 116, 25 117 and 25 120, dated 23 June, 24 June and 28 July 2026, respectively. Applying the reduced rate therefore requires the VAT Code to be read together with Decree-Law No. 97/2026, the Portuguese legal framework governing urban development and building works (RJUE), the rules on Property Transfer Tax (IMT) and Stamp Duty, and the VAT reverse charge rules.

The new regime: item 2.42.1 and its scope

Item 2.42.1 of List I to the VAT Code covers “contracts for the construction or rehabilitation of properties” intended for sale as the purchaser’s main and permanent residence or for letting exclusively for residential purposes, provided that the sale price or rent remains within the statutory limits. The applicable rate is 6% in mainland Portugal; the Autonomous Regions have their own reduced rates.

Unlike item 2.23, the new provision does not require the property to be located within an urban rehabilitation area, nor does it require an approved urban rehabilitation operation. It can cover both new construction and rehabilitation, provided that there is a genuine works contract and that the property is used for one of the two permitted purposes. Eligibility therefore depends on the residential use of the completed property rather than its location within a particular planning area.

Until the end of 2026, the limits are €660,982 for sales and €2,300 for monthly rent. The former corresponds to the upper threshold of the second IMT band applicable to the purchase of a main and permanent residence; the latter is two and a half times the statutory minimum monthly wage. These amounts may be updated by ministerial order issued by the members of the Government responsible for finance and housing.

Compliance with these limits is assessed by reference to the total value of each transaction. This includes ancillary items, equipment and services associated with the property, even where they are covered by legally separate contracts. The value is not divided according to the number of co-owners, purchasers, landlords or tenants. The caps therefore cannot be avoided by splitting a transaction between separate contracts or multiple parties.

Period of application

The reduced rate of 6% under item 2.42.1 applies from 1 July 2026 and is temporary. It covers works contracts for which the relevant planning or building control procedure is initiated between 25 September 2025 and 31 December 2029. The relevant date is the date on which the license application or prior notification is submitted or, for works exempt from prior municipal control, the date of the application for an opinion or the notification of the commencement of works. VAT must also become chargeable between 1 January 2026 and 31 December 2032, when the provision expires. For transactions on which VAT became chargeable between 1 January and 30 June 2026, the reduced rate applies only if the contractor and the party commissioning the works jointly elect to apply it and amend the invoices and returns accordingly. For these purposes, the relevant date is when VAT becomes chargeable, taking account of invoices, interim valuations of work and advance payments, rather than the date of the contract or completion of the works. Accordingly, invoices for work or supplies with a tax point after 31 December 2032 will be subject to VAT at the standard rate.

Neither the date on which the works contract is signed nor the date on which it is awarded is therefore decisive in determining whether the reduced rate applies. What matters is retaining the documentation relating to the relevant planning or building control procedure and the commencement of use of the property, taking account of invoicing periods, payments and interim valuations, where applicable.

Construction for sale: price, deadline and use as the purchaser’s main and permanent residence

Where a property is constructed or rehabilitated for sale, it must be sold for no more than €660,982, and the acquisition must qualify for the IMT rates applicable to a main and permanent residence. The sale must take place within 24 months of the date established by the relevant documentation as the commencement of use of the property.

Under Circular Letter No. 25 116/2026, for works subject to prior municipal control, this generally corresponds to the submission to the municipality of the documents required under Article 62-A of the RJUE, including the declaration of responsibility and the as-built drawings. For works exempt from prior municipal control, the relevant date is the end of the statutory period following the notification of use, subject to any inspection. From 1 October 2026, for works subject to licensing or prior notification, the relevant date continues to be the submission of the notification of use with all required supporting documents. Where prior notification is subject to a waiting period, the relevant date is the tenth day after submission, unless an inspection is ordered.

A further essential condition for applying the reduced VAT rate is that the acquisition document must expressly state that the property is intended to be the purchaser’s main and permanent residence and that the works benefited from item 2.42.1.

Subsequent failure to use the property as declared does not, in itself, result in the loss of the reduced VAT rate. If the purchaser fails to register the property as their tax address within six months, or fails to maintain its exclusive use as their main and permanent residence for the following twelve months, no VAT adjustment is required. Instead, the purchaser becomes liable for an IMT surcharge equal to 10% of the taxable value, except in the exceptional circumstances specified by law.

