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Real estate transactions: the VAT regime in Portugal
October 27, 2022
In the context of real estate transactions, the Portuguese VAT regime differs depending on the nature of the item under consideration. There are three main VAT regimes, the so-called "normal" VAT rate, which is 23%, the so-called "intermediate" VAT rate, which is 13%, and the so-called "reduced" VAT rate of 6%. Let's review in detail the VAT regime on real estate transactions in Portugal.
Certain operations, or certain items of expenditure, may be exempt from VAT. This is the case for traditional real estate sales (within the framework of a property dealer) or in the case of a sale in the future state of completion (VEFA). In these cases, no VAT is applicable on the sale price.
Real estate rentals are also exempt from VAT, unless the rental includes a service component. The notion of service is understood quite broadly. Indeed, rents are no longer exempt from VAT when the rental includes a service (cleaning, security...) but also when it is a furnished rental.
Insurance related to the realization of real estate projects is also exempt from VAT.
It should be noted that operators have the option of waiving this VAT exemption in certain specific cases, for example when it is the first sale/rental after major renovation or transformation work that involves an increase of more than 50% in the (tax) sale price of the property.
The reduced VAT rate applies within the framework of a certain typology of housing, namely affordable or controlled rent housing. This classification must be approved by a competent authority linked to the Ministry. The operators cannot, therefore, alone, and even if the lots are sold at a price meeting these criteria, take advantage of this VAT rate without the operation having been approved by the competent authorities.
This rate also applies when it is a question of public assets (renovation work of a school, a town hall, construction of an associative local requested by the State...). In this case, the client, i.e. the State, must contract directly with the contractor, without an intermediary.
The reduced rate also applies to certain identified sectors, when the rehabilitation or construction of the building is in the public interest as defined by the authorities.
This reduction in the VAT rate also applies to contracts for the improvement, transformation, renovation, restoration, repair or conservation of real estate intended for residential use. This rate does not apply to the materials needed to carry out the work, but only to the services related to the work (unless the cost of the materials does not exceed 20% of the total invoice).
There are two geographical areas in Portugal with their own rates:
In Portugal, in the case of work services related to a real estate transaction, the VAT burden is reversed. Indeed, when the entity purchasing these services (in this case, the real estate operators when they carry out works) is itself subject to VAT, the invoices issued by the building professionals are included excluding VAT. It is up to the real estate operator to pay the VAT at a later stage, which can be deducted.
In the case of operators who are not subject to VAT, the service providers must include this VAT in their invoices, and we find the classic operation similar to the French mechanism.
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