Portugal Announces Major Tax Incentives for Housing: VAT Cut to 6% for Mid-Market Construction

Portugal Announces Major Tax Incentives for Housing: VAT Cut to 6% for Mid-Market Construction

The Portuguese government has approved a new legislative proposal aimed at significantly boosting the private housing market through a series of powerful tax incentives, headlined by a reduction of the VAT rate to 6% for the construction and renovation of homes sold or rented at 'moderate prices.' The announcement was made by Prime Minister Luís Montenegro following a Council of Ministers meeting on September 26, positioning the measures as a direct response to the country's housing supply shortage and a key support for middle-class families.

This new policy package, which follows a recent set of initiatives for public housing, seeks to 'boost and strengthen the housing supply' by simplifying rental processes and creating strong fiscal incentives for private developers and landlords. The cornerstone of the proposal is the application of the reduced 6% VAT rate on new construction projects where the final sale price is capped at €648,000. The same reduced rate will apply to build-to-rent projects and major renovations where monthly rents are limited to €2,300. This temporary regime is slated to run until 2029, at which point its effectiveness will be evaluated by the succeeding government.

Prime Minister Luís Montenegro emphasized that the price ceilings were designed to address the needs of the middle class in high-demand areas. 'In the municipalities with the greatest pressure, such as the Metropolitan Areas of Lisbon and Porto, we are talking about a ceiling that gives the middle class, families with some economic capacity, a new supply possibility to be able to settle,' he stated during the press conference. This targeted approach aims to stimulate the construction of homes that fall between social housing and the luxury market, a segment where supply has been critically lacking.

The government's strategy extends beyond VAT. A legislative authorization bill will be sent to Parliament to amend the Personal Income Tax Code (CIRS), introducing further benefits. For landlords, the autonomous IRS tax rate on rental income will be reduced from the current 25% to 10% for contracts that adhere to the 'moderate rent' price caps. In a significant move to encourage the expansion of the rental market, the proposal also includes a full capital gains tax exemption for individuals who sell a property and reinvest the entire sale value into acquiring or renovating a home to be placed on the moderate rental market.

Tenants are also included in the new fiscal framework, with the maximum deductible amount for rental expenses in their annual IRS filings set to increase to €900 in 2026 and subsequently to €1,000 in 2027. In a move to cool foreign speculation, the Prime Minister also announced 'an increase in the IMT [Municipal Tax on Onerous Transfers of Real Estate] for the purchase of housing by non-resident citizens in Portugal,' while carefully noting that 'our emigrants... will not be subject to this increase.' Additionally, properties rented out under the moderate price scheme will be exempt from the Adicional ao Imposto Municipal sobre Imóveis (AIMI), a wealth tax on high-value real estate.

Alongside the fiscal measures, the government is tackling administrative bottlenecks that have long plagued the construction sector. A proposal to alter the Legal Regime for Urbanization and Building (RJUE), known as the 'Simplex Urbanístico,' will seek legislative authorization to simplify and accelerate municipal licensing procedures. The objective is to allow 'shorter periods to start housing construction works' and better align urban planning legislation with the practical needs of developers and builders. This is complemented by a formal resolution to adopt a national strategy for Building Information Modeling (BIM), a digital construction methodology the government believes can generate savings of 10-20% on capital expenditures for new projects.

Miguel Pinto Luz, the Minister of Infrastructure and Housing, confirmed that this package is part of a broader, ongoing reform agenda. He announced that additional measures addressing the urban rental law (NRAU), eviction procedures, and the regulation of the real estate mediation industry will be presented by December. The government is also in discussions with the Portuguese Banking Association 'to find new banking products that make access to housing credit more flexible, but also access to credit for those who need capital for construction.' This comprehensive approach signals a clear political will to intervene decisively in the housing market, using fiscal policy and deregulation as primary tools to stimulate supply.

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