Construction work? House refurbishment? Reduced rate of 6% in urban rehabilitation areas. Find out how to take advantage of the benefits and incentives.

How do you calculate the budget of x hundreds or thousands of euros “+ VAT at the prevailing rate”, which the contractor will surely present to you cold, without further explanation?

Which tax rate to apply? A maximum rate of 23% or a reduced rate of 6%, as you “heard” was possible in urban regeneration zones? And if the property is in the countryside, what VAT should be paid? Is there any difference between the house being your own permanent home or not?

It will also be difficult to know how to draw up the so-called construction contract that you “believe” you need to sign. What information about the parties - contractor and owner - should you include? Do any authorities provide drafts for consumers to follow?

Still on the arid terrain of tax obligations: what if the work is paid for with money from the sale of another house? Properties may or may not be permanent residences. Are there any differences? If the owner wants to buy the materials separately, is it enough to put the NIF on the invoices, as with most purchases?

Are there any tax incentives for renovation, depending on the location of the property?

The relationship between work and taxes can be (and is) difficult, but it doesn't have to have an unhappy ending.


1 - How do I ask for an estimate?

It's most likely that the contractor you've hired will present you with the typical quote “+ VAT at the prevailing rate”, which makes it impossible to know immediately how much you're going to pay in total for the work.
The impulse is to add the 23% VAT rate to the budgeted amount, and that's the end (and painful) of the story. But this is not exactly what the tax authorities demand of you.

There are benefits and nuances. In some situations, the math is less painful and easier to do; in others, you have to pull out the mathematician in you. Contracts in areas classified by municipalities as urban rehabilitation areas pay 6% VAT.

The reduced rate is applied to the overall value of the budget, i.e. the services provided and materials used, and is a way of encouraging the rehabilitation of the often dilapidated urban centers.
However, it is also possible to take advantage of this tax break when renovating houses in any area. There is, however, an important “provided”.

The tax relief, which only applies to works for the improvement, refurbishment or conservation of residential properties (whether or not they are permanent), is only possible if the value of the materials does not exceed 20% of the overall amount of the work. For example, in a budget of 60,000 euros, plus the famous “VAT at the prevailing rate”, if the labor costs 50,000 euros and the materials 10,000, the contractor can put everything on the same invoice and the client will only pay 6% VAT. But if the materials cost 20,000 euros, the correct thing to do is to individualize the amounts on the invoice, i.e. labor on one side (6% VAT) and materials on the other (23 percent). If you include everything, there's no escaping it: the VAT rate applied is 23 percent. No need... The owner, tenant or condominium can benefit from this reduction. The tax authorities say that “cleaning and maintenance work on green spaces, as well as contracts covering all or part of the constituent elements of swimming pools, saunas, tennis courts, golf or mini-golf courses or similar facilities” are excluded.
 

2 - How do I sign a works contract?

You can only benefit from the reduced VAT rate if you have a works contract with the necessary items itemized. According to the tax authorities, for there to be a works contract, it is essential that the agreement has as its object “the execution of a work, carried out under certain conditions and for a previously stipulated price”.

The document must be drawn up “globally and not according to the daily work”. The contract must include the identification of the parties, the permits, the work to be carried out and the materials to be used, the value of the work, the deadline for execution and also the penalties in the event of delay.

The more detailed the document is in terms of the work to be done and the materials to be used, the better defended the consumer will be and the more solidly they will be able to justify to the tax authorities whether they are taxing the whole or part of the contract at 6% VAT. Private works over 16,600 euros require a works contract to be drawn up. Below this amount, it is not compulsory, but advisable.
The contract is an important means of proof in the event of a claim and the need to call in the guarantee.
 

3 - What is a works contract?

The term is used in a trivial way, but in order to sign a construction contract outside the areas considered urban regeneration areas and benefit from the reduced VAT rate, you need to comply with the law. A contract implies the provision of a service, in which the contractor undertakes, in relation to the client who enters into the contract with him, to carry out a piece of work for a defined price.
It is the provision of the service, and not the materials, that can be subject to the 6 percent VAT rate.


4 - What do you need to know about reinvestment and invoices?

If the work is going to be financed with money from the sale of another house, i.e. if there is reinvestment, take note of the list of details you will need to pay close attention to.

First of all: the property you sold was your own permanent home and so is the house you're going to renovate? Not so bad. For the purposes of a possible exemption from real estate capital gains, i.e. the profit made on the sale of a property, which the tax authorities may or may not exempt from tax depending on whether it is reinvested in whole or in part, it is possible to invest the money in the extension or improvement of another property, as long as it is used as your own permanent home.

