This content is from: Portugal

Portugal: European court rules on VAT on real estate transactions in Portugal

The option for VAT taxation of the supply of Portuguese real estate has recently been characterised by uncertainty, and the latest European ruling hopes to clarify matters.

The option for VAT taxation of the supply (and letting) of Portuguese real estate has been characterised by uncertainty, essentially due to a lack of clarity on related conditions and the consequences of failing to meet those conditions. Not surprisingly, litigation at Portuguese domestic courts has reached the Court of Justice of the European Union (CJEU), which recently ruled in favour of the taxpayer in a case of restriction in relation to the right of VAT deduction.

Before explaining the scope and relevance of this decision, it is important to frame the basic features of the VAT regime on a real estate transaction dealt with by Decree-Law 21/2007:

  • The transfer of real estate (immovable property) in Portugal is exempt from VAT, unless the vendor opts to waive such exemption, provided that both parties involved in the transaction are VATable persons in Portugal and certain conditions are met (subjective conditions).
  • If the transaction is subject to VAT, the general rate (at the prevailing rate of 23%) will be applicable on the purchase price (in this case, 0.8% stamp tax is not due). The 6.5% real estate transfer tax however, will still be due. The VAT (when due) is then self-assessed by the purchaser, meaning that it is assessed and deducted in the same periodical VAT return, without any amount being payable (no cash-out). If the property is later used for non-VATable activities, the VAT initially deducted must be adjusted. This restriction binds the taxpayer for a 20-year period.
  • For the leasing of real estate, the landlord should opt to waive such exemption, which can only occur where both parties are VATable persons in Portugal and the tenant uses the leased premises for VATable activities, among other conditions. In that case, rent is subject to VAT at the standard rate (23%), and no stamp duty is payable. Standard commercial lease agreements are subject to stamp duty only when they are exempt from VAT, payable by the landlord and charged at 10% of the first amount of rent.
  • Ultimately, waiving the VAT exemption for companies owning or letting Portuguese real estate may be appropriate as a means to enable the recovery of VAT related to construction/purchase costs as well expenses incurred in the continuing rental activity.

In Case C-672/16, decided on February 28 2018, Imofloresmira-Investimentos Imobiliários (a real estate company) had opted for waiving the VAT exemption in the course of its activities of buying, selling, letting and managing immovable property, but was faced with a considerably high VAT assessment by the Portuguese tax authorities based on the fact that some units were vacant for more than two years.

Basically, the Portuguese tax authorities were contending that despite the continuous commercial promotion of available vacant spaces by the company, the company would need to make an adjustment of the tax incorrectly deducted (which could include acquisition VAT or post-acquisition input VAT) in relation to the vacant units.

The Portuguese Arbitration Court (the fast-track litigation route) referred the case of annulment of this additional VAT to the CJEU as there were serious doubts on the extent to which the Portuguese VAT regime could revoke a right of deduction which had already been acquired.

The court was fairly straightforward in concluding that the VAT Directive must be interpreted as precluding any Portuguese tax rules that would require for the adjustment of VAT initially deducted on the simple argument that a particular vacant property (vacant more than two years despite being commercially advertised) is regarded as no longer being used by the taxpayer for the purposes of its own taxed transactions. The court also denied the request to limit the temporal effects of the judgment.

In short, this decision paves the way to a more balanced interpretation of Decree-Law 21/2007 regarding vacant units. This case may also be relevant to other restrictive interpretations, such as when tax authorities limit the possibility to apply for a waiver of the VAT exemption only after the existence of a tenant to use the property is acquired.


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