VAT in Civil Construction in 2026: What Changes with the Housing Tax Package

6% VAT in Construction — How it Works and Scope of Application

Until the entry into force of this legislative package, new property construction contracts were, for the most part, taxed at the normal VAT rate of 23%. The application of the reduced rate of 6% was limited to specific situations, such as rehabilitation works in urban regeneration areas or in properties classified as being of public or municipal interest. With the promulgation of the Housing Tax Package, the tax scenario is substantially altered, extending the scope of the reduced rate of 6% to a wider range of operations in the civil construction sector, as provided for in paragraph 18 of article 23 of Table I annexed to the VAT Code (CIVA), in its new wording.

Eligibility Criteria for the Reduced VAT Rate

The reduced rate of 6% now applies to:

• Construction or rehabilitation contracts for properties intended for Primary and Permanent Residence (PPR): This category covers projects whose ultimate goal is sale to individuals for them to establish their main residence. It is crucial that the final sale value of the property does not exceed the limit of €660,982. This limit aims to direct the tax benefit to more accessible, though still considerable, market segments of housing.
• Construction or rehabilitation contracts for properties intended for residential rental: For developers targeting the rental market, the reduced rate is applicable if the monthly rents charged do not exceed €2,300. This rent ceiling seeks to encourage the supply of housing at more moderate prices, contributing to the stabilisation of the rental market.
• Contracts intended for sale for the buyer's PPR: An additional and important condition is that the sale of the property for the buyer's PPR occurs within a maximum period of 24 months after the issuance of the occupancy permit. This clause aims to prevent real estate speculation and ensure that the tax benefit is effectively channelled to the intended housing purpose.

Practical Example of VAT Savings

The practical difference in the application of the VAT rate is extremely significant. Let's consider a construction contract worth €200,000 (base value, excluding VAT):

• With the normal rate of 23%: The VAT payable would be €200,000 * 23% = €46,000.
• With the reduced rate of 6%: The VAT payable would be €200,000 * 6% = €12,000.

In this scenario, the direct VAT saving for the project represents €34,000 (€46,000 - €12,000). This difference can be a determining factor in the economic viability of many projects, allowing for the reduction of the final cost of housing or the increase in the developer's margin, depending on the commercial strategy adopted.

Conditions and Eligibility Limits for the Tax Benefit

To ensure the correct application of the reduced VAT rate of 6% and the other tax benefits introduced by the Housing Package, it is essential to understand in detail the conditions and limits established in the legislation.

Property Value and Rent Limits

• Sale Value for PPR: For a contract to qualify for the 6% VAT rate under the PPR condition, the sale value of the property cannot exceed €660,982. This limit is crucial for framing the tax benefit in mid-range housing.
• Rent Value for Residential Rental: In the case of properties intended for rental, the maximum monthly rent allowed for the application of the reduced VAT rate is €2,300. This value is an incentive for the supply of rental properties at more controlled prices, but also represents a ceiling for the luxury market.
• Consequence of Non-Compliance with Limits: One of the most relevant clauses establishes that if the dwelling is sold for a value higher than the established limit after the application of the reduced VAT rate, the developer is obliged to regularise the VAT difference, i.e., the 17 percentage points (23% - 6%) that were initially waived. This rule, enshrined in article 23, paragraph 19, of Table I annexed to the CIVA, aims to prevent abuses and ensure that the tax benefit is applied only under the predefined conditions.

Period of Validity and Retroactivity

• Temporary Nature of the Regime: The introduced tax regime is temporary, with validity established until 31 December 2029. This time limit aims to allow for a future evaluation of the measure's impact and its eventual reassessment or extension.
• Temporal Scope of Projects: The application of the regime covers projects whose licensing applications were submitted from the end of October 2025. This date is the starting point for project eligibility.
• Retroactivity of the Measure: One of the most notable features of this package is its retroactivity to October 2025. This means that works that started the licensing process from that date and that meet the other requirements are covered by the new regime, even if the law was published later. This retroactivity, although complex in terms of application and regularisation of already issued invoices, aims to accelerate the measure's impact on the market.

Buyer's Responsibility — A Strategic Change

The final version of the Housing Tax Package, approved by Parliament on 18 February 2026, introduced a highly relevant legislative change, redefining responsibility for compliance with the conditions of the reduced VAT regime. This change, which now holds the property buyer responsible instead of the developer, has profound implications for both sides of the transaction, as provided for in article 7 of Decree-Law no. 55/2026, of 3 March.

