Much like those chocolates we all know will appear under the tree, the proposal unsurprisingly establishes a reduced VAT rate to construction or rehabilitation works on properties intended for sale or rental for housing, provided the sale or rental falls under the thresholds of €648,022 and €2,300 per month, respectively.

The proposal specifies that the reduced rate applies to properties sold as the buyer’s permanent residence within 24 months of the issuance of the documentation relating to the occupancy certificate, or rented within the same timeframe, with the lease remaining in effect for at least 36 months, consecutive or not, during the first five years subsequent to the issuance of the documentation relating to the occupancy certificate.

Yet, amid the season’s spirit of enchantment and magic, the Proposal unveils an unexpected twist.

Indeed, the legislation specifies that the reduced VAT will only apply to urban development projects initiated between 25 September, 2025, and 31 December, 2029, and which tax liability occurs from 1 January, 2026, a far more restricted timeframe than many had hoped for.

For developers and construction firms hoping for this long-awaited gift in their Christmas stocking, the Proposal deserved a round of (cautious) applause. It is undeniably an opportunity to reduce costs on projects and their tax burden, but expectations for a broader scope were dashed, and several practical doubts loom large.

For instance, what exactly means “urban operations whose procedural initiative begins between 25 September, 2025, and 31 December, 2029”? – is it the first step taken by the taxpayer at City Hall, or the Municipality’s initial decision on the project?

Should the conditions for applying the reduced rate later fail, the Proposal provides mechanisms to return the VAT (difference between the reduced and the standard rate) to the State, and to ensure that this process runs smoothly, the reverse charge mechanism for construction services is amended – requiring the acquirer (as a taxable person) to self-assess the VAT even if they only carry out VAT exempt operations.

And, when it comes to return the VAT to the State, the Proposal specifies that interest and “other applicable penalties” may apply. But what does that mean? Probably the penalty for unpaid VAT. Could such a penalty not be excessive depending on the circumstances?

Leaving practical questions aside, and in tune with the (now ending) season’s spirit of giving, good deeds carry an extra touch of sweetness.

In fact, the regime even includes the possibility for individuals to reclaim part of the tax if, later on, they meet the conditions for the reduced rate.

Yes, VAT paid by individuals on construction works for their own permanent residence (where VAT liability arises by 31 December, 2032) may also benefit from the 6% rate.

In short, anyone building their own home, provided the land purchase price or, if higher, the registered taxable value plus construction costs stays under €648,022, could benefit from the reduced rate at the end.

And it is true that the perfect gift is rare, and that individuals must initially bear VAT at the standard rate, still, credit is due for creating a special regime that includes individuals too.

In the end, after all the math is done, in such a pricey season, this Proposal’s balance sheet looks quite favourable – yet its narrow scope and the practical challenges ahead remain hard to ignore.

Forvis Mazars’ Real Estate team is already working closely with clients to navigate these changes and anticipate their impact on upcoming projects.

The article was written by:

Diogo Gomes Pereira, Tax Associate Partner at Forvis Mazars in Portugal (diogo.pereira@forvismazars.com)

Daniela Lagoa, Tax Senior Manager at Forvis Mazars in Portugal (daniela.lagoa@forvismazars.com)

Maria Vaz Lopes, Tax Senior at Forvis Mazars in Portugal (maria.lopes@forvismazars.com)