6% VAT on Housing: AT clarifies Item 2.42.1 and Reverse Charge Mechanism

Last May, in our Practical Guide on Tax Relief Measures to Promote Housing , we analyzed Decree-Law 97/2026 of May 20, focusing on the temporary application of the reduced 6% VAT rate to construction and rehabilitation work on residential properties (Item 2.42.1 of List I attached to the VAT Code).

In the meantime, the tax authority (“AT”) issued two circulars from the VAT Services Directorate: Circular 25116 of June 23, 2026, clarifying the scope of application of that item, and Circular 25117 of June 24, 2026, clarifying the framework for the reverse charge rule in civil construction services, following the amendments introduced by that decree-law.

In this post, we present a brief summary of the most relevant points of these circulars for investors:

Circular 25116/2026 of June 23: This circular clarifies Item 2.42.1

1. Effective date of Item 2.42.1: July 1, 2026

In the guide, we noted that the decree-law did not contain a general rule regarding the date of entry into force, so we presumed the supplementary rule would apply (fifth day after publication, i.e., May 25, 2026). For Item 2.42.1, the decree-law merely stated that it would take effect “in the quarter following the entry into force” of the decree-law.

Circular 25116/2026 now unambiguously establishes that Item 2.42.1 is effective from the quarter following the entry into force of the decree-law, that is, from July 1, 2026. This is an important practical clarification: July 1, 2026 becomes the operating milestone from which the reduced rate applies, even though, as we explain below and also in our guide, the regime applies retroactively to affected transactions from January 1, 2026.

2. Procedural initiative: The key concept for determining the applicable rate

As we noted in our guide, Item 2.42.1 applies to works contracts for urban development projects whose procedural initiative starts between September 25, 2025, and December 31, 2029, provided the VAT becomes due on or after January 1, 2026 (see page 8 of our Practical Guide).

Circular 25116/2026 now clarifies that “procedural initiative” means the first formal act performed by the interested party at the municipal council, constituting the key chronological milestone for determining the applicable rate. There are three types, depending on the level of prior checks for the urban development project:

• Projects subject to licensing: date on which the license application is submitted.
• Projects subject to prior notification: date of submission of the prior notification, provided all the required documents are submitted.
• Projects exempt from prior checks: date of submission of the preliminary opinion (article 7.2 of the Legal Regime on Urbanization and Building (“RJUE”)) or, in the remaining cases, the date of notification regarding the start of work.

In practice, Item 2.42.1 applies only to construction work whose procedural initiative starts between September 25, 2025 and December 31, 2029, and whose tax liability arises on or after January 1, 2026—two cumulative requirements.

The circular provides examples to illustrate this interaction: A prior notification submitted on September 10, 2025, renders the item inapplicable, even if invoicing occurs in 2026; and an advance payment invoice with a tax liability arising in December 2025 is excluded, even if the procedural initiative is on time. The item expires on December 31, 2032, so invoices issued after that date are taxed at the normal rate, even for work whose procedural initiative is eligible.

3. The “start-of-use” date: The trigger for the 24-month, 36-month, and 5-year deadlines

A new clarification that has direct practical implications concerns the definition of the date of “use of the property,” that is, the date on which the start-of-use documentation is issued and the following deadlines begin to run.

• Sale: 24 months
• Rental: The first residential rental contract must start to run no later than 24 months after the start-of-use documentation is issued (RJUE), and the property must remain rented for at least 36 consecutive or non-consecutive months in the first five years after being issued.

Therefore, according to the AT, the relevant dates for construction work are the following:

• For construction work subject to prior checks, the relevant date is the date the documentation required under article 62-A.1 of the RJUE (statement of responsibility from the works manager or supervising manager and final blueprints, if applicable) is submitted to the municipal council.
• For construction work not subject to prior checks, the relevant date is the 20th day following the submission of the prior notification with a deadline, along with a statement of responsibility, unless an inspection is ordered.

For investors, this definition is decisive for planning the marketing and rental deadlines Item 2.42.1 requires.

