More Affordable Housing: Reduction of VAT to 6% on Construction

The Government recently presented a proposal that could significantly transform access to housing in Portugal: the reduction of the VAT rate to 6% on the construction and rehabilitation of houses for sale or rent at moderate prices. This measure, which is still awaiting final approval by the Assembly of the Republic, aims to reduce construction costs and encourage an increase in housing supply in a strongly pressured market.

The proposal provides that the reduced rate of 6% will apply to properties intended for sale with a maximum price of 648,000 euros, as well as to houses intended for rent whose monthly rent does not exceed 2,300 euros. In addition to the commercial market, individuals who build their own permanent housing will also be able to benefit from this regime by refunding the difference between the VAT paid at 23% and the new reduced rate. The goal is to make construction more accessible, both for families who want to buy or build their home, and for developers who want to increase the supply of houses at controlled prices.

To ensure that the tax benefits effectively correspond to the increase in housing supply, the proposal imposes some conditions. Dwellings built for sale or rent must be placed on the market within a maximum period of 24 months after the issuance of the use license. In the case of leasing, a contract with a minimum duration of 36 months is also required. In the case of construction for own housing, the owner must request a VAT refund within one month after the issuance of the use license, and the refund will be processed within a maximum of 150 days.

Although the Government anticipates that the regime may come into force during the first quarter of 2026, applying to licenses submitted from that date, industry experts anticipate that the real impact should only be felt in 2027. This interval is explained by the average timings of project approval, licensing and start of works. Even so, the expectation is that the measure will stimulate the start of new construction and rehabilitation, contributing to correct the shortage of supply that has marked the real estate market in recent years.

The potential economic impact of the VAT reduction is significant. The drop from 23% to 6% represents a difference of 17 percentage points, and could translate into substantial savings for households, construction companies and property developers. This reduction in final cost may also be reflected in more competitive sales prices and more affordable rents, reinforcing the objective of promoting moderately priced housing, especially in the most pressured urban areas.

Despite the enthusiasm that the measure has generated, it is important to underline that, for the time being, the regime is not yet in force and remains subject to parliamentary debate. Until the final legislation is adopted, the standard rate of 23% continues to apply to all construction operations.

The proposal for VAT at 6% represents an important step in the attempt to make housing more affordable in Portugal, but its success will depend on the speed of legislative approval and the market's ability to respond with new projects that meet the defined criteria.

Source: Idealista News