PSD proposes retroactive 6% VAT for urban rehabilitation projects

Portugal’s Social Democratic Party (PSD) has submitted a proposal to parliament that could significantly reduce tax liabilities for construction companies involved in urban rehabilitation projects, while potentially ending a long-running dispute with the tax authorities.

According to a report by Jornal de Negócios, cited by ECO, the proposal would ensure that urban rehabilitation works carried out in properties or public spaces located within designated Urban Rehabilitation Areas (ARUs) qualify for the reduced VAT rate of 6%, regardless of whether a formal Urban Rehabilitation Operation (ORU) has been approved by the local council.

The measure includes a provision for “authentic interpretation” of the law, meaning it would apply retroactively to 2008, when the reduced VAT rate for urban rehabilitation works was first introduced.

If approved, the proposal would overturn the interpretation that has been adopted in recent years by Portugal’s Tax Authority and upheld by the Supreme Administrative Court. The court has already standardised case law on the issue, ruling that the reduced VAT rate can only be applied where an approved Urban Rehabilitation Operation exists in addition to the property being located within an Urban Rehabilitation Area.

The differing interpretations have led to years of legal disputes between construction companies and the tax authorities. Businesses that applied the 6% VAT rate based solely on a project’s location within an ARU have subsequently faced additional tax assessments worth millions of euros.

Tax specialists quoted by Jornal de Negócios described the PSD proposal as “revolutionary” and a major relief for the construction sector. Some companies have reportedly faced serious financial difficulties after being presented with unexpected tax bills linked to completed projects.

The reduced VAT rate was originally introduced in 2008 as part of efforts to encourage urban regeneration and make rehabilitation projects more attractive to investors and property owners. However, subsequent changes in the interpretation of the legislation created uncertainty over eligibility.

Initially, tax authorities accepted that works located within an Urban Rehabilitation Area qualified for the reduced rate. More recently, however, the Tax Authority has argued that an approved Urban Rehabilitation Operation is also required before the tax benefit can be applied.

Supporters of the PSD proposal argue that the original intention of the legislation was to promote urban renewal and that the stricter interpretation has undermined investment in rehabilitation projects.

If passed by parliament, the measure could have significant implications for the construction industry, potentially allowing companies to challenge past tax assessments and recover sums paid under the disputed interpretation.

Source: ECO/Jornal de Negócios

Inês Lopes

Newspaper editor at The Portugal Resident