Since 1 July 2026, Portugal applies a reduced 6% VAT rate on housing construction and rehabilitation works, under Decreto-Lei n.º 97/2026, de 20 de maio, which added verba 2.42.1 to List I of the VAT Code (CIVA). The rate covers contract works (empreitadas) on dwellings destined either for sale as the buyer’s own permanent home, at a price up to 660,982 euros, or for residential rental at a monthly rent up to 2,300 euros. It applies to building projects whose first formal step at the municipal council was taken between 25 September 2025 and 31 December 2029, reaches back to operations on which VAT became chargeable from 1 January 2026, and runs until 31 December 2032. In Madeira, where MCS is based, the regional reduced rate of 4% applies instead of 6%. This guide sets out the conditions, the deadlines, the 10% IMT surcharge that replaced the VAT clawback on buyers, and the points that decide eligibility in practice.
What changed on 1 July 2026
The reduced rate became operative on 1 July 2026. Decreto-Lei n.º 97/2026 was published on 20 May 2026 and stated that the new VAT list item takes effect in the quarter following entry into force; the Tax and Customs Authority (AT) confirmed the 1 July 2026 date in Ofício Circulado n.º 25116/2026, of 23 June, which also clarified the main conditions of the regime. A second instruction, Ofício Circulado n.º 25117/2026, of 24 June, addressed the reverse-charge rule for construction services, which the same diploma amended. Although operative from July, the regime reaches back: works on which VAT became chargeable from 1 January 2026 can benefit under a transitional mechanism described below.
Which works qualify
The rate applies to construction or rehabilitation contract works on property destined for permanent housing, within a defined procedural window. Two requirements are cumulative. First, the building project’s iniciativa procedimental must fall between 25 September 2025 and 31 December 2029. Iniciativa procedimental means the first formal act filed with the municipal council: the licensing application for licensed works, the prior communication (comunicação prévia) for works under that regime, or the prior opinion or works-start information for works exempt from prior control. Second, VAT on the works must become chargeable on or after 1 January 2026. The AT’s examples are strict on both ends: a prior communication filed on 10 September 2025 disqualifies the project even if invoicing occurs in 2026, and an advance invoice chargeable in December 2025 is excluded even where the procedural initiative is timely. The list item expires on 31 December 2032, and invoices issued after that date revert to the standard rate even on eligible projects.
The moderate-value ceilings
Eligibility is capped by price and rent ceilings, and the ceilings count more than the headline figures suggest. For sale, the dwelling’s price cannot exceed 660,982 euros, the upper limit of the second IMT bracket for own permanent housing in 2026. For rental, the monthly rent cannot exceed 2.5 times the guaranteed minimum monthly wage for 2026, that is, 2,300 euros. Ofício Circulado n.º 25116/2026 adds a point with real consequences: movable goods, equipment or accessory elements attached to the property with a character of permanence, and services that add value to it, count towards the ceilings even when invoiced under separate contracts. The AT’s own example: an apartment sold at 650,000 euros with fitted kitchen units and central air conditioning supplied separately for 20,000 euros gives a relevant value of 670,000 euros, above the ceiling, and the reduced rate is lost for the whole contract works. In co-ownership or co-tenancy, the ceilings are measured against the global price or rent, with no proportional split among the parties.
Deadlines after completion
The destination must materialise within fixed periods counted from the property’s use documentation. For sale, the dwelling must be sold for own permanent housing within 24 months of the issue of the documentation marking the start of use under the urban-planning regime (RJUE). For rental, the first residential lease must take effect within 24 months of that documentation, and the property must remain let for at least 36 months, continuous or interpolated, within the first five years. Ofício n.º 25116/2026 fixes the reference date: for works under prior control, the date the statutory completion documentation is filed with the municipal council; for works not subject to prior control, the twentieth day after the relevant submission, unless an inspection is ordered. Developers planning marketing or letting schedules should treat these dates as hard limits, since missing them triggers regularisation of the VAT difference to the State.
What buyers must know: the 10% IMT surcharge
The buyer does not repay the VAT saving; the buyer risks an IMT surcharge instead. The purchase deed must expressly mention the application of verba 2.42.1 and record the declaration, by all acquirers, that the property is destined for their own permanent housing. If the property is not made the buyer’s permanent home within six months of acquisition, or does not remain exclusively so for the following twelve months, Article 10.º of the diploma applies a surcharge of 10% of the taxable value in IMT, in the buyer’s sphere, without affecting the VAT rate applied to the works. The surcharge is excused in exceptional circumstances of the kind recognised in the IRS Code: changes in the household through marriage or civil partnership, divorce or dissolution, or an increase in the number of dependants. Co-ownership carries a specific trap: if any one co-purchaser fails to declare the permanent-housing destination in the deed, the reduced rate fails for the entire works and VAT must be regularised; if all declare it but one fails to move their tax domicile, the reduced rate survives and only the defaulting co-owner bears the IMT consequence.