4. Key concepts: Movable property and services count toward price and rent thresholds

Circular 25116/2026 clarifies how to calculate the “moderate price” and “moderate rent” thresholds (€660,982 and €2,300, respectively), which we explained in the guide.  Movable property, equipment, or fittings that are permanently attached to the property must be added to the purchase price or rent. The same applies to services that increase the value of the property, even if they are covered by separate legal transactions. In practice, this means that these items must be included when assessing whether the relevant threshold is met. For example, an apartment is purchased for €650,000. Under a separate contract, the buyer also acquires custom-made kitchen cabinets and a central air conditioning system with a total value of €20,000. The relevant value for assessing compliance with the moderate price threshold will be €670,000. This exceeds the legal limit, so the reduced VAT rate cannot apply to the construction works.

Note on Circular 25117: Circular 25117/2026 clarifies the concept of civil construction services for the purposes of the reverse charge mechanism. In particular, it differentiates between (i) civil construction services subject to the reverse charge, such as the manufacture and installation of custom-made kitchens, built-in closets, or central air conditioning systems (“HVAC”), when permanently integrated into the property; and (ii) transfers of movable property with associated assembly that do not constitute civil construction services, such as the supply and installation of household appliances (washing machines, refrigerators, stoves, and ovens) that do not require adaptation work. In the second case, the supplier must assess the VAT as usual, and the reverse charge mechanism does not apply. However, the fact that these goods are excluded from the reverse charge mechanism does not mean they are irrelevant when calculating the moderate price threshold. As Circular 25116 explains, movable property and equipment that are permanently attached to the property must be added to the purchase price when assessing compliance with the €660,982 limit. Therefore, the example above remains valid: both the kitchen cabinets and the central air conditioning system must be added to the price of the apartment. This may cause the limit to be exceeded, in which case the reduced rate would not apply.

5. IMT increase if the buyer fails to designate the property as their own permanent residence (“OPR”)

As stated in Circular 25116/2026:

• when the property is not designated for the purpose stated in the deed of purchase within six months from the purchase date; or
• is not used exclusively for that purpose within the 12 months following its designation,

an increase in the municipal tax on for-value real estate transfers (“IMT”) applies to the buyer, without any impact on the applicable VAT rate.

In other words, the buyer’s failure to comply with the conditions for designation as their own permanent residence does not mean that the reduced VAT rate is inapplicable nor does it give rise to an obligation for the taxable person (developer) to regularize the VAT.

6. Co-ownership and joint ownership: Limits based on the total value

Circular 25116/2026 clarifies that, in cases of co-ownership, joint ownership, or joint rental, the price or rent thresholds always refer to the total value of the purchase or contract, and proportional sharing among the various parties involved is not permitted.

Moreover, Item 2.42.1 applies only when all the buyers intend to use the property as their permanent residence. If only one of the co-owners designates the property as their own permanent residence in the deed of purchase, Item 2.42.1 will no longer apply to the entire transaction, and the tax must be regularized in favor of the State. Conversely, if all co-owners declare that the property is designated as their own permanent residence, but only one of them changes their tax domicile, the item remains fully applicable, with the breach affecting only the IMT position of the non-complying co-owner.

7. Corporate tenant

Circular 25116/2026 expressly acknowledges, for the first time, that the requirement for exclusive residential use is considered met when the tenant is a legal entity if the following cumulative conditions are met: (i) the property is expressly designated in the contract as the permanent residence of duly identified individuals (e.g., employees or managers), and any commercial, industrial, or service-related use is prohibited; and (ii) the actual use of the property coincides exclusively with that purpose. This clarification has a direct impact on institutional rental structures and employee housing solutions.

8. Mixed-use properties and condominiums: Proportionality formula

For condominium properties (or properties with independently used stories that are not condominiums), we already anticipated in our Practical Guide that the reduced tax rate would apply proportionally. The circular now provides the actual calculation formula.

The formula consists of the ratio between (i) the sum of the gross construction area and the area exceeding the placement area of the units that meet the conditions, and (ii) the same sum relating to the totality of the units, both determined in accordance with article 40 of the IMI Code.

