Maria Gouveia and Solange Dias Nóbrega analyse the impact of the STA ruling on VAT in urban rehabilitation

Maria Gouveia and Solange Dias Nóbrega, tax lawyers at Morais Leitão, analyse the implications of a recent ruling by the Supreme Administrative Court (STA), which standardises case law on the application of the reduced rate of 6% VAT on urban rehabilitation contracts. The court's decision, handed down on 26 March, came down in favour of the Tax Authority, establishing that it is not enough for the property to be located in an Urban Rehabilitation Area (ARU); it must also be part of an Urban Rehabilitation Operation (ORU) formally approved by the local authority.

This new legal interpretation should have a direct effect on dozens of arbitration and court cases that are still ongoing, in which taxpayers were arguing for a broader interpretation of the concept of urban rehabilitation. Morais Leitão's lawyers stress that this dual requirement - ARU and ORU - weakens the position of taxpayers, while at the same time legitimising the Tax Authority to demand the application of the standard rate of 23% in several cases.

The STA's decision comes in the context of a high level of litigation over section 2.23 of the VAT Code, the wording of which, prior to the Mais Habitação Programme coming into force on 7 October 2023, allowed the reduced rate to be applied in certain circumstances.
However, the understanding now consolidated could halt the momentum of new rehabilitation projects, especially in urban areas where there are no ORUs yet approved.

In their analysis, Maria Gouveia and Solange Dias Nóbrega consider that the ruling ignores essential elements of the Legal Framework for Urban Rehabilitation, namely the legal value of the certification issued by the local authorities attesting to the qualification of a contract as urban rehabilitation. According to the lawyers, the case law now established not only fails to ensure an interpretation that is consistent with the objectives of the tax legislation, but also ignores the operational constraints faced by local authorities in approving an ORU.

This judicial understanding thus introduces new risks and uncertainties for developers and investors in the construction and urban regeneration sector, forcing a reassessment of ongoing and future projects, as well as litigation strategies already underway.

Read the full article in Observador.