2-3 minutes
Circular Letter No. 25118, dated 22 July 2026, clarified the new rules governing the partial refund of VAT paid by individuals when building their own primary and permanent residence.
This regime does not allow the contractor to apply the reduced VAT rate directly. Instead, the individual pays VAT at the standard rate (23%) and, once construction is completed, may apply to the Portuguese Tax Authority for a refund of the difference between the VAT paid at 23% and the amount that would have been due at the 6% reduced rate.
At a Glance
- Applies only to individuals, outside the scope of any business activity.
- The property must be intended as the applicant’s primary and permanent residence.
- The reference value must not currently exceed €660,982.
- Only VAT paid on construction services (works contracts) is refundable.
- The property must become the applicant’s permanent residence within six months.
- It must remain the applicant’s permanent residence for at least 12 months.
Who Can Benefit?
The scheme is intended for individuals who enter into one or more construction contracts to build a property that will serve as their own permanent home.
The following are excluded:
- Companies and property developers;
- Business owners who include the property in their business activities;
- Properties built for sale;
- Properties built for rental or short-term tourist accommodation.
The applicant’s tax residence at the property is one of the factors used to demonstrate that it is their primary and permanent residence.
What Is the Value Limit?
To determine eligibility, the following are compared:
- the property’s final taxable value (Valor Patrimonial Tributário – VPT); and
- the purchase price of the land plus construction costs, excluding VAT.
The higher of these two amounts is considered and must not exceed €660,982.
Construction costs include:
- construction contracts;
- materials purchased separately;
- permanently installed equipment;
- other services related to improving the property’s value.
Property Transfer Tax (IMT) and Stamp Duty paid on the purchase of the land are not included.
Which Construction Works Are Covered?
The scheme applies to the construction of new residential properties.
There may be several contracts with different contractors. However, simple renovation, repair or refurbishment of existing buildings is not covered.
Where an existing building is completely demolished and replaced with a new one, the scheme may apply. In such cases, demolition costs are added to the land value when assessing the legal value limit.
Which VAT Can Be Recovered?
The refund covers VAT paid at the standard rate on construction services.
Invoices must:
- be issued in the applicant’s name;
- include the applicant’s Portuguese Tax Identification Number (NIF);
- clearly identify the property;
- have been reported to the Portuguese Tax Authority.
VAT paid on materials purchased directly by the property owner is not refundable, even if those materials are later incorporated into the construction. Their value is only considered when calculating the overall construction cost.
How Is the Refund Calculated? Example
For a construction contract worth €250,000 (excluding VAT):
- VAT paid at 23%: €57,500
- VAT equivalent at 6%: €15,000
- Refund amount: €42,500
What Is the Deadline to Apply?
The application must be submitted through the Portuguese Tax Authority’s online tax portal (Portal das Finanças)within 12 months of the issuance of the documentation confirming the start of the property’s use.
The application should include, among other documents:
- written construction contracts;
- invoices relating to construction costs;
- proof of the land purchase price;
- planning and building documentation;
- identification of the property and its owners.
The Portuguese Tax Authority has a maximum of 150 days from receipt of a properly completed application to pay the refund.
Does This Scheme Apply to Property Developers?
No.
Where a company commissions construction works for properties intended for subsequent sale, it cannot benefit from this refund.
However, the construction contract may still qualify for the reduced VAT rate under Item 2.42 of List I attached to the Portuguese VAT Code, provided the relevant legal requirements are met. This is a separate regime under which the reduced rate is applied directly to the construction contract.
Frequently Asked Questions
Should the contractor charge VAT at 6%?
No, not under this scheme. The individual initially pays VAT at the standard rate and subsequently applies for a partial refund.
Are renovation works covered?
No. The scheme is intended for new construction, except where an existing building is completely demolished and replaced with a new one.
Can I sell or rent the property after receiving the refund?
The property must remain exclusively the owner’s primary and permanent residence for at least 12 months, except in certain exceptional circumstances.
How Can We Help?
URB Law Services provides legal and tax assistance with:
- assessing eligibility;
- reviewing construction contracts;
- validating invoices; and
- preparing and submitting the VAT refund application.
If you are looking for a lawyer in Almancil with experience in VAT, construction law and real estate taxation, we provide legal services in Almancil and assist clients with projects throughout the Algarve and across Portugal.
Contact us to learn more.
