On July 15, the Committee on Budget, Finance, and Public Administration approved, in detail, Bill 642/XVII/1, introduced by the Social Democratic Party (PSD), which provides an authoritative interpretation of Item 2.23 of List I annexed to the Value-Added Tax Code (VAT Code), as amended by Law No. 64-A/2008 of December 31.
The bill clarifies that the reduced VAT rate of 6% applies to urban renewal projects carried out on real estate or public spaces located in Urban Renewal Areas (ARU) delimited in accordance with the law, regardless of whether an Urban Renewal Operation (ORU) has been approved.
At issue is the interpretation of Item 2.23 of List I annexed to the VAT Code, as amended by Law No. 64-A/2008 of December 31, until the entry into force of Law No. 56/2023 of October 6 (“Mais Habitação”). During that period (from January 1, 2009, through October 6, 2023), that provision provided for the application of the reduced VAT rate to urban renewal projects, as defined in the Legal Framework for Urban Renewal, carried out on real estate or in public spaces located within Urban Renewal Areas (ARUs) delimited in accordance with the law, or within the scope of redevelopment and renewal operations of recognized national public interest.
On the other hand, until 2012, the municipality was required to delimit the ARU and, at the same time, approve the corresponding ORU. However, Law No. 32/2012, of August 14, allowed the municipality to approve the delimitation of an ARU without simultaneously approving the corresponding ORU, which gave rise to differing interpretations regarding the requirements for applying the reduced VAT rate in those areas. For several years, builders and real estate developers applied the reduced VAT rate of 6% to renovation projects located in ARUs without an approved ORU, and the Tax and Customs Authority (AT) began to require the existence of the respective ORU approved by the municipality, which resulted in additional VAT assessments at the rate of 23%.
This legislative initiative also follows the ruling issued by the Supreme Administrative Court (STA) on March 26, 2025, which upheld the position defended by the AT, according to which the application of the reduced VAT rate depended not only on the existence of an urban rehabilitation project carried out within an ARU, but also on the prior approval of the corresponding ORU by the municipality. The STA’s decision sparked widespread opposition from the construction and real estate sectors, leading the PSD to deem legislative intervention necessary to overturn that interpretation.
In this context, the bill now clarifies that, “for the purposes of applying the reduced VAT rate provided for in Item 2.23 of List I annexed to the Value-Added Tax Code, as amended by Law No. 64-A/2008 of December 31, all urban renewal projects carried out on real estate or public spaces located in urban renewal areas delimited in accordance with the law are considered urban renewal projects, regardless of whether an urban renewal operation has been approved.”
The legislation provides an authentic interpretation of the wording in effect during that period, which means that its effects are retroactive to January 1, 2009, the date on which Law No. 64-A/2008 of December 31 entered into force.
According to the explanatory memorandum of the bill, the proposed authentic interpretation aims to safeguard “predictability and legal certainty, ensure the consistency of public policies promoting urban renewal, and protect the public interest in ensuring the continuity of urban renewal works and projects.”
It should be noted that, as of October 7, 2023, with the “Mais Habitação” program, it became clear that the applicability of the reduced 6% VAT rate to urban rehabilitation projects depends solely on the project’s location within an ARU. However, since then, the reduced rate has applied only to the rehabilitation of buildings (excluding new construction) and to construction or rehabilitation projects involving public facilities for collective use.
The bill will now go to the Plenary for a final vote, after which it will be sent to the President of the Republic for promulgation.
Image credits: © Milivoj Kuhar | Unsplash
Translated with DeepL.com (free version)
