The Housing Slump that could clash with VAT

The Government announced, at the Council of Ministers meeting on September 25, 2025, a reduction in the VAT rate to 6% for the construction of new housing with a sale value of the constructed properties up to €648,000.00, and for rentals with rents up to €2,300.00/month. The measure was presented as the necessary "housing shock" to boost the supply of homes, reduce prices, and relaunch private investment in the sector.

The principle of fiscal neutrality and its risk of distortion. We must always bear in mind that VAT, being a neutral tax, should not burden the producer nor distort competition between operators carrying out similar operations. This raises the question of whether applying a reduced rate only to certain market segments or products based solely on sales value or rental income could create artificial fiscal barriers within the same economic chain.

The construction of a building is a unique and continuous operation, but with a mixed economic purpose — for example, a developer creates a development composed of independent units, some intended for commerce/services and others for housing. However, only the latter will be subject to the new tax regime and, in turn, the reduced VAT rate. If only part of the units (residential) benefits from the reduced VAT rate – 6% – we enter a dangerous area: how should the developer calculate the deductible VAT on common construction costs (land, structures, foundations, infrastructure)?

The VAT Code provides for methods of deducting VAT on goods for mixed use through the application of a pro rata. However, this formula, although technically feasible, is complex and subject to reassessment at the time of actual use of the goods, and always requires subsequent adjustments at the end of the sale of all independent units in the development.

Thus, if the real estate developer bears 6% VAT on all suppliers (materials, contractors, subcontractors), but later sells some of the units for commercial or service purposes, two immediate practical questions arise:

1. Do suppliers apply the 6% or 23% VAT rate? The answer depends on the known intended use at the invoice date. If there is no certainty that the entire building is intended for residential use, suppliers will prudently tend to apply the standard rate (23%) — which delays the benefit and creates potential disputes.
2. Ultimately, a VAT adjustment will be necessary to correct any tax paid "in excess" or "inferiorly." However, such an adjustment, involving thousands of transactions, is administratively burdensome and creates uncertainty.

Thus, what seems like a simple measure — applying 6% instead of 23% — in practice requires an extremely precise and regulated allocation system, otherwise it risks creating inequality, litigation, and legal uncertainty.

The dilemma of the final price. Another issue that we cannot fail to mention arises in the control of the price limit: the legislation defines that only buildings intended for sale up to €648,000.00 or for rent with monthly rents up to €2,300.00 benefit from the reduced tax rate.

It should be noted from the outset that the taxable event, the element that makes this tax due, occurs during the execution of the work, not at the future moment of sale. The builder/contractor invoices monthly, based on the physical progress of the work, often using measurement reports, applying the rate that he deems correct.

What if the real estate developer initially estimates a sale price of €640,000.00 for the residential units, but after the completion of the construction project, the market appreciates and the residential units are actually sold for €690,000.00?

According to VAT principles, a rate error implies a correction in favor of the State, corresponding to the difference between 23% and 6% on the total taxable value. But — and here is the crucial point — there is currently no clear mechanism to retroactively settle this difference, or is there an actual error in this case, for the purposes of applying the VAT correction mechanism?

Will this "regularization," if it proves necessary, be done through self-assessment in the periodic tax return? By issuing a debit note? By official correction?

Without an explicit rule, developers will be vulnerable: either they assume the tax risk (with potential adjustments and fines), or they choose to apply 23% from the start, negating the incentive.

Furthermore, the Tax Administration would have to monitor both intent and final price, something conceptually incompatible with the functioning of VAT, which taxes objective transactions, not sales intentions.

The regime will remain in effect until 2029. In its statement of September 25, 2025, the government announced that the regime will only be in effect until 2029, which, in theory, corresponds to four years of effective application. However, in Portugal, the average cycle of a real estate project — from licensing to sale — easily exceeds this period, and can reach five or six years.

With labor shortages, delays in municipal licensing, and increased financing costs, few developers will be able to start and complete a full project within that timeframe.

In practice, the measure only benefits those who already have licensed projects or projects under construction. The rest will hardly be able to benefit from the scheme before it expires. Therefore, the objective of encouraging new construction seems to be thwarted from the start and will cause, or at best, investment in new projects in 2026 that will most likely not be completed and sold by 2029.

A temporary incentive, without a guarantee of extension, does not alter structural investment decisions; at most, it slightly accelerates ongoing projects.

Therefore, this incentive appears to us that it will only be applicable, initially, to real estate projects that are already underway, and therefore does not seem likely to encourage the development of new, purpose-built real estate projects on its own.

The special care taken by the legislator in regulating the regime. Based on the above, the announced legislation is politically attractive, but it may bring problems in its practical application, as we have tried to describe.

We believe that the following deserve special attention in the regulation of this tax regime:

I. Criteria for applying the reduced rate when housing and mixed uses coexist (Article 23 of the VAT Code); II. Billing and settlement regime for situations where the final price varies above the limits; III. Mechanism for controlling and self-assessing “outstanding” VAT (difference between 6% and 23%); IV. Clarification of when the fee is applied — whether upon delivery by the contractor, upon sale of the property, or both;

V. Coordination with the standards of Directive 2006/112/EC, which only allows reduced rates for "social" or "affordable" housing (Article 98 and Annex III, point 10) — therefore requiring an objective national definition of "moderate price" compatible with European law.

Conclusion The "housing shock" could turn into a legal and fiscal shock if the Government does not rigorously define the operational boundaries of the regime.

VAT is a tax with a European structure, governed by neutrality and proportionality. These measures are welcome, but only if they are consistent with the mechanics of the tax and transparent in their practical application.

If the government is not cautious in implementing this system, we run the serious risk of returning to the problems of the 2012 system, when the attempt to apply differentiated rates to rehabilitation works led to years of doubts, corrections, and tax disputes.

The principle is commendable; however, its implementation will require much more in-depth legislative and regulatory work—otherwise, the 6% rate may end up being merely a theoretical incentive.