Practical Implications for the Buyer

Anyone acquiring a dwelling that benefited from the application of the 6% VAT rate in its construction or rehabilitation now assumes direct responsibility for complying with the following conditions:

• Allocation to Primary and Permanent Residence (PPR): The property must be effectively allocated to the buyer's primary and permanent residence. This is a fundamental condition that aims to ensure that the tax benefit fulfils its purpose of facilitating access to housing.
• Minimum Period of Stay: The buyer is obliged to remain in the property for a minimum period of 12 months. This rule is intended to curb the purchase of properties with reduced VAT for speculative purposes or quick resale, without the intention of permanent residence.
• Penalty for Non-Compliance: In case of non-compliance with these conditions, namely if the property is not allocated to PPR or if it is alienated before the minimum period of 12 months, the buyer will be penalised with the payment of 10 percentage points of Municipal Property Transfer Tax (IMT) on the acquisition value. This penalty, which is added to the IMT already paid, aims to restore the tax situation as if the benefit had not been granted, discouraging non-compliance.

Admitted Exceptions for the Period of Stay

The legislation does, however, provide for some exceptions to the 12-month stay rule, recognising that certain life circumstances may justify early vacating of the property. These exceptions include:

• Marriage or de facto union;
• Dissolution of marriage or de facto union;
• Increase in the number of dependents in the household.

In these duly proven cases, the buyer may alienate the property before the 12-month period without incurring the IMT penalty.

Relevance for Property Developers

This legislative change is particularly positive for property developers. By transferring responsibility for compliance with the conditions to the buyer, developers are no longer exposed to the risk of subsequent VAT regularisation (the 17 percentage points difference) if the buyer decides to use the property for a purpose other than PPR. This change simplifies developers' tax management and reduces their legal uncertainty, allowing them to focus on construction and sales, with greater security regarding the applied VAT regime.

Self-Build — Partial VAT Refund for Individuals

The Housing Tax Package is not limited to benefiting developers and buyers of new or rehabilitated properties. Recognising the effort and importance of self-build for many Portuguese families, the legislation also introduces a mechanism for partial VAT refund for individuals who decide to build their own home. This measure, detailed in article 23-A of the VAT Code, aims to equate, in a way, the tax treatment of self-build with that of acquiring properties from developers.

Refund Mechanism

Individuals who build their own home and intend it for primary and permanent residence are entitled to a refund of the difference between the normal VAT rate (23%) and the reduced rate (6%) on eligible construction contracts and material purchases. This corresponds to a refund of 17% of the VAT paid on eligible costs.

How to Request a Refund

• Submission Deadline: The refund request must be submitted to the Tax and Customs Authority (AT) within a maximum of 12 months after the issuance of the property's occupancy permit. It is crucial to respect this deadline to avoid losing the right to the refund.
• Submission Entity: The request is made electronically, through the Tax Portal, in the reserved area for this purpose, where the taxpayer must attach supporting documentation for invoices and payments made.
• AT Refund Period: The Tax Authority has a period of 150 days, counting from the date of receipt of the duly completed request, to proceed with the refund of the VAT amount.
• Allocation Condition: As with acquisitions from developers, the refund is conditional on the property being allocated to the individual's primary and permanent residence for at least 12 months. Non-compliance with this condition may lead to the demand for repayment of the refunded VAT, plus interest and any fines.

Self-Build Refund Example

Let's consider an individual who undertakes a self-build project worth €150,000 (excluding VAT) and pays 23% VAT on this amount:

• VAT paid: €150,000 * 23% = €34,500.
• VAT due at the reduced rate: €150,000 * 6% = €9,000.
• Refund Amount: The difference to be refunded will be €34,500 - €9,000 = €25,500.

This amount represents significant help for families opting for self-build, alleviating the tax burden and making this option more competitive. It is essential for individuals to keep all invoices for contracts and materials with their tax identification number (NIF) to be able to process the refund request.

IMT, Stamp Duty, and IMI Exemptions — Housing Incentives

In addition to the VAT changes, the Housing Tax Package introduces a set of exemptions and reductions in municipal property taxes – Municipal Property Transfer Tax (IMT) and Municipal Property Tax (IMI) – and in Stamp Duty. These measures aim to reduce the costs associated with the acquisition and maintenance of properties intended for housing, complementing the benefits of reduced VAT and encouraging investment and housing supply, as articulated in the Tax Benefits Statute (EBF), in its new wording.