For developers, this makes it important to address the relevant contractual requirements from the outset, both in the preliminary sale and purchase agreement and in the works contract.

Construction for letting: exclusive residential use and minimum letting periods

Where a property is constructed or rehabilitated for letting, the letting must qualify for the VAT exemption under Article 9 of the VAT Code and be exclusively for residential purposes. Monthly rent must not exceed €2,300, calculated by reference to the total amount payable for the use of the property and any associated services or equipment. Short-term tourist accommodation under the alojamento local regime, hotel operations and other services subject to VAT are therefore excluded from this regime.

As regards timing, the first tenancy agreement must take effect within 24 months of the commencement of use of the property. In addition, the property must remain let for at least 36 months, whether continuously or in separate periods, during the first five years.

The tenancy agreements must be notified to the AT under Article 60 of the Stamp Duty Code. The owner should also include contractual provisions requiring residential use, restrict incompatible subletting and retain evidence of the notifications and rent receipts needed to substantiate the periods during which the tenancy was in effect.

Works contracts and mixed-use developments

A works contract is defined in Article 1207 of the Portuguese Civil Code as a contract under which one party undertakes to carry out specified work for a price. Circular Letter No. 25 117/2026 requires actual construction or rehabilitation work and also refers to the service provider’s legal authorization under Law No. 41/2015. The mere purchase of materials, equipment or furniture does not become a works contract simply because delivery or incidental assembly is included.

Installation or assembly may form part of a works contract where the main purpose is to carry out the works, the item is permanently incorporated into the property and the work falls within a legally recognized category of construction activity. By contrast, installation that is straightforward, reversible or merely incidental to a sale generally remains a supply of goods. Separately supplied architectural, engineering, construction supervision, consultancy or project management services do not, in themselves, qualify under item 2.42.1.

Item 2.42 expressly refers to construction or rehabilitation works contracts and does not provide for its extension to subcontracts. On a literal reading of the provision, the reduced rate applicable to the main works contract should therefore not, in principle, be automatically extended to transactions between the main contractor and subcontractors. Where the relevant conditions are met, those transactions remain subject to the general reverse charge rule for construction services, with VAT accounted for at the rate applicable to the particular transaction.

Where a development combines qualifying residential units with units that do not qualify for the reduced rate, whether intended for retail, services, tourism or residential use, the reduced rate applies in proportion to the qualifying residential component, subject to the remaining requirements. Decree-Law No. 97/2026 uses the ratio between the combined gross construction area and land area beyond the building footprint attributable to the qualifying units, on the one hand, and the corresponding combined areas for all units, on the other. This test applies both to buildings divided into legally autonomous units under the propriedade horizontal regime and to buildings held under a single title.

The apportionment is based on areas, not on sale prices, estimated costs or the ownership shares allocated to the units. To maintain the evidence needed to demonstrate entitlement to the reduced VAT rate, the developer should arrange for area schedules and other appropriate technical documentation to be prepared before invoicing under the works contract begins. These documents should substantiate the relevant proportions of the development, be consistent with the planning and building records, and be reviewed and updated whenever changes are made.

Reverse charge: who invoices and who accounts for VAT

Decree-Law No. 97/2026 extended the reverse charge rule in Article 2(1)(j) of the VAT Code to purchases covered by item 2.42.1. The contractor issues the invoice without charging VAT and includes the wording “IVA — Autoliquidação” (“VAT — Reverse charge”). The customer calculates VAT at the reduced rate and pays any amount due to the tax authority, taking account of any entitlement to deduct input VAT.

This special rule applies even where the customer is a taxable person carrying out only exempt transactions and has no right to deduct input VAT, as may be the case for a landlord engaged exclusively in residential letting. In that situation, the customer must comply with the relevant filing obligations and pay the VAT accounted for under the reverse charge by the end of the month following the transaction. The absence of a right to deduct does not transfer responsibility for accounting for VAT to the contractor.

By contrast, the general reverse charge rule for construction services normally requires the customer to be a taxable person carrying out transactions that give rise to a full or partial right to deduct input VAT. The special rule under item 2.42.1 is therefore broader as regards the customers it covers, but narrower as regards the work: the works contract must actually qualify for the regime.

