Reduced 6% VAT on Construction to See Full Effect Starting in 2027
The Minister of Finance, Joaquim Miranda Sarmento, has projected that the "great effect" of the VAT reduction on construction from 23% to 6% will only materialize from 2027, as the impact will not be immediate. "This is a very important measure, but it is medium-to-long term. It will not have very significant effects already in 2026. Projects take some time to get their approval, and then for constructors to be able to start building," stated Sarmento during a parliamentary hearing on the State Budget for 2026 (OE2026) this Friday.
The new legislation is a cornerstone of the government's strategy to address the housing crisis. Speaking before the Committee on Budget, Finance, and Public Administration (COFAP), Joaquim Miranda Sarmento explained that the 6% VAT will apply "to new projects submitted to the municipalities," with the law expected to come into force in 2026. However, he emphasized that the effects will not be immediate. "The great effect will start to be felt in 2027, due to this 'delay' that exists between the presentation of projects, their approval, and the start of works," he noted.
The implementation timeline is critical for developers and investors. The process involves submitting architectural and engineering plans to municipal councils, which then undergo a review for compliance with zoning laws, building codes, and other regulations. This process can often take several months to over a year, depending on the complexity of the project and the municipality's efficiency. This is a common topic of discussion for those seeking constructors in Portugal.
The Prime Minister had announced on September 25th that the Government will propose to parliament a reduction of the VAT rate to 6% for the construction of houses for sale up to €648,000. For houses intended for the rental market, the reduced rate will apply to those with rents up to €2,300 per month. This tax regime is planned to be in effect until 2029.
Prime Minister Luís Montenegro admitted that the rental cap of €2,300 "sounds a bit high," but defended it as a "maximum ceiling" intended to cover housing for families in high-pressure areas like the Lisbon and Porto Metropolitan Areas. This detail is particularly relevant for those analyzing the market for investment properties.
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The measure is part of the "Constructing Portugal - Rental and Simplification" package, which is designed to increase the supply of affordable housing and is linked with the Recovery and Resilience Plan (PRR). The legislative proposal for the VAT reduction has not yet been formally introduced in parliament and is not part of the OE2026 initiative itself.
Industry reaction has been cautiously optimistic. The Association of Civil Construction and Public Works Industrialists (AICCOPN) has welcomed the measure but also highlighted the need for simplification of licensing procedures to truly accelerate housing delivery. They pointed out that the VAT reduction alone would not solve the housing crisis if projects remain stuck in bureaucracy.
The government's rationale is that by lowering the tax burden on construction, developers will be incentivized to start new projects, which will eventually lead to an increase in housing supply and help stabilize prices. The full details of the law will be scrutinized once the proposal is formally submitted to parliament. For those navigating these changes, consulting with property acquisition lawyers is advisable.
The Ministry of Housing is expected to work closely with municipalities to streamline the approval process, although no concrete measures on this front have been announced in conjunction with the VAT reduction. The opposition parties have signaled that they will be closely examining the proposal, with some expressing concern that the benefits may be captured by developers rather than passed on to consumers.
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