Porta da Frente Christie’s International Real Estate - 22/07/2026, 10:49:50
6% VAT for developers: applying item 2.42.1 | Porta da Frente Christie’s International Real Estate
6% VAT for developers and works owners: how to apply item 2.42.1
For the developer, the 6% VAT is not an automatic discount. It is a regime with a narrow scope, cumulative conditions, its own accounting mechanics and an obligation to regularise if the conditions fail. This page describes the practical application of item 2.42.1 of List I of the VAT Code.
Who can benefit
Under Article 10(1) of Decree-Law no. 97/2026, the following can benefit from item 2.42.1: construction or renovation contracts on properties destined for sale for the own permanent residence of the buyer, or on properties destined exclusively for residential letting.[1] The Tax Authority confirms this double gateway.[2] Outside these two situations, the item does not apply.
The conditions, by modality
Sale for own permanent residence | Residential letting |
|---|---|
The property is sold for the buyer's own permanent residence and on the acquisition the rates of Article 17(1)(a) or (b) of the CIMT apply.[1] | The letting is exempt from VAT under Article 9 of the CIVA.[1][3] |
The sale takes place within 24 months from the start-of-use documentation (RJUE).[1][4] | The contracts are communicated under Article 60 of the Stamp Duty Code.[1][5] |
The title deed expressly mentions the application of item 2.42.1.[1] | The first contract enters into force within 24 months from the same documentation.[1] |
In co-ownership or communion, all co-owners allocate the property to permanent residence.[1] | The property is let for at least 36 months, consecutive or interspersed, in the first five years, and no subletting above the rent limit is agreed.[1] |
The reverse charge, step by step
In civil construction services, Article 2(1)(j) of the VAT Code determines the reverse charge. Circular Letter no. 25117/2026 explains the interaction with the new item.[6][7]
- The contractor issues the invoice without VAT charged, with the reverse charge mention.[6]
- The works owner accounts for the VAT at the applicable rate, 6% on the eligible part and 23% on the non-eligible part, and the Tax Authority illustrates precisely this two-rate accounting on the respective tranches of the construction contract.[2]
- The works owner deducts the tax to the extent of its right to deduct.
- There is no reverse charge when the acquirer is not a VAT taxable person, is an exempt taxable person, or is a taxable person only by making intra-Community acquisitions. In those cases it falls to the supplier to charge the tax.[6]
Subcontracts: what the law says and what it does not say
The reverse charge provided for within the scope of item 2.42 applies exclusively to construction contracts and does not extend to subcontracts, without prejudice to the reverse charge provided for in the first part of Article 2(1)(j) of the VAT Code being applicable to the latter.[6] As the item refers to construction contracts, the dominant reading is that subcontracts do not benefit from the reduced rate. Note, however, that the circular letters do not expressly set the rate applicable to subcontracts.[7] Confirm the framework with your certified accountant before contracting.
What is not construction or renovation work
The Tax Authority excludes from the scope services that do not fall within the strict concept of construction or renovation work on the built structure.[6] The boundary depends on the form of contracting: when site supervision is contracted within a global construction contract, the administrative understanding absorbs it into the construction-contract regime.[6] Standalone services of design, site supervision, safety coordination, brokerage and marketing follow the general regime. Materials acquired separately by the works owner, outside the construction contract, likewise follow the general regime.[6]
Horizontal property: apportionment by area
Under Article 10(3), the item applies only to the part of
the construction contract proportional to the gross construction area of the
building or of the units and to the area exceeding the footprint area,
designated A, as defined in Article 40 of the IMI Code, to be allocated to
housing, corresponding to the units that meet the conditions.[1][8] The Tax Authority confirms that the apportionment key is area and not value, even when a unit is ineligible by its value.[2] The same applies, with the necessary adaptations, to properties with divisions capable of independent use not constituted under horizontal property.[1]
the construction contract proportional to the gross construction area of the
building or of the units and to the area exceeding the footprint area,
designated A, as defined in Article 40 of the IMI Code, to be allocated to
housing, corresponding to the units that meet the conditions.[1][8] The Tax Authority confirms that the apportionment key is area and not value, even when a unit is ineligible by its value.[2] The same applies, with the necessary adaptations, to properties with divisions capable of independent use not constituted under horizontal property.[1]
Practical recommendation: fix the area matrix at the start of the project, validate it with the designer and keep it documented. That is the document that supports the apportionment in an inspection.
