VAT on urban rehabilitation: Portuguese Tax and Customs Authority clarifies effects of Law 48/2026

The Portuguese Tax and Customs Authority (the “AT”) issued Circular 25121/2026 of September 25 (the “Circular”), instructing its departments on the application of Law 48/2026 of August 17. The law established an authentic interpretation of item 2.23 of List I attached to the VAT Code, with retroactive effect from January 1, 2009. As discussed in our previous post, VAT on Urban Rehabilitation: Waiver of ORU Approval, the law removed the requirement for an approved urban rehabilitation operation (“ORU”) to apply the reduced VAT rate of 6% to urban rehabilitation works contracts.

The Circular now clarifies the practical implications of this change for real estate developers, builders and investors. However, it introduces a requirement that warrants particular attention: the urban rehabilitation area (“ARU”) must not have expired.

The AT confirms that approval of an ORU cannot be required as a condition for applying the reduced rate. If an ORU exists, the reduced rate cannot be denied solely because the works contract does not comply with its rehabilitation options.

However, the AT reads item 2.23 in conjunction with the Urban Rehabilitation Regime (“RJRU”). Under article 14 of the RJRU, the delimitation of an ARU approved without an ORU expires if the corresponding ORU is not approved within three years.

Accordingly, the AT considers that works contracts performed in a legally delimited ARU qualify for the reduced rate if, on the date VAT becomes chargeable:

• the pertinent ORU has been approved; or
• if no ORU has been approved, the ARU was delimited less than three years earlier.

In practice, the decisive requirement is now that the ARU delimitation remains valid when VAT becomes chargeable. For works contracts performed in an ARU delimited more than three years earlier without an approved ORU, the AT may continue to deny the reduced rate based on the expiration of the ARU. It will be important to assess whether this interpretation is consistent with interpretive law. That law refers only to ARUs “delimited in accordance with the law,” “regardless of whether an ORU has been approved.”

In all cases, the other requirements must still be met: there must be a works contract, and the property or public space must be located in a legally delimited, unexpired ARU. Documentation proving the existence of an ORU, the works contract’s inclusion in an ORU, or compliance with its rehabilitation options is no longer required.

The interpreted wording was in force from January 1, 2009, through October 6, 2023. It continues to apply to transactions covered by the transitional regime under article 50.9 of Law 56/2023 (the “More Housing Law”). These include applications for licensing, prior notice or prior information submitted before October 7, 2023. They also include later applications based on a favorable prior information decision that remains valid, even if VAT becomes chargeable after that date. The authentic interpretation established by Law 48/2026 applies in full to these transactions.

Transactions for which VAT becomes chargeable on or after August 18, 2026

For transactions covered by the transitional regime under Law 56/2023, an approved ORU cannot be required, nor can compliance of the works contract with the ORU. Transactions governed by the current wording of item 2.23 remain subject to its specific requirements.

Transactions for which VAT became chargeable on or before August 17, 2026

The AT emphasizes that retroactivity does not, by itself, reopen expired deadlines for administrative claims, review, judicial challenges, or VAT regularizations. The appropriate corrective mechanism must be determined on a case-by-case basis under the VAT Code, the General Tax Law (“LGT”), and the Tax Procedure and Proceedings Code (“CPPT”).

Ongoing tax inspection proceedings

In ongoing tax inspection proceedings, the AT should neither propose nor make adjustments based solely on the absence of an ORU or the works contract’s noncompliance with an ORU. If a proposed adjustment rests on other grounds, the AT will assess whether they are independent and sufficient. This assessment will likely include whether the ARU has expired.

Additional VAT assessments

The AT distinguishes between acts that have become final and binding and acts subject to a pending administrative claim, ex officio review, hierarchical appeal, or other procedure. In pending procedures, if the absence of an ORU was the sole basis for the adjustment, that basis cannot be upheld.

VAT regularization

• VAT charged at the standard rate to customers without a right to deduct: The supplier must issue a credit note for the difference between the standard and reduced rates. The note must include the information required by article 36.6 of the VAT Code. A regularization in the supplier’s favor requires proof that the customer was reimbursed, under article 78.5 of the VAT Code and Circular 25120/2026 of July 28.
• VAT self-assessed by the customer under the reverse-charge mechanism, with a right to deduct: The recipient may make the correction within the four-year period applicable to errors of law.

Ex officio review

A particularly important point is that the AT considers its previous approach to have been based on the unifying caselaw of the Supreme Administrative Court (judgment of March 26, 2025, Case 12/24.9BALSB). However, given the interpretive law’s effects, the AT acknowledges an error attributable to the tax authorities for the purposes of article 78.1 of the LGT. This error may support an application for ex officio review. Administrative claims based on Law 48/2026 will be converted into ex officio review proceedings under article 52.2 of the CPPT.

The application will not necessarily be granted. The AT will verify whether the application was filed on time and reject applications concerning assessments based on independent grounds other than the absence of an ORU.

The date on which the ARU was delimited and whether an ORU had been approved when VAT became chargeable for each transaction.

• Whether the transactions fall within the transitional regime under Law 56/2023.
• The status of tax inspection proceedings and additional assessments, and whether independent grounds for adjustment exist.
• The deadlines for VAT regularizations, ex officio review, and challenges, and the most appropriate procedural route.
• Coordination between suppliers and customers in issuing credit notes and substantiating reimbursement.

Circular 25121/2026 confirms the favorable impact of Law 48/2026 and opens the way for ex officio review. However, the requirement that the ARU has not expired may limit the law’s reach in many cases. Each affected transaction, procedure and assessment should be analyzed individually to determine the best strategy for recovering VAT and protecting taxpayers’ rights.