On December 2, the Government presented to the Assembly of the Republic a draft bill authorizing legislative changes to the Value Added Tax (VAT) code, the Personal Income Tax (IRS) code, the Tax Benefits Statute (EBF), and the Municipal Tax on Onerous Transfers of Real Estate (IMT) code.
In the same document, which already includes the text of the authorized Decree-Law, the Government proposes the creation of the investment contract for rental (CIA) regime, the regime for partial refund of Value Added Tax incurred in construction works for permanent residential properties, and the simplified affordable rental regime (RSAA).
Among the proposed changes, one that stands out is the temporary application of a reduced VAT rate (6%) to construction or renovation projects for properties intended for sale as the purchaser's own permanent residence or for residential rental. The granting of these tax incentives for housing is subject to maximum limits on moderate monthly rent and moderate sale price, which may not exceed, in the case of moderate monthly rent, 2.5 times the minimum monthly wage set for 2026, i.e., €2,300, and, in the case of moderate sale prices, the upper limit of the second bracket of the IMT (€648,022 in 2025). These limits may be updated by ministerial order.
In the case of sale, the reduced VAT rate is only applicable if the property is sold for the purchaser's permanent residence within a maximum period of 24 months from the date of issue of the documentation relating to the start of use, in accordance with the Legal Regime for Urbanization and Construction (RJUE). In the case of rental for housing, it is necessary, among other requirements, that the first residential lease agreement comes into force within a maximum period of 24 months from the date of issue of the documentation relating to the start of use, under the terms of the RJUE, and that the property is subject to lease agreements in force for at least 36 consecutive or interpolated months during the first five years after the issuance of the aforementioned documentation.
In the case of property acquired under joint ownership, the reduced VAT rate is only applicable when, once the other conditions have been verified, all co-owners use it as their permanent residence. In the case of property under horizontal ownership, the reduced rate only applies to the part of the contract proportional to the gross construction area of the building or fractions and the area exceeding the footprint to be used for housing, corresponding to the fractions for which the conditions are met, depending on whether they are intended for sale or rent.
IRS exemption on capital gains from real estate
Also noteworthy is the IRS exemption on capital gains resulting from the transfer of residential properties, in the case of reinvestment in the acquisition of properties for residential rental, with a ‘moderate’ monthly rent, i.e., not exceeding €2,300. The reinvestment must be made between 24 months prior to and 36 months after the date of sale, and the taxpayer must express their intention to reinvest, even if only partially, mentioning the respective amount in their income tax return for the year of sale. This measure is expected to remain in force until the end of 2029.
Reduction of personal income tax (IRS) and corporate income tax (IRC) on residential leases
The proposal provides for a reduction in IRC and the application of a reduced autonomous IRS tax rate on property income arising from residential lease and sublease agreements obtained until the end of 2029. Thus, the autonomous tax rate applicable to property income arising from residential rental agreements whose monthly rent does not exceed €2,300, earned until December 31, 2029, will be 10%, except where a more favorable rate applies. And, for corporate income tax purposes, only 50% of such property income is taken into account.
Investment Contracts for Rental
An investment contract for rental (CIA) scheme is being created, guaranteeing a set of tax benefits for a period of up to 25 years for investment in the construction, renovation, or acquisition of real estate for rental or subletting. Namely: exemption from IMT and Stamp Duty due on the acquisition of real estate intended for residential leasing or subleasing; exemption from Municipal Property Tax (IMI) on the same properties for a period of up to 8 years, from the year of acquisition, inclusive, and a 50% reduction in the IMI rate for the remaining period of the CIA; application of the reduced VAT rate to construction or renovation works on urban buildings or autonomous units for residential rental or subletting; exemption from the IMI surcharge on the same properties during the term of the CIA; 50% refund of the amount equivalent to VAT paid on architectural services, projects, and studies related to the construction or renovation of those properties; and 50% reduction in the Stamp Duty rate, depending on the proportion of assets held by the alternative investment entity subject to residential lease or sublease agreements covered by the CIA.
For the purposes of applying this regime, investments are eligible when the construction area of buildings intended for residential rental corresponds to at least 700/1000 of the total construction area of the buildings covered, with the remainder being allocated to uses that are complementary or compatible with housing. On the other hand, the monthly rent for residential rental contracts, or subletting contracts, may not exceed the maximum ‘moderate’ monthly rent limit, i.e., €2,300 in 2026.
Tax benefits for tenants and buyers of HCC
The Government's proposal also includes a set of tax benefits for tenants and buyers of controlled-cost housing (HCC).
The annual deduction limit for tenants, in terms of personal income tax, on rents paid under residential lease agreements is increased, with this increase being progressive, to €900 in 2026 and €1,000 from 2027 onwards.
On the other hand, purchasers of controlled-cost housing will have access to a reduction in IMT (property transfer tax) and Stamp Duty.
Simplified Affordable Rental Scheme
The Government proposes the approval of the Simplified Affordable Rental Scheme (RSAA) to promote the supply of housing at limited rents, which will be based on 80% of the median rent per square meter in each municipality, providing for exemption from income tax and corporate income tax on property income obtained in this context.
For the purposes of applying this scheme, affordable rental contracts for permanent residence must have a minimum term of three years, and rental contracts for temporary residence or special transitional purposes must have a minimum term of three months.
Increase in IMT for non-residents
An IMT rate of 7.5% is expected to be applied to the purchase by non-residents of urban buildings or autonomous fractions of urban buildings intended for housing, unless the taxpayer has been considered, or becomes, within two years of the acquisition, a resident for tax purposes in national territory, or the property is intended for rental for housing with a ‘moderate’ monthly rent within six months from the date of acquisition and is rented for at least 36 consecutive or interpolated months during the first five years after acquisition.
Benefits for Collective Investment Undertakings
The law provides for the application of a 5% tax on income earned by participants or shareholders from units or shares in alternative investment undertakings (AIUs), by distribution, which respect the results of the immediately preceding tax period, in proportion to the income of those organizations resulting from residential lease or sublease agreements entered into under the RSAA or other legislation promoting affordable residential leasing or subleasing.
It also provides for the extension, up to 30%, of the percentage of exclusion, for IRS or IRC purposes, of income earned by participants or shareholders arising from participation units or shares in OIA, through distribution or redemption or liquidation, when at least 50% of the assets of these organizations consist of property rights or other rights of equivalent content over real estate subject to residential lease or sublease agreements entered into under the RSAA or other similar legislation.
Application of the reduced VAT rate over time
If approved by the Portuguese Parliament, most of these measures will take effect on January 1, 2026, except for the CIA and RSAA regimes, which will take effect on June 1, 2026.
As for the reduced VAT rate on construction or renovation work on properties intended for sale at a ‘moderate’ price, for the purchaser's own permanent residence, or for rental at a ‘moderate’ rent, it will apply “to services relating to urban development operations for which the procedural initiative begins in the period between September 23, 2025, and December 31, 2029, and for which the tax becomes payable from January 1, 2026,” as stated in Article 18(3) of the authorized Decree-Law contained in the Legislative Authorization Bill. The same applies to the new regime for partial refund of the amount equivalent to VAT paid by individuals on construction contracts for residential properties for their own permanent use.
Image credits: © Jacek Dylag | Unsplash
Translated with DeepL.com (free version)
