VAT on Urban Rehabilitation: New Decision by the Supreme Administrative Court

[1] Judgment of the Supreme Administrative Court, case no. 012/24.9BALSB, dated 26/03/2025, available at dgsi.pt

The Supreme Administrative Court has recently ruled on the application of the reduced VAT rate (6%) to urban rehabilitation works — and the decision may have a direct impact on projects carried out in recent years.

Regarding an appeal brought before the Full Session of the Tax Litigation Section of the Supreme Administrative Court for the Purpose of Harmonizing Case Law, the appellant argued that the arbitral decision issued was in contradiction, on the same fundamental legal issue, with the decisions made by the same Arbitration Center in cases no. 2/2023-T, 404/2022-T, and 295/2022-T (all fully available at https://caad.org.pt/tributario/decisoes/).

Thus, the appellant raised three key legal questions:

1. In order to benefit from the reduced VAT rate provided for in item 2.23 of List I annexed to the VAT Code (CIVA), is it sufficient for the two expressly mentioned requirements to be met — i.e., it must be a contract for urban rehabilitation works located in a designated urban rehabilitation area — or are additional requirements necessary, such as those related to an official urban rehabilitation operation?

2. Does the concept of "urban rehabilitation contract" apply to the construction of new buildings within a designated urban rehabilitation area, or does it only include the rehabilitation of existing buildings?

3. Is certification by the competent municipality that a project constitutes an urban rehabilitation contract in a designated urban rehabilitation area and part of an official urban rehabilitation operation sufficient for applying the reduced VAT rate under item 2.23 of CIVA?

Although the Court only addressed the first question — finding that the legal requirements for harmonizing case law were not met in relation to the other two — it ruled that:

The application of the reduced VAT rate provided for in item 2.23 of List I annexed to the CIVA depends on the existence of an approved Urban Rehabilitation Operation for the area designated as an Urban Rehabilitation Area in which the Urban Operation (contract work) is carried out.

In other words, the Court held that entitlement to the tax benefit established jointly in Article 18(a) of the CIVA and item 2.23 of List I is legally dependent on the goods and services taxed at the 6% rate being provided under a contract for urban rehabilitation and that classifying a contract as such presupposes the prior existence of a formally approved Urban Rehabilitation Operation.

Based on the literal wording, only contracts for urban rehabilitation works may benefit from the reduced VAT rate established in Article 18(1)(a) of the CIVA, where tax rates are defined, and in item 2.23 of the mentioned List I, which states that only “Urban rehabilitation contracts, as defined in specific legislation (…),” are eligible.

According to the Court, the concept of an urban rehabilitation contract must be interpreted in light of the definition of urban rehabilitation established in the Legal Framework for Urban Rehabilitation (RJUR), enacted by Decree-Law no. 307/2009 of October 23. Article 2(j) of the RJUR states that “Urban rehabilitation” is “a form of integrated intervention on the existing urban fabric, in which urban and real estate assets are preserved, in whole or in substantial part, and modernized through works that remodel or improve urban infrastructure systems, equipment, and public or green spaces, or through construction, reconstruction, expansion, alteration, conservation, or demolition of buildings.”

Therefore, according to this reasoning, the Court decided that the “urban rehabilitation contract,” which the tax legislator considers relevant for access to the 6% reduced rate, must be part of a strategic rehabilitation plan developed by municipalities, which are responsible for promoting urban rehabilitation.

In interpreting the concept of urban rehabilitation contract and item 2.23, the Court emphasized Articles 7, 8, and 16 of the RJUR, which establish that urban rehabilitation arises from the cumulative approval of two instruments: the delimitation of the urban rehabilitation area [Article 7(a)] and the urban rehabilitation operation to be carried out in the designated areas in accordance with the previous point, through a specific instrument or a detailed urban rehabilitation plan [Article 7(b)].

In conclusion, and for the purpose of harmonizing case law, the Court ruled that:

• Only contracts for urban rehabilitation works benefit from the 6% VAT rate provided jointly in Article 18(a) and item 2.23 of List I annexed to the CIVA;

• Classification as an “urban rehabilitation contract” requires the existence of a contract and its execution within a designated Urban Rehabilitation Area for which an Urban Rehabilitation Operation has been previously approved.

What now?

In practice, this decision may imply that:

• Projects involving new construction or interventions not formally included in an Urban Rehabilitation Operation are not eligible for the reduced VAT rate;

• The Tax Authority may review past cases and demand payment of the VAT difference, especially in situations where the newly required criteria are not met.

We therefore recommend that all companies and developers who have benefited or intend to benefit from the reduced VAT rate on rehabilitation works:

• Review the documentation of past projects (since 2021), particularly whether there is formal approval of the Urban Rehabilitation Operation;

• Confirm the fiscal eligibility of future projects based on this new case law;

• Seek legal or tax advice whenever necessary to ensure correct classification.