IMT and Stamp Duty

• Exemption on the Acquisition of Land and Buildings: Exemption from IMT and Stamp Duty is granted on the acquisition of land for construction and buildings for construction or rehabilitation, provided that these are intended for primary and permanent residence (PPR) or for rental at moderate rents. This exemption, provided for in article 45 of the EBF, is a strong incentive for developers and individuals who intend to invest in the construction or rehabilitation of housing, reducing one of the most significant initial costs.
• Conditions for Exemption: To benefit from this exemption, buyers must declare, at the time of the deed, that the property is intended for the foreseen purposes (PPR or moderate rental) and comply with the established deadlines for the start and completion of works. Non-compliance with these conditions may result in the liquidation of the waived tax, plus compensatory interest.

IMI (Municipal Property Tax)

• IMI Exemption for up to 8 Years: Properties built or rehabilitated under the Housing Package regime can benefit from an IMI exemption for a period of up to 8 years. This exemption, enshrined in article 46 of the EBF, represents substantial savings in annual property charges, making the investment more attractive.
• IMI Reduction for Rental: For properties intended for rental, the IMI exemption can be complemented with an IMI reduction of up to 50% for the remaining period of the rental contract, after the period of total exemption. This measure aims to encourage the maintenance of properties in the rental market in the long term, contributing to the stabilisation of rents.

Non-Residents — Aggravated IMT

In contrast to the incentives for residents and for housing, the Housing Tax Package introduces a disincentive measure for the acquisition of properties by non-residents for non-residential or speculative purposes. The acquisition of properties by non-residents will now be subject to a fixed IMT rate of 7.5%. This measure, found in article 17 of the CIMT, aims to discourage the purchase of properties that do not contribute to the supply of housing for residents or to the revitalisation of the local economy.

• Exception for Portuguese Emigrants: It is important to note that this aggravated rate does not apply to Portuguese emigrants who return to the country and acquire properties for PPR, benefiting from the normal rate and the exemptions applicable to residents.

This set of tax measures demonstrates a multifaceted approach to addressing the housing crisis, combining incentives for supply with disincentives for speculation, and seeking to balance the needs of different market segments.

IRS on Rental Income — Reduction for Landlords and Support for Tenants

Within the scope of the Housing Tax Package, important changes were also introduced to the Personal Income Tax (IRS), with the aim of encouraging long-term and more affordable rentals, as well as supporting tenants. These measures, which directly affect landlords and tenants, are detailed in the IRS Code (CIRS), namely in its articles 72 and 78-E.

Reduction of the IRS Rate for Landlords

One of the main novelties is the reduction of the IRS rate applicable to rental income (category F) for landlords who enter into rental contracts with rents up to €2,300/month. This measure aims to make renting more attractive for property owners, encouraging the placement of more properties on the rental market and the practice of moderate rents.

• Reduced Rate: The IRS rate on rental income is reduced to 10% (instead of the autonomous rate of 28% or taxation by aggregation, depending on the taxpayer's option). This reduction is applicable to contracts that meet the established conditions.
• Minimum Contract Duration: To benefit from this reduced rate, rental contracts must have a minimum duration of 3 years. This condition aims to promote stability in the rental market and discourage short-term contracts that contribute to tenant instability.
• Validity: This reduced rate regime is valid until 2029, aligning with the application period of other measures in the Housing Package.

Tax Credit for Tenants

In parallel with incentives for landlords, the Housing Package also strengthens support for tenants by increasing the IRS tax credit for rents. This measure aims to alleviate the burden of housing expenses for tenant families.

• Increased Deduction: The tax credit for tenants is increased to €900 in 2026, rising to €1,000 in 2027. This value represents the maximum amount that taxpayers can deduct from their annual IRS for rents paid.
• Conditions: The conditions for the deduction remain the general ones for rental expenses, namely the communication of rents to the AT by the competent entities and the allocation of the property to permanent residence.

Practical Example of IRS for Landlords

Let's consider a landlord with a rental contract that generates a monthly rent of €1,000, totalling €12,000 annually, and who meets the conditions for the reduced rate of 10%:

• IRS at the normal rate (28%): €12,000 * 28% = €3,360.
• IRS at the reduced rate (10%): €12,000 * 10% = €1,200.

