Municipalities call on government to introduce 6% VAT rate on construction projects in urban regeneration areas

Portugal’s National Association of Portuguese Municipalities is calling on the government to slash VAT to 6% on construction projects in Urban Regeneration designated areas.

Business daily Negócios reports that the reduced VAT regime of 6% should apply “to urban rehabilitation works in Urban Rehabilitation Areas (ARUs) in the broad sense, and not merely to the renovation of buildings”.

And outside the ARU, the same reduced rate should apply “to equipment, infrastructure and streets and public spaces” and not only to the construction and rehabilitation of affordable housing, at controlled costs or for affordable income, as is now the case. This would make it possible to foster “coherence and integration to social housing projects”.

The suggestion has been made by the National Association of Portuguese Municipalities (ANMP) in an opinion report sent to the Portuguese parliament on the proposed State Budget (OE).

In general, the association representing town mayors concludes that the proposal “presents positive measures for municipalities”, by “reinforcement of transfers” under the terms of the Local Finance Law and the “distribution criteria used”, so it has produced “an overall favourable opinion”. However, it points out a set of other matters that it considers insufficient or even negative. (in the case of VAT on construction)

In the report the ANMP reveals that at a meeting held in September with the Minister of Finance, Joaquim Miranda Sarmento, the minister had said that if the State Budget was approved, he would “take another look at reduced VAT rates”,  and make an assessment of the “requests from various sectors”.

VAT at 6% on construction projects is an important issue for municipalities, as it is seen as an incentive to build more housing.

However, the previous government’s ‘More Housing’ package introduced restrictions, and in the ARU the reduced rate was only available for renovations – excluding construction.

Moreover, the Portuguese tax authorities has been very strict in its application, imposing an almost case-by-case assessment, creating considerable uncertainty and confusion for developers and builders when it comes to making investments.

The budget proposal foresees a request for legislative authorisation from the government in the sense that construction or rehabilitation contracts for housing covered by the reduced 6% rate should be “defined according to established criteria” by the Ministers of Finance and Housing; and also impose limits, depending on the value of the housing being built, leaving out those that are valued over the “limit compatible with social housing policies”.

Now the ANMP is calling on the government to go further by widening the criteria under which projects are eligible for a reduced 6% VAT rate. It now remains to be seen if the government will adopt the association’s suggestions.