9. Reverse charge and regularization mechanism

Circular 25116/2026 confirms that, in the case of civil construction services provided on a construction works basis to a taxable person, the reverse charge mechanism (self-assessment) applies, and the buyer must assess the reduced rate VAT on the contract price. Circular 25117/2026 of June 24 further develops the legal and tax framework of this rule, clarifying the concept of civil construction services, the application requirements, and the situations in which different services coexist (see detailed analysis below). Regarding the regularization in favor of the State in cases of non-compliance, Circular 25116 details the reporting procedures—differentiating between situations that are regularized in the periodic tax return (Field 41 of Table 06) and those requiring a new corrective periodic return (Fields 3 and 4 of Table 06), providing a summary table of the relevant facts and respective dates. The regularization deadline is four years, under article 94.1 of the VAT Code.

10. Transitional regime: Two distinct regimes for 2026 transactions

Finally, and in addition to what we said in our guide on retroactive application by joint option, Circular 25116/2026 differentiates between two transitional regimes.

• Buyers who only carry out transactions without a right to deduct VAT, for which VAT becomes due on or after January 1, 2026: Whether the reduced rate applies is contingent on a joint option of the provider and the buyer, and is applied by the provider issuing a credit note or notes (containing only the VAT amount) bearing the indication “VAT-Self-assessment–Item 2.42” and the corresponding declarations of both parties.
• Buyers entitled to a full or partial reduction for construction work with a due date between January 1 and June 30, 2026: The difference may be regularized without needing a joint option, by inclusion in field 40 of the periodic return for July 2026 or the third quarter of 2026 (or following period).

This distinction is particularly relevant for investors that have already entered into works contracts in the first half of 2026 and wish to apply the reduced rate.

Circular 25117/2026 - Reverse charge mechanism in civil construction

Circular 25117/2026 of June 24, supplements Circular 25116 by clarifying the legal and tax framework for the reverse charge mechanism in civil construction services, following the amendments made to article 2.1.j) of the VAT Code by Decree-Law 97/2026. Below we highlight the most relevant points.

1.    Extension of the scope of the reverse charge mechanism

The reverse charge mechanism for civil construction services now covers two distinct situations:

(i) buyers that carry out transactions entitling them to a full or partial VAT deduction; and

(ii) buyers that carry out only exempt transactions (without a right to deduct VAT), when they are buyers of construction or renovation work envisaged in Item 2.42—as we previously stated in our Practical Guide.

2. Definition of civil construction services: Qualified entities

For the purposes of applying the reverse charge rule, only civil construction services provided by legally accredited entities—individuals or legal persons holding a contractor’s license or certificate issued under Law 41/2015 of June 3—are classified as civil construction services. Taxable persons that do not hold a contractor’s license or certificate, even if they perform services specific to the construction sector, do not apply the reverse charge rule.

3. Services for installing or assembling goods: Permanence criterion

Services involving the installation or assembly of goods constitute civil construction services when, in substance, the main purpose of the contract is the performance of construction work, and the goods are permanently integrated into the property. The circular provides specific examples of situations in which the reverse charge applies:

• Photovoltaic solar panels or wind energy systems integrated into the property’s infrastructure
• Telecommunications infrastructure (ITED), electronic door entry systems, and video door entry systems that are permanently integrated
• HVAC systems, boilers, or heat pumps that are structurally and permanently integrated
• Elevators, freight elevators, or lifting platforms with permanent structural attachment
• Kitchens, bathrooms, interior doors, or custom-made furniture (such as built-in closets), provided they are integrated and permanently attached

4. Appliances and non-structural furniture: Exclusion from the reverse charge mechanism

Conversely, Circular 25117/2026 clarifies that the mere transfer of goods along with associated assembly services does not constitute a civil construction service (and, therefore, there is no reversal), particularly when these do not involve any construction work or play a predominant role. The circular expressly lists the examples below.