In this example, the landlord saves €2,160 annually in IRS, which represents a significant incentive to keep the property in the rental market at moderate prices and with long-term contracts.

These IRS changes demonstrate an integrated strategy to address housing affordability, seeking to balance the interests of owners and tenants, and promote a more stable and fair rental market.

Impact for Contractors and Property Developers — Challenges and Opportunities

The Housing Tax Package represents a paradigm shift for contractors and property developers. While it opens doors to new business opportunities and greater dynamism in the sector, it also imposes new challenges in terms of tax, contractual, and risk management. The correct application of the new rules is crucial to avoid tax contingencies and ensure legal compliance.

What Changes in Invoicing and Contract Management

• Verification of Work Requirements: Before applying the 6% VAT rate, the contractor or developer must rigorously verify that the work in question meets all the eligibility requirements established in law, namely the sale/rent value limits and the property's purpose (PPR or moderate rental).
• Obtaining a Written Declaration from the Client: It is imperative that the contractor obtains a written declaration from the client or developer, in which the latter certifies the final purpose of the property and compliance with the requirements for the application of the reduced VAT rate. This declaration, which must be archived, will serve as proof in case of inspection and is essential for justifying the applied rate. Article 23, paragraph 20 of Table I annexed to the CIVA, establishes the need for this declaration.
• Adaptation of Construction Contracts: Construction contracts must be reviewed and adapted to include VAT adjustment clauses. These clauses must foresee what happens if the conditions for the application of the reduced rate cease to be met (for example, if the property is sold for a value higher than the limit) and who will be responsible for regularising the tax.
• Maintenance of Supporting Documentation: The maintenance of all documentation proving eligibility for the reduced rate is fundamental. This includes building permits, client declarations, purchase and sale or rental contracts, and any other document that attests to compliance with legal conditions.

Risk of Improper Application and Tax Contingencies

The application of the 6% rate to contracts that, in hindsight, are found not to meet the legal requirements, exposes the contractor to serious tax contingencies. The consequences can be severe:

• Tax Adjustments: The Tax Authority may demand the liquidation of the VAT difference (the 17 percentage points) that was not initially charged.
• Compensatory Interest: On the outstanding VAT amount, compensatory interest will be applied, calculated from the date the tax should have been liquidated until the date of its effective payment.
• Fines: In addition to the tax and interest, the contractor may be subject to significant fines for tax infringement, which may vary depending on the severity and intent of the situation, as provided for in the General Regime of Tax Infringements (RGIT).

This risk is mitigated by transferring final responsibility to the buyer in certain scenarios, but the contractor still has the initial responsibility to apply the correct rate and to exercise due diligence in collecting information and declarations. Solid tax and accounting advice thus becomes indispensable in this new context.

Common Mistakes to Avoid in Applying the New Tax Regime

The complexity of the new Housing Tax Package, coupled with its retroactivity and multiple eligibility conditions, can lead to errors in its application. Avoiding these failures is crucial for contractors, developers, and individuals, in order to ensure legal compliance and maximise tax benefits. Here are 5 to 7 common mistakes to avoid:

