Quick overview: Under Articles 21(2)(f) and (g) of the Portuguese VAT Code (CIVA), companies may deduct input VAT on company vehicles powered by electricity (full deduction, acquisition cost up to €62,500), by plug-in hybrid technology (full deduction, up to €50,000), or by LPG or CNG (50% deduction, up to €37,500). Ofício-Circulado (Circulaire) n.º 25088/2025, issued by the Portuguese tax authority on 21 November 2025, tightens the documentary and procedural conditions under which that VAT deduction can survive a tax inspection.
On 21 November 2025, the Direção de Serviços do IVA of Portugal’s Autoridade Tributária e Aduaneira (AT) issued Ofício-Circulado n.º 25088/2025, addressed to all directorates, finance and customs services. The stated purpose is to clarify the scope of Article 21(2)(f) and (g) of the Portuguese VAT Code (CIVA) — the provisions that permit deduction of input VAT on the acquisition, lease, importation and transformation of electric, plug-in hybrid, LPG and CNG passenger vehicles falling within the “viatura de turismo” category. The legal text has not been amended. What changes is the AT’s administrative reading of it, and that reading sets a markedly higher operational standard for companies that have deducted, or intend to deduct, VAT on this kind of vehicle.
This note sets out what the Circulaire actually states, where it goes beyond the literal text of the CIVA, and what affected taxpayers, including foreign companies operating in Portugal and Madeira entities, should be reviewing internally before the next AT inspection cycle.
The underlying rule
Under the general regime of Article 21(1)(a) CIVA, VAT incurred on the acquisition, manufacture, importation, lease, use, transformation and repair of viaturas de turismo (tourism vehicle) is not deductible, regardless of whether the vehicle is used for business purposes. The category captures any motor vehicle (including trailers) which, by reason of its construction and equipment, is not intended exclusively for the transport of goods or for a use of an agricultural, commercial or industrial character, or which, being a mixed-use or passenger vehicle, has no more than nine seats including the driver.
Law n.º 82-D/2014, of 31 December, the so-called green tax reform, introduced two carve-outs from this general exclusion. Article 21(2)(f) allows full deduction of VAT on the acquisition, lease and transformation of electric and plug-in hybrid passenger and mixed-use vehicles classified as viaturas de turismo, provided the acquisition cost (excluding VAT) does not exceed the limit set by Portaria (Ministerial Order) n.º 467/2010, of 7 July. Article 21(2)(g) allows a 50% deduction of VAT on the same operations in respect of LPG- and CNG-powered vehicles, subject to a separate threshold.
The current thresholds (acquisition cost excluding VAT) are:
- €62,500 for vehicles powered exclusively by electricity;
- €50,000 for plug-in hybrid vehicles;
- €37,500 for LPG- and CNG-powered vehicles, including bi-fuel vehicles (LPG plus petrol or diesel), which the Circulaire now expressly confirms fall within Article 21(2)(g).
Above each threshold, the entire input VAT is excluded from deduction; the cap operates as an all-or-nothing limit, not a tapered allowance. Maintenance, repair, conservation and use expenses remain fully outside the carve-outs, since the legislator chose not to extend deductibility to those headings.
No artificial decomposition of the acquisition cost
The Circulaire closes one of the more common planning attempts seen in practice, invoicing the vehicle and its embedded accessories separately to keep the base price below the Portaria threshold. Paragraphs 10 to 12 are categorical: for the purposes of the thresholds set out in Article 21(2)(f) and (g), the acquisition cost includes the purchase price net of discounts and all amounts related to that acquisition, including statutory charges, even if some of those amounts are invoiced separately. Artificial decomposition is not permitted.
The example given by the AT (Example 4) makes the point operationally. A taxpayer acquires a plug-in hybrid vehicle invoiced in two parts: €47,000 for the base vehicle and €10,000 for a navigation system, both excluding VAT. The acquisition cost for threshold purposes is €57,000, which exceeds the €50,000 plug-in hybrid limit; input VAT on the full transaction is non-deductible. The lesson is straightforward: any accessory or option ordered at the point of acquisition forms part of the threshold base, regardless of how the dealer chooses to invoice it.
Private use of company vehicles: the kilometre-based criterion
Paragraphs 13 to 16 address what happens when an electric, plug-in hybrid or LPG/CNG vehicle on which input VAT has been deducted is used privately by the taxable person or otherwise outside the scope of taxable operations. The AT’s position is that such use is a supply of services for consideration under Article 4(2)(a) CIVA, taxable at the standard VAT rate (Article 18(1)(c)). The taxable base is the open market value of the service under Article 16 CIVA, that is, the price (with accessory expenses) that an independent service provider would charge for an equivalent service in normal market conditions, and in no case lower than the cost incurred by the taxable person in providing the service.
