For an urban rehabilitation project to benefit from 6% VAT instead of the standard rate of 23%, additional authorization from the city council is required, i.e., formal approval of an “urban rehabilitation operation (ORU)” for the area where the project is located.
In other words, it is not enough for the project to be located in an urban rehabilitation area (ARU), according to binding information from the Tax Authority (AT), published on Tuesday, August 5, on the Finance portal, which supports a ruling by the Supreme Administrative Court that standardized case law on this matter.
The letter follows a request for clarification from a private social solidarity institution (IPSS) asking for the minimum rate of 6% to be applied to the construction of a new residential facility for the elderly (ERPI) on the grounds that it already has an approved license and is located in an urban regeneration area (ARU).
“At the time the project was launched, the legal requirements for the application of the reduced rate were met, with the Municipality of Cabeceiras de Basto formally recognizing the relevance of the project and its alignment with the objectives defined for the respective ARU,” writes the IPSS.
However, it states that due to "the non-completion of the urban rehabilitation operation (ORU) by the local authority, the application of the 6% rate was not feasible, and the normal rate of 23% was applied at the contractor's request, which resulted in a significant increase in the costs of the work and compromised the economic and financial viability of the investment," emphasizes the owner of the nursing home.
The IPSS indicates that several arbitration courts “have been consolidating the understanding that the formal absence of the ORU does not constitute an absolute impediment to the application of the reduced VAT rate, provided that the other legal requirements are met and the project is effectively in line with the objectives of the ARU,” as is the case.
Therefore, “clarification is requested on the possibility of applying the reduced rate of 6% to the project in question, with exemption from the requirement of formal approval of the ORU, in line with the aforementioned jurisprudential understanding.”
However, the tax authorities consider that without an ORU approved by the municipality, it is not possible to benefit from the 6% VAT rate and base their conclusion on a ruling by the Supreme Administrative Court (STA) which "standardized case law in the sense that the application of the reduced rate requires, cumulatively, that the contract be classified as an ‘urban rehabilitation contract’, [...] that it is carried out in an ARU delimited in accordance with the law and that an ORU for the ARU in question has been previously approved," writes the tax authorities.
"The STA based this decision on a systematic interpretation of the Legal Regime for Urban Rehabilitation (RJRU), understanding that urban rehabilitation presupposes not only the delimitation of an ARU, but also the approval of an ORU, where the intervention strategies for the area in question are defined, thus rejecting the thesis previously defended in some arbitration courts that allowed the application of the reduced rate even without formal approval of the ORU, making this understanding now untenable in light of the STA ruling," according to the same binding information.
Therefore, and despite "the fact that the property is located in a duly delimited ARU, and the municipality has issued a certificate attesting that the work falls within the scope of an urban rehabilitation operation, the ORU applicable to the ARU in question was not formally approved at the time the work was carried out, a circumstance that led to the application of the standard VAT rate," notes the AT.
Thus, in the absence of a formally approved ORU for the ARU where the work is located, the tax authorities consider that “one of the cumulative requirements for the application of the reduced VAT rate is not met.”
“In view of the above, and considering the absence of a formally approved ORU, [...] it is concluded that the conditions required [...] to benefit from the reduced VAT rate of 6% are not met, and the standard rate of 23% should continue to apply,” “under the terms defined by the STA ruling of March 26, 2025,” the Finance Department emphasizes.
Image credits: © Milivoj Kuhar | Unsplash
Translated with DeepL.com (free version)