1. Improper Application of the 6% VAT Rate without Prior Verification:
   • Error: A contractor assumes that all housing construction or rehabilitation works are automatically covered by the 6% rate, without verifying the sale/rent value limits or the property's purpose.
   • Consequence: Additional VAT assessment by the AT (17 percentage points), plus compensatory interest and fines, if the work does not meet the requirements.
   • Solution: Always obtain a written declaration from the client or developer, attesting to compliance with the eligibility conditions (sale/rent value, property purpose) and keep this documentation archived for future inspections.
2. Lack of Awareness of Buyer's Responsibility:
   • Error: A developer does not properly inform the buyer about their responsibilities regarding the allocation of the property to PPR and the minimum period of stay.
   • Consequence: The buyer may incur an IMT penalty (10 percentage points) for non-compliance, leading to dissatisfaction and potential disputes with the developer. Although the tax responsibility lies with the buyer, the developer's reputation may be affected.
   • Solution: Include clear clauses in purchase and sale contracts detailing the buyer's obligations and the consequences of non-compliance, as well as providing an informative document on the tax regime.
3. Failure to Meet Deadlines for Refund Requests (Self-Build):
   • Error: An individual who self-builds their home misses the 12-month deadline after the occupancy permit for submitting the VAT refund request.
   • Consequence: Loss of the right to a 17% VAT refund, resulting in a significant and irrecoverable financial burden.
   • Solution: Actively monitor the issuance of the occupancy permit and prepare the necessary documentation in advance to submit the request within the legal deadline.
4. Lack of Adaptation of Construction Contracts:
   • Error: Maintaining old construction contracts that do not provide for the new VAT conditions, namely adjustment clauses or responsibility in case of a change in the property's purpose.
   • Consequence: Legal uncertainty and potential disputes between the contractor and the client over who bears the costs of any VAT regularisation.
   • Solution: Update all contract templates to reflect the new legal framework, including clear clauses on the applicable VAT regime and the responsibilities of each party.
5. Ignoring Moderate Rental Conditions for Tax Benefits:
   • Error: A landlord assumes they can benefit from the 10% IRS rate without verifying if the rent charged falls within the €2,300/month limits or if the contract has a minimum duration of 3 years.
   • Consequence: Taxation of rental income at the normal rate of 28% (or by aggregation), losing the expected tax benefit.
   • Solution: Ensure that rental contracts strictly comply with the rent value and minimum duration conditions to benefit from the reduced IRS rate.
6. Failure to Keep Adequate Supporting Documentation:
   • Error: Contractors, developers, or individuals do not organise and fully archive all invoices, permits, declarations, and contracts related to the works and the application of tax benefits.
   • Consequence: Inability to prove compliance with conditions in case of AT inspection, which may lead to the annulment of benefits and the application of penalties.
   • Solution: Implement a robust document archiving system, both physical and digital, for all relevant transactions and documents.

Frequently Asked Questions

Is the 6% VAT rate on construction already in force?

Yes. The Housing Tax Package was approved by Parliament on 18 February 2026 and promulgated on 3 March 2026. The measure has retroactive effect to October 2025, meaning that works whose licensing applications were submitted from that date and that meet the requirements are already covered.

Which works are covered by the reduced VAT rate?

New construction or rehabilitation contracts intended for Primary and Permanent Residence (PPR) with a sale value of up to €660,982, or for residential rental with rents up to €2,300/month, are covered. It is fundamental that the sale for the buyer's PPR occurs within 24 months after the occupancy permit.

What happens if a dwelling that benefited from 6% VAT is not used as PPR?

Responsibility has shifted to the property buyer. If the property is not allocated to PPR or is alienated before 12 months (except for exceptions), the buyer will be penalised with the payment of an additional 10 percentage points of IMT on the acquisition value.

How does the VAT refund for self-build work?

Individuals who build their PPR are entitled to a refund of the difference between the VAT paid (23%) and the reduced rate (6%) on contracts. The request must be made to the Tax Authority within 12 months after the issuance of the occupancy permit, with the refund expected within 150 days. The property must be PPR for 12 months.

Does the IMT exemption apply to any land?

No. The IMT and Stamp Duty exemption applies only to land and buildings for construction or rehabilitation intended for PPR or for rental at moderate rents, according to the conditions established in law. A declaration of intent is required at the time of the deed.

Does it apply to urban rehabilitation?

Yes. The 6% rate applies to both new construction projects and property rehabilitation projects, provided they meet the purpose requirements (PPR or moderate rental) and the established value/rent limits.

What is the impact for landlords?

Landlords can benefit from a reduction in the IRS rate on rental income to 10%, provided they enter into rental contracts with rents up to €2,300/month and with a minimum duration of 3 years. This measure aims to encourage long-term and affordable rentals.

Sources and Legal References

• Decree-Law no. 55/2026, of 3 March: Approves the Housing Tax Package, amending various tax codes.
• Value Added Tax Code (CIVA): Article 23, paragraphs 18, 19 and 20 of Annex I (new wording) and Article 23-A (VAT refund for self-build).
• Tax Benefits Statute (EBF): Article 45 (IMT and Stamp Duty exemption) and Article 46 (IMI exemption).
• Municipal Property Transfer Tax Code (CIMT): Article 17 (IMT for non-residents).
• Personal Income Tax Code (CIRS): Article 72 (IRS reduction for landlords) and Article 78-E (tax credit for rents).
• General Regime of Tax Infringements (RGIT): Relevant articles on fines and interest.