1-2 minutes
Circular Letter No. 25117, dated June 24, 2026, clarified the rules on the reverse charge mechanism (VAT self-assessment) for construction services.
When the reverse charge applies, the service provider issues an invoice without VAT, marked “VAT – Reverse Charge,” and it is up to the buyer to calculate and declare the tax.
In summary
- The contractor issues the invoice without VAT.
- The buyer self-assesses the tax.
- As a rule, the buyer must be a taxable person with full or partial right to deduct.
- The provider must be legally qualified to carry out construction activity.
- For contracts under item 2.42, the reverse charge may apply even to buyers without a right to deduct.
- VAT wrongly charged by the provider cannot be deducted by the buyer.
What counts as construction services?
The concept covers work related to:
- construction and reconstruction;
- extension and alteration;
- rehabilitation;
- repair and maintenance;
- conservation;
- demolition of buildings.
The contract does not need to formally be labeled a “works contract” or “subcontract.” What matters is the actual nature of the work performed.
Must the provider hold a license (alvará)?
According to the Tax Authority’s interpretation, the provider must hold a contractor’s license or certificate issued under Law No. 41/2015.
A company without this qualification should not apply the reverse charge, even if it carries out work materially related to construction.
Licensing status and authorized categories can be checked with IMPIC (Portugal’s construction and real estate institute).
Are installations and fittings covered?
They may be, when the main purpose of the contract is a construction project and the equipment is permanently incorporated into the property.
The Circular Letter identifies, among others:
- solar panels;
- HVAC and climate control systems;
- alarm and video surveillance systems;
- elevators;
- doors, windows, and gates;
- custom-made kitchens;
- built-in wardrobes.
Where there is only a sale of goods with simple, reversible installation, standard VAT rules apply — as is the case with appliances or furniture that retains its status as movable property, since no incorporation is required.
What if the contract includes materials?
When materials and services are part of an overall construction service package, the reverse charge applies, in principle, to the total value.
If the materials are sold separately, outside the works contract, the supplier must charge VAT on that sale.
In this latter case, holding a license does not turn all of a company’s operations into construction services.
What rules apply to housing construction contracts?
For works contracts covered by item 2.42 of List I annexed to the VAT Code, the reverse charge applies even when the buyer:
- carries out exclusively exempt operations;
- has no right to deduct;
- is covered by Article 9;
- is exempt under Article 53 of the VAT Code.
This rule is particularly relevant for developers building or rehabilitating properties intended for residential rental.
Does the reverse charge apply to advance payments?
Yes.
The contractor must issue the advance payment invoice without VAT, marked “VAT – Reverse Charge.” The buyer declares the tax in the period when payment is made or the invoice is issued in advance.
What happens if the contractor charges VAT by mistake?
The buyer cannot deduct VAT that was wrongly charged by the provider.
Furthermore, the buyer remains obligated to self-assess the tax when the legal conditions were met.
The invoice must be corrected, and it may also be necessary to amend the periodic tax returns.
From when do these rules apply?
The new instructions generally apply to transactions for which VAT becomes due starting July 1, 2026.
For certain transactions covered by item 2.42 carried out between January 1 and June 30, 2026, the provider and buyer may jointly opt for regularization.
How can we help?
URB Law Services supports contractors, real estate developers, and companies acquiring construction services, including contract review, VAT framework analysis, and invoicing corrections.
For those looking for a lawyer in Almancil with experience in VAT, construction contracts, and real estate in the Algarve, we provide services in Almancil and handle transactions throughout the country.
Contact us to learn more.
