Among the most significant aspects of this legislative package are the VAT measures. In this regard, there are not only rate reductions, but also practical changes regarding how it must be reported.
1.1. The 6% reduced VAT rate — items 2.42.1 and 2.42.2
The law adds two new items to List I annexed to the VAT Code, allowing a reduced 6% VAT rate to apply to housing construction and renovation contracts. In a nutshell, the distinction is as follows:
Item 2.42.1 – Construction or renovation contracts for properties intended for the buyer’s own permanent residence at a moderate price (€660,982), or intended exclusively for residential rental at a moderate rent (€2,300).
To apply the reduced rate, the rules require that the sale take place within 24 months of the issuance of the documentation confirming the property is ready for use, and that the property actually be used as the buyer’s own permanent residence. For rental properties, the first lease agreement notified to the Tax Authority must take effect within 24 months at most, and the property must remain leased for residential use for at least 36 months (whether consecutive or not) within the first five years.
An important point to highlight withinthis regime is that if the buyer does not use the property as their permanent residence, this does not affect the reduced VAT rate or require the developer to adjust the VAT already charged. Instead, the buyer is simply penalized with a 10% surcharge on the real estate transfer tax (IMT).
This regime takes effect from the quarter following the entry into force of the law, i.e., from 1 July 2026, but it may be applied as early as 1 January 2026 if both the supplier (typically the builder) and the buyer (typically the developer) jointly elect to do so.
This early application is only available for construction or renovation contracts relating to development projects for which the application process with the local municipal council begins between 25 September 2025 and 31 December 2029, and where VAT becomes due on or after 1 January 2026.
This measure will cease to apply on 31 December 2032.
Item 2.42.2 — Construction contracts carried out under Rental Investment Agreements (CIA). Its period of application follows the term of the underlying CIA (discussed in more detail in a dedicated section below).
On this topic, Circular Letter No. 25116 of 23 June 2026 was recently published. Among other things, it clarifies the concepts underlying this item, specifying that the purchase price and the monthly rent include movable assets, equipment, or accessory items physically attached to the property, as well as services that add value to it, even if documented under separate legal arrangements. It also clarifies that, in cases of co-ownership, the price or rent caps are always assessed based on the total value of the transaction, without dividing them proportionally among the co-owners.
The Circular Letter also clarifies that when not all units in a development are sold or leased within the moderate price/rent limits, the reduced rate does not automatically apply to the entire construction contract simply because some units meet the requirements of item 2.42.1.
Instead, the reduced rate should only apply to the portion of the construction work proportional to the gross floor area of the units that, individually, meet all the conditions of the item, using the ratio between that eligible area and the total area of the building or units.
1.2. Change to the VAT self-assessment rule
Alongside the reduced rate, the law changes the VAT self-assessment rule applicable to construction services, extending the reverse charge mechanism to taxpayers who carry out activities that do not give rise to a right to deduct VAT (exempt taxpayers) when they purchase construction work covered by the new item 2.42. This change shifts the responsibility for charging, reporting, and paying the tax to the buyer - an obligation that, in many cases, was not previously part of their normal reporting practice.
On this topic, Circular Letter No. 25117 of 24 June 2026 was recently published, distinguishing between two situations: (i) under the general rule, the reverse charge only applies when the buyer has a right to deduct VAT in full or in part; (ii) specifically for item 2.42, the reverse charge applies regardless of the buyer’s right to deduct VAT (including buyers that are VAT-exempt) but it is limited to main construction contracts and does not extend to subcontracts. This means that VAT-exempt taxpayers, who normally have no obligation to file VAT returns, must now file a return by the end of the month following the month in which the tax becomes due, rather than on the usual quarterly basis.
That said, in our view this reverse charge rule should have a limited shelf life, since draft law No. 86/XVII/1.ª - already submitted to the Portuguese Parliament - proposes extending the reverse charge to all purchases of construction services, whether under a main contract or a subcontract, regardless of whether the buyer has a right to deduct VAT and regardless of whether the transaction falls under item 2.42. If approved, the new wording would simplify the analysis - it would no longer be necessary to assess the buyer’s right to deduct VAT or whether the transaction falls under item 2.42 - and would significantly broaden the range of transactions subject to the reverse charge, including subcontracts.
1.3. Partial VAT refund for own permanent residences
An individual who initially pays VAT at the standard rate (23%) on construction contracts, may later apply to the Tax Authority for a partial refund of the VAT paid.
The refund is equal to the difference between the VAT actually paid at the standard rate and the VAT that would have been due had the 6% reduced rate applied to the eligible expenses.
This mechanism is only available to individuals who contract for construction work outside the scope of a business or professional activity, where the property is intended to be their own permanent residence. The property’s taxable value - or, if higher, the cost of the land plus construction costs (excluding VAT) - must not exceed the legal cap applicable to a moderate sale price (€660,982).
On this regime, Circular Letter No. 25118 of 22 July 2026 was recently published, clarifying which expenses qualify, the procedure, and the transitional rules for cases where the documentation confirming the property was ready for use.