What developers and contractors must know
The compliance burden of the regime sits with the supply side, and two mechanics deserve attention. First, the reverse charge: the diploma amended Article 2(1)(j) of the CIVA so that self-assessment by the acquirer now also covers verba 2.42 works supplied to taxable persons carrying out exempt operations without a right of deduction. Only services supplied by contractors legally qualified under Lei n.º 41/2015, de 3 de junho (holders of the construction alvará or certificate, verifiable on the IMPIC portal), count as construction services for this rule. Ofício n.º 25117/2026 draws the line between installed elements that follow the works regime (fitted kitchens, built-in wardrobes, HVAC, lifts, integrated solar panels) and supplies of goods with accessory assembly that do not (household appliances, non-structural furniture), which the supplier invoices with VAT in the normal way. Second, regularisation: where the regime’s conditions fail on the project side, the VAT difference is regularised to the State through the periodic return, within the four-year period of Article 94.º of the CIVA. For works with VAT chargeable between 1 January and 30 June 2026, the transitional rules allow recovery of the difference: acquirers with a right of deduction regularise through field 40 of the July or third-quarter 2026 return; acquirers without a right of deduction need a joint option with the contractor, documented by credit notes bearing the statutory mention.
Corporate tenants and mixed-use buildings
Two clarifications in Ofício n.º 25116/2026 matter for institutional projects. A corporate tenant does not disqualify the rental route, provided the lease expressly destines the property to the permanent housing of identified individuals (employees or managers, for example), excludes any commercial, industrial or services use, and the actual use matches. This accommodates employee-housing and institutional leasing structures. For mixed-use buildings and horizontal property, the reduced rate applies proportionally, using the ratio of gross construction area (plus area exceeding the implantation area) of the qualifying units to that of all units, measured under Article 40.º of the IMI Code.
The rate in Madeira and the Azores
Eligible works on property located in Madeira take 4%, not 6%. Construction services are located for VAT purposes where the immovable property is situated, and the autonomous regions apply their own rates under Article 18.º(3) of the CIVA and regional legislation. In the Autonomous Region of Madeira the reduced rate has been 4% since 1 October 2024. For a project in Funchal or elsewhere in the Region, verba 2.42.1 therefore delivers a rate of 4% on qualifying works, a two-point advantage over the mainland that compounds the Region’s standing cost position. The eligibility conditions, ceilings, deadlines and surcharge rules described above are the same.
Frequently asked questions
When did the 6% VAT on housing construction in Portugal come into force? On 1 July 2026, with retroactive reach to operations on which VAT became chargeable from 1 January 2026, and validity until 31 December 2032.
What is the maximum sale price to qualify? 660,982 euros, including fitted equipment and value-adding services attached to the property, even if contracted separately.
What is the maximum rent? 2,300 euros per month, corresponding to 2.5 times the 2026 national minimum wage of 920 euros.
Does the buyer repay the VAT if the house stops being their permanent home? No. A 10% IMT surcharge on the taxable value applies instead, subject to the six-month and twelve-month rules and the statutory exceptions.
Can a company be the tenant? Yes, if the lease expressly reserves the property for the permanent housing of identified individuals and excludes any commercial use.
What rate applies in Madeira? 4%, the regional reduced rate in force since 1 October 2024.
How MCS can help
MCS can assist developers, contractors and buyers with the regime, subject to a review of the specific project: confirming the procedural-initiative date and eligibility window, testing the price or rent against the ceilings including attached equipment, structuring deeds and leases with the required mentions and declarations, applying the reverse-charge and transitional regularisation mechanics, and planning the 24-month and 36-month deadlines. For projects in Madeira, MCS can also advise on the interaction of the 4% regional rate with the Region’s wider cost and structuring position.
This article is provided for general information only and reflects Decreto-Lei n.º 97/2026 and the administrative guidance in force at the date of publication. It is not legal or tax advice, does not take account of any particular person’s or project’s circumstances, and should not be relied upon as a substitute for professional advice. The thresholds, deadlines and administrative positions summarised here may change, and the legislation and instructions referenced below govern in the event of any discrepancy with this text. Reading this article does not create a client relationship, and MCS accepts no liability for any action taken, or not taken, in reliance on it. Before acting on any point above, you should obtain advice on your specific position. MCS can assist, subject to a review of your circumstances and a formal engagement.
Ambrosio Jardim has, since 1998, worked mainly in the areas of commercial law (corporate, mergers and acquisitions, joint ventures, restructuring and planning), national and international tax law and real estate…. Read more