The reverse charge also applies to advance payments and invoices issued in advance, provided that sufficient information is already available to establish the works contract’s VAT treatment. If the supplier charges VAT when the reverse charge should have applied, the customer cannot deduct that VAT merely because it appears on the invoice. The error must be corrected through an invoice adjustment and the corresponding amendments to the VAT returns.

VAT adjustments: loss or subsequent confirmation of relief

The reduced rate may be applied while the works are in progress on the basis of the intended use of the property, with eligibility being confirmed or lost at a later stage. Article 11 of Decree-Law No. 97/2026 and Circular Letters Nos. 25 116 and 25 120 distinguish between circumstances requiring amendments to the original VAT returns and those in which non-compliance may be addressed through an adjustment in the period when it becomes known.

If the property is sold for more than €660,982, the sale takes place after the 24-month deadline, or the rent exceeds €2,300, the VAT treatment must be corrected from the outset. As a rule, amended returns must be filed for each period in which VAT became chargeable. The difference between the standard and reduced rates must then be accounted for, together with compensatory interest and any applicable administrative penalties.

In other cases of non-compliance — including omission of the mandatory statements from the acquisition document, failure to register the tenancy agreement with the AT, or failure to meet the statutory minimum letting periods — the VAT difference is adjusted in the return for the period in which the relevant event occurs or the following period. Compensatory interest may still be due.

Circular Letter No. 25 120/2026 also addresses the reverse situation: a transaction initially invoiced at the standard rate may subsequently meet the conditions of item 2.42.1. In that case, a customer who accounted for VAT at the standard rate under the reverse charge may make an adjustment in their favor within the four-year statutory time limit, running from the date on which eligibility for the reduced rate is confirmed.

If the customer carries out only exempt transactions and the supplier initially charged VAT, a coordinated approach is required to move the transaction into the special regime. The supplier issues a credit note with the appropriate wording, adjusts the VAT initially charged and obtains evidence that the customer has been notified of the correction or received a refund. The customer then accounts for VAT at the reduced rate under the reverse charge. The retrospective election for the first half of 2026 must follow the same documentary process.

Urban rehabilitation: coexistence with item 2.23

The new item 2.42.1 did not repeal item 2.23 of List I. Under the wording introduced by Law No. 56/2023, item 2.23 continues to cover contracts for the rehabilitation of buildings and contracts for the construction or rehabilitation of public facilities for collective use located within legally designated urban rehabilitation areas, as well as certain rehabilitation projects recognized as being of national public interest.

The two regimes have different scopes. Item 2.23 is based on rehabilitation and the location or recognized status of the project. Item 2.42.1 also covers new construction, but requires residential use, compliance with sale price or rent limits, and observance of the deadlines for sale or letting.

For procedures covered by the transitional provisions of Article 50 of Law No. 56/2023, the previous wording of item 2.23 remains relevant. In judgment No. 3/2026, issued to resolve conflicting case law, the Portuguese Supreme Administrative Court (STA) had recently held that the reduced rate required not only that the property be located within an Urban Rehabilitation Area (ARU), but also that the corresponding Urban Rehabilitation Operation (ORU) had been approved in advance.

That interpretation has since been superseded by Law No. 48/2026 of 17 August. As an interpretative statute, it clarifies that, for this purpose, it is sufficient for the works to be carried out on a property or public space within a legally designated ARU, regardless of whether an ORU has been approved. The law takes effect from the date on which the wording introduced by Law No. 64-A/2008 came into force.

Practical implications

Item 2.42.1 allows VAT on contracts for the construction or rehabilitation of properties intended for sale as the purchaser’s main and permanent residence or for residential letting to be reduced from 23% to 6%. The relief is not automatic: it depends on meeting an interconnected set of requirements concerning the planning and building control procedure, the works contract, invoicing arrangements, the applicable reverse charge rules and the use of the property.

The decision to apply the 6% rate must be documented before, during and after the invoicing periods for the works and qualifying supplies. It must also be supported by the records relating to the sale or letting of the property, in accordance with the requirements of the regime.