The criterion the AT instructs taxpayers to apply is kilometre-based: the proportion of kilometres driven for private purposes, or otherwise outside the scope of taxable operations, against the total kilometres driven during the tax period. Example 5 illustrates the calculation. A civil engineer holds a financial lease over an electric “viatura de turismo” (€50,000 excluding VAT, monthly rent €800 excluding VAT). The lease rent qualifies for full VAT deduction under Article 21(2)(f). In a given month, the vehicle is used privately for 40% of the kilometres driven. Output VAT is then assessed on the private-use portion at 23%: €800 × 23% × 40% = €73.60, reported in fields 3 and 4 of the periodic VAT return. To this must be added the proportional amount of input VAT deducted on the electricity used to charge the vehicle under Article 21(1)(h) CIVA.
Two points are worth recording carefully. First, the kilometre-based criterion is administrative guidance, not statutory law. The CIVA requires output VAT on private use of business assets where input VAT has been deducted; it does not prescribe how the private-use proportion must be measured. The Circulaire installs the kilometre method as the AT’s preferred reference standard, but does not, and cannot, exclude alternative methods that demonstrate effective and necessary business affectation. Taxpayers electing a different methodology should expect to defend it, and to keep the underlying records.
Second, the Circulaire assumes that any private use, however residual, triggers the output-VAT liability. Our tax professionals commentary on the Circulaire make the practical objection well: a company vehicle that is unambiguously a working tool, with a natural and non-abusive private extension outside working hours, is treated identically to a vehicle used predominantly for private convenience. Whether AT inspectors apply the rule with that level of indifference, or distinguish in practice between abusive and incidental private use, will determine how disruptive the Circulaire turns out to be.
Operating leases (“renting”): the itemisation requirement
Section III of the Circulaire (paragraphs 17 to 28) addresses operating leases, commonly marketed in Portugal as renting. The AT’s position is that the monthly rent under such contracts almost invariably bundles several distinct components: the pure rental of the vehicle, maintenance and assistance services, insurance, administrative management, and the handling of tolls and fines. Each of those components has, in the AT’s reading, a distinct VAT-deduction treatment, and the contractual bundling does not collapse them into a single supply.
The operational consequence is binary. If the monthly invoice itemises the various components and identifies a separate price for each, the VAT on the pure rental component is deductible under Article 21(2)(f) or (g), subject to the relevant acquisition-cost threshold, and the VAT on the remaining components (maintenance, assistance, insurance, administrative management) is non-deductible under Article 21(1)(a). If the invoice presents the monthly rent as a single global figure, with no breakdown, no part of the input VAT is deductible.
Example 6 in the Circulaire covers the first scenario: an electric vehicle (€50,000) under a 36-month operating lease, with the monthly invoice showing €800 rental, €100 maintenance and assistance, €50 insurance and management, VAT on the €800 is deductible, the rest is not. Example 7 covers the second: a plug-in hybrid (€45,000) under a 36-month operating lease, monthly rent presented as a single €950 figure, no VAT deduction at all.
There is a structural tension in this position that deserves to be acknowledged. Economically, an operating lease is generally a single composite supply: the principal element is the provision of the vehicle, and the ancillary services exist because they are necessary, or commercially indissociable from, that principal supply. The Court of Justice of the European Union’s jurisprudence on composite supplies (notably Card Protection Plan, C-349/96, and the line of cases that follows) treats such bundled supplies as single transactions for VAT purposes, with the ancillary elements following the VAT treatment of the principal. Forcing the lessor and lessee to itemise on the invoice, and penalising the failure to do so with complete loss of deduction, sits uncomfortably with that body of law, and may yet be the basis of administrative or judicial challenge. For now, however, the AT’s reading is the operative one for inspection purposes.
What the law has not changed, and what the Ofício effectively does
Two observations, made plainly. First, the underlying CIVA provisions have not been amended. The carve-outs introduced in 2014 to support the migration of company fleets towards electric, plug-in hybrid and gas-powered vehicles remain in place, and the thresholds remain at the levels set by Portaria n.º 467/2010. What the Circulaire does is install a level of documentary and procedural rigour around the exercise of the deduction right that was previously left to taxpayer interpretation.
Second, and this is the practical question, the AT has shifted the inspection cost of accessing the deduction without shifting the legal scope of it. Private-use tracking by kilometre, itemised renting invoices, and a hard refusal to permit decomposition of acquisition cost all increase the administrative burden of compliance. In the limit, that burden may approach the effect of a partial exclusion of the deduction itself: not because the law has been changed, but because the documentary cost of demonstrating entitlement has been raised. Whether this is a calibrated response to abuse, or a more general tightening, will become visible only as the next AT inspection cycle plays out.
