Residential letting and the CIA regime: items 2.42.1 and 2.42.2
There is widespread confusion between the two items that Decree-Law no. 97/2026 added to List I of the VAT Code. They are not the same thing, they do not cover the
same, and they do not take effect on the same date. This page separates them.
Item 2.42.1 already covers letting
Contrary to what many summaries suggest, item 2.42.1 is not the sale item. It covers construction contracts for the building or refurbishment of properties intended for sale as the buyer's own permanent residence, or of properties intended exclusively for residential letting.[1][2] Anyone building to let enters through this door, not through item 2.42.2.
The conditions of the letting branch
Article 10(1)(b) imposes five cumulative conditions.[1]
- The letting is exempt from VAT under article 9 of the VAT Code.[3]
- The lease contracts are reported under article 60 of the Stamp Duty Code.[4]
- The first residential lease contract takes effect within a maximum of 24 months from the issue of the habitation/use certificate documentation.[5]
- The property is the subject of residential lease contracts in force for at least 36 months, consecutive or not, during the first five years after that documentation.
- No possibility of subletting for an amount above the rent cap is agreed.
The fourth condition is the most demanding and the most overlooked. It is not enough to let. The property must be kept let for at least 36 months in the first five years. If it fails, the taxable person has to regularise the tax owed.[1]
The rent cap
The moderate monthly rent cap is 2.5 times the guaranteed minimum monthly wage set for 2026, which corresponds to €2,300 per month.[1] It is an indexed value, not a fixed figure,
and can be updated by ministerial order in accordance with the factor of article 24 of the New Urban Lease Regime (NRAU).[1] For letting, the annual value divided by the number of months elapsed in each year is taken.[1]
So what is item 2.42.2
Item 2.42.2 applies to construction contracts for the building or refurbishment of urban properties, or autonomous units of urban properties, for residential letting or letting for residential subletting, covered by the rental investment contracts regime, the CIA regime, approved as an annex to Decree-Law no. 97/2026 itself.[1]
Item 2.42.2 is not the item for affordable housing in general. It is the item for the CIA regime, an investment-contracts regime that guarantees a set of tax benefits, for a period of up to 25 years, for investment in the construction, refurbishment or acquisition of properties intended for residential letting or for letting for residential subletting.[1]
The CIA regime takes effect on 1 September 2026, and not on 1 July, the date on which item 2.42.1 takes effect.[1] On the same date the new affordable-letting support regime comes into force, based on 80% of the median rent values per square metre in each municipality, and Decree-Laws nos. 68/2019 and 69/2019 are repealed.[1] Affordable letting is a matter distinct from item 2.42.2.
Why the economic effect is greater in letting
The letting of properties for housing is, as a rule, exempt from VAT under article 9 of the VAT Code.[3] The owner who lets housing does not charge VAT on the rents and, correspondingly, does not deduct the input VAT incurred.
Without the right to deduct, each percentage point of VAT on the construction contract is a definitive cost. The drop from 23% to 6% reduces the total cost of the investment structurally, not just in cash-flow terms. It is in this segment that the regime has the greatest real economic impact.
Interaction with the European framework
The European Union VAT Directive only allows reduced rates on housing within the scope of social policy. It was that framework that shaped the design of the Portuguese regime, in particular the existence of price and rent caps.[6] Future changes will have to respect the same framework.
Frequently asked questions
I build to let. Which item applies?
As a rule item 2.42.1, in its exclusive residential letting branch, once the five conditions of article 10 are met.[1] Item 2.42.2 applies only within the CIA regime.
Is item 2.42.2 the affordable housing item?
No. It is the item for rental investment contracts, the CIA regime approved as an annex to the decree.[1] Affordable letting is the subject of its own regime, also approved by the same decree-law, but distinct.
When does the CIA regime take effect?
On 1 September 2026, unlike item 2.42.1, which takes effect on 1 July 2026.[1]
Does letting now carry VAT at 6%?
No. Letting for housing remains exempt from VAT.[3] The 6% applies to the construction contract.
What happens if I only let for two years?
The 36-month condition in the first five years fails, and the taxable person must regularise the tax owed under article 11.[1]
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 in light of 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[5] Portuguese Urbanisation and Building Legal Regime (RJUE), Decree-Law 555/99 of 16
December.
https://diariodarepublica.pt/dr/legislacao-consolidada/decreto-lei/1999-34448575This 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.