• Household appliances: supply and installation of appliances (e.g., washing machines, refrigerators, stoves, or ovens) that do not require adaptation work
• Non-structural items: supply and assembly of movable items that, while they may be screwed to the wall for safety or stability reasons, retain their movable nature and do not become an integral or structural part of the property

5. Application of the law over time

The amendments to article 2.1.(j) of the VAT Code are effective from July 1, 2026. However, if there is a joint option of the provider and the buyer, from January 1, 2026, the reverse charge rule may be applied to the situations Item 2.42 covers. In this case, the provider must rectify the invoices issued to apply the reverse charge rule, following the clarification provided in Circular 25116.

In summary: Circulars 25116 and 25117/2026 do not alter the substantive regime we described in our guide, but they add operational clarifications with direct practical implications for investors. Circular 25116 clarifies the conditions for applying the reduced VAT rate (Item 2.42.1), while Circular 25117 further clarifies which service qualify as civil construction services for the purposes of the reverse charge rule.

Practical recommendations for investors

Based on the clarifications in the circulars, we identified the following practical recommendations:

General recommendations (applicable to sales and rentals)

1. Confirm the date of the procedural initiative with the municipal council (licensing application, prior notification, or notification of start of work) and retain documentation proving that it occurred between September 25, 2025, and December 31, 2029.

2. Ensure that the price threshold (€660,982) and rent threshold (€2,300/month) are respected, and that the value of movable property, equipment, or improvement services permanently attached to the property is included in the calculation, even if governed by separate contracts.

3. For mixed-use properties or condominiums, apply the proportionality formula based on the gross construction area and the area exceeding the placement area of the eligible units, preparing the ratio calculation in advance for self-assessment purposes.

4. Check that the contractors hired hold a license or certificate issued under Law 41/2015—an essential condition for application of the reverse charge rule. This can be checked on the IMPIC website.

5. Differentiate, on supplier invoices, between civil construction services subject to the reverse charge (manufacture and assembly of custom kitchens, HVAC, elevators, and integrated solar panels) and mere transfers of goods with associated assembly (appliances and non-structural furniture), which must be invoiced with VAT assessed by the provider.

6. For construction works contracts for which VAT became due between January 1 and June 30, 2026, assess whether retroactive regularization is available. Buyers that are not entitled to a VAT deduction need a joint option with the provider, who must issue the relevant credit notes. Buyers entitled to a VAT deduction may regularize the difference in the July 2026 or third-quarter return, without needing a joint option.

7. Monitor the four-year adjustment period established in article 94 of the VAT Code, as well as the Item 2.42.1 deadline of December 31, 2032: invoices issued after this date are taxed at the normal rate, even for construction works where the procedural initiative is eligible.

Specific recommendations for sales

1. Deadlines: plan the marketing so that the sale is finalized within a maximum of 24 months from the date on which the start-of-use documentation is issued (RJUE).

2. Ensure that the deed of sale includes (i) an express reference to the application of the rate established in Item 2.42.1; and (ii) a declaration by all buyers that the property is designated as their own permanent residence (in the case of co-ownership, all co-owners must declare this designation for Item 2.42. to remain applicable to the entire construction works).

3. Inform buyers that failure to comply with the obligation to designate the property as their own permanent residence (failure to change their tax domicile within six months or failure to designate the property exclusively for that purpose within the following 12 months) has consequences for the buyer’s IMT liability, but does not affect the VAT rate applied to the transaction.

Specific recommendations for rentals

1. Deadlines: Ensure that the first residential rental contract starts to run no later than 24 months after the start-of-use documentation is issued (RJUE).

2. Time periods: Ensure that the property remains rented for at least 36 consecutive or non-consecutive months in the first five years after the start-of-use documentation is issued.

3. Communicate the rental contracts to the tax authority (AT) under article 60 of the Stamp Duty Code and ensure that the rental contract does not allow subrental at an amount exceeding €2,300.

4. In rental contracts entered into with legal entities, ensure that (i) the property is expressly designated in the contract as the permanent residence of identified individuals (employees or managers); (ii) any commercial, industrial, or service-related use is prohibited; and (iii) the actual use of the property coincides exclusively with residential purposes.

Upcoming developments: We will continue to monitor supplementary regulations, particularly the ordinances on rental investment contracts and the simplified affordable rental regime.