It is also worth noting the policy context. The deduction was introduced as part of the a deliberate environmental fiscal-policy choice to encourage corporate adoption of low-emission vehicles. Converting that incentive into a permanent locus of inspection risk, additional assessments and litigation would be, at the least, an internally inconsistent outcome for the tax system.
Practical steps for affected companies
Companies that have deducted VAT on electric, plug-in hybrid or LPG/CNG vehicles, or that operate fleets under renting contracts, should treat the Circulaire as the AT’s stated audit standard from late 2025 onwards. The internal review work points clearly enough:
Review every acquisition cost against the Portaria threshold including all accessories and options invoiced separately, and where the threshold is breached, reverse any VAT previously deducted before the AT does it on inspection.
For each vehicle on which VAT was deducted, establish whether there has been private use during the relevant tax periods, and if so put in place a defensible record of business and private kilometres driven, onboard telematics, fleet-management software outputs, or company-policy logs, as appropriate to the vehicle and the role. The kilometre-based criterion is the AT’s preferred method; deviating from it is permitted but raises the documentary bar.
Audit the renting invoices currently being received from operating-lease providers. Where the monthly invoice does not itemise the pure rental from the ancillary services, raise the issue with the lessor and obtain re-issued invoices, or accept that no part of the input VAT on those contracts is deductible. For new contracts, the itemisation should be specified at signature.
Madeira Corporate Services can assist clients in reviewing existing fleet structures and renting contracts against the Circulaire, in implementing the documentary regime required to defend a deduction position on inspection, and in advising on the remedial steps where prior deductions need to be reversed or otherwise corrected. The work is scope-controlled and engagement-based; clients with active fleet positions should treat the next inspection cycle as the relevant planning horizon, not a future contingency.
Frequently asked questions
What is Ofício-Circulado n.º 25088/2025?
Ofício-Circulado n.º 25088/2025 is an administrative instruction issued by the Portuguese tax authority’s VAT Directorate (Direção de Serviços do IVA) on 21 November 2025. It clarifies the scope of Article 21(2)(f) and (g) of the Portuguese VAT Code (CIVA) on input VAT deduction for electric, plug-in hybrid, LPG and CNG company vehicles. The underlying law was not amended; the instruction sets the AT’s administrative reading.
Can companies in Portugal deduct VAT on electric company cars?
Yes. Under Article 21(2)(f) CIVA, input VAT on the acquisition, lease, importation and transformation of fully electric passenger or mixed-use vehicles is deductible in full, provided the acquisition cost excluding VAT does not exceed €62,500. The cap is all-or-nothing: above the threshold, no VAT is deductible.
What is the VAT deduction limit for plug-in hybrid vehicles in Portugal?
€50,000 of acquisition cost excluding VAT. Plug-in hybrid passenger or mixed-use vehicles classified as viaturas de turismo qualify for full input-VAT deduction under Article 21(2)(f) CIVA, subject to that cap. The €50,000 figure derives from Portaria n.º 467/2010, of 7 July.
Is VAT deductible on an operating lease (renting) of an electric company car?
Only on the pure rental component, and only if the monthly invoice itemises that component separately from maintenance, assistance, insurance and administrative management. If the monthly rent is presented as a single global figure, the AT’s position is that no part of the input VAT is deductible.
How is private use of a company car measured for VAT purposes in Portugal?
The Circulaire instructs taxpayers to use a kilometre-based criterion: the proportion of kilometres driven for private use against total kilometres driven during the tax period. Output VAT is then assessed on that proportion at the standard 23% rate. The kilometre method is administrative guidance, not a statutory requirement; taxpayers may apply alternative methods, provided the underlying records support them.
This article is provided by Madeira Corporate Services for general information purposes only. It reflects the legal and administrative position as at the date of publication and does not take account of subsequent legislative, administrative or judicial developments. The content does not constitute legal, tax, accounting or other professional advice and must not be relied upon as a substitute for advice tailored to specific facts and circumstances. The application of the Portuguese VAT Code (CIVA), of Portaria n.º 467/2010, of Ofício-Circulado n.º 25088/2025 and of related instruments depends on the individual situation of each taxable person and may produce different outcomes in apparently similar cases.
Readers should not act, or refrain from acting, on the basis of any information set out in this article without first obtaining professional advice. Madeira Corporate Services accepts no liability for any loss arising from reliance on the content of this article. Any engagement with Madeira Corporate Services is subject to a separate written engagement letter setting out the scope of work, the applicable terms and the relevant fee arrangements.
Miguel Pinto-Correia holds a Master Degree in International Economics and European Studies from ISEG – Lisbon School of Economics & Management and a Bachelor Degree in Economics from Nova School of Business and Economics. He is a permanent member of the Order of the Economists (Ordem dos Economistas)… Read more