If the conditions fail: regularisation in favour of the State
Whenever any of the conditions is not met, or ceases to be met, the taxable person must regularise the tax owed, under Article 11.[1] The regularisation is made by the end of the
tax period following that in which the event determining the loss of the right occurs, provided certain requirements are maintained, and in that case no penalties other than the compensatory interest due are applicable. In the remaining cases it is made by replacement of the periodic return, with interest and other applicable penalties.[1][9]
tax period following that in which the event determining the loss of the right occurs, provided certain requirements are maintained, and in that case no penalties other than the compensatory interest due are applicable. In the remaining cases it is made by replacement of the periodic return, with interest and other applicable penalties.[1][9]
Mandatory mentions and documentary trail
- Express mention of item 2.42.1 in the title deed.[1]
- Reverse charge mention on the invoice, where the reverse charge applies.[6]
- Evidence of the procedural initiative with a date within the window.[1]
- Table of units with expected price, ancillary parts and enhancement services, assessed
against the limit.[1] - Field A area matrix for the apportionment.[8][2]
- Control of the 24-month deadline between the start-of-use documentation and the sale or the first letting.[1][4]
The impact on the financial model
In residential development with a full right to deduct, the construction-contract VAT is recoverable and the effect of the reduced rate on the result is mainly one of cash flow. The impact is structural when the right to deduct is limited or nil, in particular when the property is destined for exempt residential letting. Assess the regime according to your specific framework.
Frequently asked questions
Does item 2.42.1 apply to the whole works or only to the eligible residential part?
Only to the part proportional to the area allocated to housing corresponding to the units that meet the conditions, calculated by area under Article 40 of the IMI Code.[1][8][2]
Can subcontracts apply 6%?
The item refers to construction contracts and the specific reverse charge does not extend to subcontracts.[6] The dominant reading is that they do not benefit from the reduced rate, but the circular letters do not state so expressly. Confirm with your certified accountant.[7]
Do I have to issue an invoice with 6% VAT to the developer?
If the developer is a taxable person, the reverse charge applies and the invoice is issued without VAT charged, with the reverse charge mention. It is the developer who accounts for it.[6]
What counts as procedural initiative?
The submission of the licensing application, the submission of the prior notification, or, in works exempt from prior control, the prior opinion or the information on the start of works.[1]
And if the works overrun to after 2032?
Item 2.42.1 ceases to be in force on 31 December 2032.[1] Plan the invoicing schedule with margin.
Call to action
Porta da Frente Christie’s International Real Estate works with developers and landowners on the positioning, commercial planning and sale of residential developments. If you are assessing a project under the new regime, talk to us.
Sources
All sources were verified on the date shown at the top of this page.
[1] Decree-Law 97/2026, full text (PDF, Diário da República, series I no. 97). https://files.diariodarepublica.pt/1s/2026/05/09700/0001400040.pdf
[2] Tax Authority Circular 25116/2026 of 23 June (item 2.42.1, with worked examples). https://info.portaldasfinancas.gov.pt/pt/informacao_fiscal/legislacao/instrucoes_administrativas/Documents/Oficio-Circulado-25116-2026.pdf
[3] Portuguese VAT Code, article 9 (exemption on property transfers) and annexed List I. https://info.portaldasfinancas.gov.pt/pt/informacao_fiscal/codigos_tributarios/civa_rep/Pages/iva9.aspx
[4] Portuguese Urbanisation and Building Legal Regime (RJUE), Decree-Law 555/99 of 16
December. https://diariodarepublica.pt/dr/legislacao-consolidada/decreto-lei/1999-34448575
December. https://diariodarepublica.pt/dr/legislacao-consolidada/decreto-lei/1999-34448575
[5] Portuguese Stamp Duty Code, article 60 (notification of tenancy agreements). https://info.portaldasfinancas.gov.pt/pt/informacao_fiscal/codigos_tributarios/selo/Pages/codigo-do-imposto-do-selo-indice.aspx
[6] Tax Authority Circular 25117/2026 of 24 June (reverse charge). https://info.portaldasfinancas.gov.pt/pt/informacao_fiscal/legislacao/instrucoes_administrativas/Documents/Oficio-Circulado-25117-2026.pdf
[7] Cuatrecasas, analysis of item 2.42.1 and the reverse charge (25 June 2026). https://www.cuatrecasas.com/pt/portugal/art/iva-6-habitacao-at-clarifica-verba-2-42-1-e-inversao-sujeito-passivo-1
[8] Portuguese Property Tax Code (CIMI), article 40 (types of building area). https://informador.pt/legislacao/lexit/codigos/direito-fiscal/codigo-do-imi/capitulo-vi-do-valor-patrimonial-tributario-dos-predios-urbanos/seccao-ii-das-operacoes-de-avaliacao/artigo-40-o-tipos-de-areas-dos-predios-edificados/
[9] Portuguese General Regime of Tax Infringements (RGIT). https://info.portaldasfinancas.gov.pt/pt/informacao_fiscal/codigos_tributarios/rgit/Pages/rgit118.aspx
This content is informational and does not constitute tax or legal advice. The legislation referred to may change. Always confirm your specific situation with a certified accountant or lawyer. Porta da Frente Christie’s International Real Estate.
