Portugal’s long-promised cut to construction VAT has stopped being a headline and started being paperwork. After months of parliamentary wrangling, the reduced 6% rate on new-build and rehabilitation contracts for permanent housing is now working its way through real invoices, and developers in the Algarve — where new-build supply has been tightest — are among the first to structure projects around it.
What actually changed, and when
The measure comes from Decreto-Lei n.º 97/2026, published in Diário da República on 20 May 2026, which reworks VAT, IRS, IRC, IMT and rental rules under the government’s housing relief package. The Decree-Law 97/2026, of 20 May, affects VAT, IRS, IRC, IMT and the accessible rental regime. Rather than a blanket cut, the reduced rate is narrowly targeted: it applies to sale prices up to a maximum of €660,000 or rents up to €2,300 a month.
Crucially, the change isn’t purely forward-looking. The reduced rate can cover construction or rehabilitation contracts whose procedural initiative began between 25 September 2025 and 31 December 2029, provided VAT becomes chargeable from 1 January 2026. That backdating matters for anyone who filed a licensing request or prior communication last autumn — those projects can retroactively qualify.
The practical rollout, though, has its own calendar. VAT changes generally take effect from the quarter following the decree-law’s entry into force, meaning regularisations for covered operations can be made from July 2026. That’s effectively now — which is why builders and buyers who spent the spring reading draft law are suddenly filing real applications.
The €660,982 ceiling, explained
The cap isn’t an arbitrary number. The property can’t exceed €660,982, corresponding to the upper limit of the second IMT bracket applicable to permanent primary residences in 2026. Buy or build above that threshold and the whole contract reverts to the standard 23% rate — there’s no partial relief.
For anyone building rather than buying off-plan, self-construction gets a separate refund mechanism rather than an upfront discount. Individuals building a home for their own permanent use can request a partial VAT refund, but this applies only to those building outside a business or professional activity. To qualify, the property’s taxable value or the land cost plus construction costs, excluding VAT, cannot exceed €660,982, and the home must be used as a permanent residence within six months of the usage licence, maintained for at least 12 months. The claim itself has a clock on it too: the request must be submitted electronically to the tax authority within 12 months of the usage documentation being issued.
One administrative wrinkle worth flagging for anyone building right now: refund requests relating to the first three quarters of 2026 can only be submitted from 1 October 2026. Early movers will be filing paperwork, not receiving money, for a while yet.
Why the Algarve is moving first
Industry groups reacted quickly once the parliamentary vote landed. The Associação Portuguesa de Promotores e Investidores Imobiliários welcomed the February 2026 approval as “a decisive step to face the housing crisis” facing the country. Legal advisers based in the Algarve’s Golden Triangle have since been fielding a wave of enquiries from developers wanting projects audited for eligibility before signing general contracts, since the qualifying window is locked in from the moment a licensing request is filed — not after.
Not everyone expects buyers to see the full benefit at the till. José Teixeira, head of construction group DST, has warned the VAT cut may not fully benefit homebuyers given the current “heated economy,” suggesting most of the incentive will be absorbed by the market rather than passed on in lower sale prices. That’s a fair caution for anyone assuming a mechanical 17-point saving will show up in the asking price of a new Algarve apartment.
There are real teeth behind the rules, too. Buying a home that benefited from the 6% rate and then selling it or ceasing to use it as a permanent residence within 12 months triggers a 10-percentage-point IMT penalty. And for developers selling on: contracts qualify only if the sale to the buyer’s permanent residence occurs within 24 months of the usage documentation being issued.
What foreigners buying or building should watch
For non-resident buyers, this VAT relief sits alongside a separate, less favourable change — acquisitions by non-residents are now subject to a flat IMT rate of 7.5%, regardless of property value. The 6% construction VAT and the flat non-resident IMT rate are two different levers pulling in opposite directions, so run the full cost comparison rather than fixating on one saving.
Because eligibility depends on paperwork filed at the very start of a project — the licensing request date, the contract type, the price ceiling — it pays to get a tax adviser and the builder aligned before signing anything. GrowIN’s guide to buying or building in Portugal walks through the full purchase process, from NIF to escritura, for readers weighing whether new-build now beats resale. See our tax & NIF hub for NIF and residency basics that underpin any property purchase here.
The scheme runs only until 2029, with regularisations possible through 2032 for longer projects — a finite window that developers and buyers alike are treating as a reason to move now rather than wait. As always with tax measures still bedding in, confirm current thresholds and deadlines directly with Portal das Finanças before signing a construction contract.
This article was produced with AI assistance and editorial oversight in line with our editorial policy. It is general information, not legal or tax advice.