VAT on construction cut to 6%

Portugal’s government has approved reducing VAT on construction to 6% and the creation of Build to Rent contracts with tax benefits.

However, the government will put up property transfer tax or IMI on house purchases by non-residents.

And for landlords who sign up to the government’s affordable rents scheme, they will get the right to a total exemption on IRS tax.

The measures were approved at a meeting of the Council of Ministers which approved the raft of changes for Portugal’s housing market, including the lynchpin policy to slash VAT on developers and construction companies that sell properties for housing when the value of the sale is up to or below €648,000 to 6%.

The announcement was made by Prime Minister Luís Montenegro in a press release while the Council of Ministers was in session. “We are talking about a measure that integrates the entire market context that encompasses the whole country, and a specific market up to this amount in areas of higher price pressure.

We are acting throughout Portugal, and practically all buildings will be covered by this tax rate in most of the country, and in Lisbon or Porto this value integrates the concept that we bring to our housing policy, which is access to (housing) at moderate prices”.

The reduced VAT rate will also cover, in addition to construction and rehabilitation, rental projects with rental values of up to €2,300. Recognising a relatively high price ceiling, Luís Montenegro explained that the idea is that practically the entire rental market is covered by this tax benefit.

“We are talking about a ceiling that gives the middle class and families with some economic capacity a new supply capacity to be able to settle and constitute the human resources that our companies and the public administration need to be competitive. This is an ambitious project, but it is for everyone, it is inclusive, and it leaves no one out, except for those who really have a much higher income.”

The new tax regime will remain in force until 2029. “This is a shock policy initiative because we want to shake up the construction and rental market during our term in office”, he said.

Luís Montenegro also confirmed that the government would be increasing the IRS tax deduction threshold on rent charges to €900, in a first phase, and to €1,000 later, and the application of an IRS rate of 10% for landlords who place their properties on the market at controlled prices, meaning up to €2,300 for 3-year contracts. Rents that are 20% below the average rent rate of the municipality in question are entitled to zero IRS and IRC. The Government bases its calculations on a household effort rate of up to a maximum of 40%.

Another innovation is the increase in IMT property transfer tax on houses purchased by non-residents in Portugal, “excluding our emigrants”. In the case of housing placed on the market for rent up to €2,300, the AIMI that is currently in force will not be applied.

“These tax measures aim to make an increased, ambitious and daring effort to give our society, developers and builders, and citizens, greater confidence, greater predictability and conditions to solve this constraint that we have on people’s quality of life and the competitiveness of our economy.

We are acting with financial responsibility, without jeopardising the balance and health of public finances, preserving our goal of continuing to have budget surpluses in the coming years.” The objective of all these measures is to “increase supply, and contain and reduce prices,” added the Prime Minister.