2-3 minutes
For several years, construction companies, real estate developers, and property owners applied the reduced VAT rate to rehabilitation works carried out on properties located within Urban Rehabilitation Areas.
However, the Tax Authority began to argue that a property’s location within an Urban Rehabilitation Area — ARU — was not sufficient. Prior approval of an Urban Rehabilitation Operation — ORU — would also be required.
This interpretation, later adopted by the Supreme Administrative Court, led to inspections and additional assessments, with the difference between the reduced 6% rate and the standard 23% rate being charged, often together with interest.
Parliament has now approved, unanimously and in a final global vote, a clarification stating that, under the former item 2.23 of List I annexed to the VAT Code, it was sufficient for the works to be carried out on a property or public space located within a legally delimited ARU — approval of an ORU was not required.
In Summary
Parliament clarified that urban rehabilitation works carried out within an ARU could benefit from the reduced VAT rate, even if the municipality had not yet approved an ORU.
This solution runs counter to the interpretation adopted by the Supreme Administrative Court and subsequently followed by the Tax Authority.
Once in force, the clarification could be relevant to inspections, additional assessments, and pending proceedings whose sole basis is the absence of an ORU.
However, the annulment of assessments and reimbursement of tax already paid will not necessarily be automatic. Deadlines, the available means of challenge, and the specific stage of each case will need to be reviewed.
This issue should also not be confused with the new 6% VAT regime for construction or rehabilitation of housing properties, created in 2026, which does not require an ARU but has its own conditions.
Why Is This Relevant in the Algarve?
This issue is particularly important in the Algarve, where a significant share of real estate activity involves the recovery, expansion, or transformation of existing buildings in consolidated urban areas.
In the municipality of Loulé, for example, Urban Rehabilitation Areas have been delimited in the historic centers of Loulé and Quarteira. Developers, construction companies, and property owners with works in these areas may have applied the reduced rate or may have faced corrections based on the absence of an ORU.
The property’s location should be confirmed through the municipality’s official records in effect on the relevant date. The mere fact that a property is located in an old area or an urban center does not, by itself, mean it falls within an ARU.
What Was the Problem?
The former item 2.23 provided for the reduced VAT rate to apply to urban rehabilitation works carried out on properties or public spaces located within legally delimited ARUs.
Urban planning legislation distinguishes between:
- the ARU, which corresponds to the territorial area delimited by the municipality;
- the ORU, which corresponds to the programming of interventions and measures intended to rehabilitate that area.
For years, many taxpayers understood that a property’s location within an ARU was sufficient to apply the 6% VAT rate.
The Tax Authority adopted a more restrictive interpretation, also requiring prior approval of the corresponding ORU.
In practice, companies that had applied the reduced rate were later confronted with corrections to 23%, in some cases after the works were completed and the properties sold. At that stage, there was no longer any real possibility of passing the additional tax on to the client.
What Did the Supreme Administrative Court Decide?
The Supreme Administrative Court standardized case law through Ruling No. 3/2026, concerning the decision of March 26, 2025.
The Court concluded that classification as an urban rehabilitation project required:
- the existence of a genuine construction contract (empreitada);
- its execution within an ARU;
- prior approval of an ORU for that area.
According to the Court, it was not enough for the work to be located within an ARU. The intervention had to be carried out under an already-approved ORU.
This interpretation reinforced the Tax Authority’s position and paved the way for intensified inspections and additional assessments based on the absence of an ORU.
What Did Parliament Approve?
Parliament clarified that urban rehabilitation works were considered to include all those carried out on properties or public spaces located within legally delimited ARUs, regardless of whether an ORU had been approved.
This is an authentic interpretation. In simple terms, the legislator itself is explaining how the earlier law should have been understood from the outset, rather than merely creating a new rule for the future.
The clarification concerns the wording of item 2.23 introduced by Law No. 64-A/2008 and applicable until the amendment introduced by the “Mais Habitação” program in October 2023.
There are, however, limits. An interpretative law is, in principle, incorporated into the law it interprets, but certain already-consolidated effects are safeguarded, including those resulting from a final and unappealable court decision.
As of this article, the text has been approved as Decree of the Assembly of the Republic No. 91/XVII. Its application as effective law still depends on the completion of the legislative process and its publication.
What Happens to Inspections and Assessments Already Issued?
Parliamentary approval does not mean that all proceedings will be automatically closed.
Where an inspection is still ongoing and the proposed correction is based exclusively on the absence of an ORU, there are grounds to request a reassessment of the procedure once the clarification enters into force.
For assessments that can still be challenged, the new interpretation may be invoked, depending on the case, through a prior hearing, administrative complaint, hierarchical appeal, request for review, judicial challenge, or tax arbitration.
In judicial proceedings still without a final decision, the interpretative law may also be relevant to the outcome.
Payment of the tax does not necessarily prevent a challenge. It may be possible to obtain annulment of the assessment and reimbursement of amounts paid, potentially plus compensatory interest, provided an appropriate means of challenge exists and the relevant deadlines are met.
Cases already finally decided by a judgment that has become final present greater difficulties and will need to be assessed individually.
A Note on the New 6% VAT for Housing
This clarification concerns the former item 2.23 and urban rehabilitation works carried out within an ARU.
It is different from the new regime under item 2.42.1, created in 2026, which may cover new construction or rehabilitation works for housing, even outside an ARU.
For properties built for sale, the reduced rate may apply to the construction contract between the developer and a legally distinct construction company, including a related company, provided the legal conditions are met.
These conditions include:
- the sale being for the buyer’s own permanent residence;
- a sale price not exceeding €660,982;
- mandatory statements in the title of acquisition;
- the sale taking place within a maximum period of 24 months;
- compliance with the legally required dates for the urban planning procedure and for when VAT becomes chargeable.
For works subject to prior control, the 24-month period generally runs from the submission to the City Council of the documentation required for the property to begin being used, namely the declaration of responsibility (termo de responsabilidade) and, where applicable, the as-built drawings (telas finais).
Frequently Asked Questions
Was it enough for the property to be located within an ARU?
Under the approved clarification, yes — provided there was a genuine urban rehabilitation project and the other conditions of the former item 2.23 were met. A previously approved ORU would not be required.
Can an additional assessment based on the lack of an ORU still be challenged?
Possibly. It depends on the time remaining, the appropriate means of challenge, and the stage the case is at. Parliamentary approval, by itself, does not suspend ongoing deadlines.
Will the VAT refund be automatic?
In principle, no. The taxpayer may need to request annulment of the assessment and reimbursement through the appropriate administrative or judicial procedure.
Does the clarification also cover new construction?
No. The clarification of the former item 2.23 concerns urban rehabilitation. New construction may be covered by the current regime under item 2.42.1, if the relevant conditions are met.
How We Can Help
URB Law Services provides legal and tax support to construction companies, real estate developers, and property owners, namely in:
- reviewing the application of the reduced VAT rate;
- confirming a property’s location within an ARU;
- reviewing or preparing construction contracts and urban planning documentation;
- responding to draft reports and tax inspection reports;
- challenging additional VAT and interest assessments;
- filing administrative complaints, requests for review, judicial challenges, or tax arbitration proceedings;
- recovering wrongly paid tax, where legally possible.
With an office in Almancil, in the Algarve, and representation in Lisbon, URB Law Services handles real estate projects and tax proceedings throughout Portugal.
Contact us to learn more.
