Portugal Announces Sweeping Housing Policy Overhaul, Slashes Construction VAT to 6%
The Portuguese government has approved a significant new package of housing measures, with Prime Minister Luís Montenegro announcing a reduction of the VAT (Value Added Tax) rate on new housing construction from 23% to 6%. The announcement was made following a Council of Ministers meeting dedicated to the housing crisis, outlining a strategy the government describes as a necessary 'shock' to the market. This reduced tax rate will apply to the construction and rehabilitation of properties intended for sale with a value up to €648,022, as well as to properties destined for the rental market under a new 'moderate rent' scheme with monthly rents capped at €2,300.
During the policy presentation, the Prime Minister stated that the measures are designed to have a nationwide impact while also addressing the acute price pressures in metropolitan areas. 'We are talking about a VAT for the construction sector that integrates the entire market context, covering the generality of the country and a specific market up to this amount in areas of higher price pressure,' Luís Montenegro explained. The €648,022 cap is consistent with the threshold for other government programs, such as the IMT (Property Transfer Tax) exemption for young buyers. The policy also includes benefits for individuals undertaking self-construction projects, although the exact limits based on construction costs are still to be finalized.
A central element of the new strategy is the creation of a 'moderate rent' category, which effectively replaces the previous Arrendamento Acessível (PAA) program, a scheme officials deemed to have had insufficient market traction. For a property to qualify, the rental contract must be for a minimum of three years, with the rent not exceeding €2,300 per month. In defending this ceiling, Montenegro noted the economic realities of major urban centers. 'For a citizen of Bragança or Freixo de Espada à Cinta, a rent of €2,300 is a fortune. But a family with two or three children, in Lisbon and Porto, often cannot find housing at a price lower than this,' he remarked, adding that the government calculated the figure based on a 40% effort rate for a household with a monthly income of €5,750, which he defined as 'middle class'.
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To incentivize landlords to participate, the applicable income tax (IRS) rate on these rental contracts will be drastically cut from 25% to 10%. Furthermore, a 50% exclusion on corporate income tax (IRC) will be available. Tenants under this scheme will also see their tax deductions for rent expenses increase, rising to a maximum of €900 in 2026 and €1,000 in 2027. The government is also introducing 'build-to-rent' investment contracts, which provide a bundle of fiscal benefits to developers and property owners who commit to long-term moderate rent agreements through the Institute of Housing and Urban Rehabilitation (IHRU). These benefits include the 6% VAT rate, exemptions from IMT and the additional property tax (AIMI), and an IMI exemption for the first eight years of the contract, followed by a 50% reduction from the ninth year onward.
The Minister of Infrastructure and Housing, Miguel Pinto Luz, emphasized the goal of attracting private capital, stating, 'Today there are about €190 billion in term deposits in Portugal,' and that the 'Government is saying to put money into real estate investment funds for moderate rent.' Another significant change is the exemption from capital gains tax for property owners who sell a home and reinvest the funds into purchasing a property for the moderate rental market, provided it is rented out under these conditions for a minimum of five years. Conversely, the government plans to increase the IMT for property acquisitions by non-resident citizens, with the exception of Portuguese emigrants, although the specific details of this tax hike have not yet been disclosed.
The policy package is complemented by measures aimed at reducing bureaucracy. The Legal Regime for Urbanization and Building (RJUE) will be revised to simplify licensing and shorten administrative deadlines. For instance, the period for municipal post-construction verification will be reduced from ten years to just one. Patrícia Gonçalves Costa, the Secretary of State for Housing, clarified that this change reflects that the impact of a construction project begins when it is completed or starts to be used. The government has indicated that more measures are forthcoming before the end of the year, including the simplification of eviction procedures and adjustments to rent support programs. Understand policy impacts on your Portugal property plans at realestate-lisbon.com.