But it takes little effort to prove that the reinvestment was in fact for this purpose. For the tax authorities, there can be no doubt that the money obtained from the sale of the previous house was reinvested in the construction of the new property. The contract, which identifies the owner, the address of the work, details of the work carried out and the materials used, is once again essential.
As for the invoices, both for the work and for the materials that the owner buys for you, they must clearly indicate the owner and the property being renovated: name, VAT number and identification and location of the property. We advise you to enter the data from the land registry.
The contract invoice must also include a description of the work carried out and, says the tax authorities, the reason for applying the 6% VAT rate, namely by stating “Reduced rate under item 2.27 of List I annexed to the CIVA”.

 
5 - Write-off of capital gains: what is accepted by the tax authorities?

For the purposes of reinvestment and settling accounts with the tax authorities in relation to capital gains, are all the invoices for the necessary expenses for the works to be carried out on the property accepted?
The contract invoice, containing the elements mentioned above, is accepted. The biggest doubt concerns the materials purchased by the owner. A typical example: are invoices for kitchen furniture and appliances bought separately considered reinvestment by the tax authorities? As long as it is proven that the purpose of these materials is the property to be restored, of course? The property is their own permanent home.

 
6 - What are the tax incentives for urban rehabilitation?

For those who carry out urban rehabilitation work, there are benefits in terms of IRS, IMI and IMT.


IRS

Up to 500 euros can be deducted from the tax bill for 30% of the costs incurred by the owner in rehabilitating properties in urban rehabilitation areas and rehabilitated under the terms of the respective rehabilitation strategies, or in rehabilitating rented houses whose rents can be updated in stages.

Also with regard to the IRS, there are tax benefits in terms of the taxation of capital gains and property income.


TAXATION OF CAPITAL GAINS

Capital gains earned by IRS taxpayers resident in Portugal from the first sale of a property, following the intervention of a property located in an urban rehabilitation area, are taxed at an autonomous rate of 5%, without prejudice to the option of aggregation.

This means that properties sold and which have undergone rehabilitation work, covered by these conditions, have a strong reduction in the tax burden payable. The 5% autonomous taxation is always much lower than the usual taxation, which can vary depending on the marginal IRS rates, between 14.5% and 48 percent.


TAXATION OF PROPERTY INCOME

Property income earned by IRS taxpayers resident in Portugal is taxed at a rate of 5%, without prejudice to the option of aggregation, when it is entirely derived from the rental of:
properties located in an urban rehabilitation area and rehabilitated under the terms of the respective rehabilitation strategies;
rented properties subject to phased updating of rents and which are the subject of rehabilitation actions.
The advantage of this autonomous tax rate, 5%, is the same as for capital gains: instead of a rate that can vary between 14.5% and 48%, or even 28%, the 5% tax is much more beneficial.


TAXATION OF PROPERTY INCOME

The works covered are:

Construction work on new buildings is excluded from these incentives. This is because the concept of rehabilitation presupposes a pre-existing building, which is not the case with new construction.

The taxpayer will have to prove that the rehabilitation work has begun and has been completed, and must therefore request an initial inspection from the town hall. This notice must be given five days in advance, whether or not the work is subject to prior control. The identity of the person responsible for carrying out the work must also be communicated.

After the work, a final inspection must be requested from the town hall in order to assess the property's new level of conservation. As a result of the rehabilitation, the property's state of conservation must rise by at least two levels compared to the level measured in the initial inspection, and have at least a “good” level.


IMI

Urban buildings located in urban rehabilitation areas or completed more than 30 years ago and which are the subject of urban rehabilitation may, by decision of the municipalities, be exempt from IMI. Tax relief is allowed for three years, starting from the year in which the rehabilitation work was completed. But there are requirements to be met.

The above-mentioned works are covered by the benefits in terms of capital gains and rent (property income), and the conditions for granting them are the same, such as the need for prior notice and an inspection by the town hall.

The exemption, if so decided by the municipality, allows exemption from IMI for a period of three years, starting from the year in which the rehabilitation works are completed. By resolution of the municipal assembly, and if the owner so requests, the initial period of exemption from IMI can be renewed for a further five years, provided that the property is used to rent for permanent housing or for own permanent housing, and maintains the state of repair measured at the time the initial benefit was recognized.

There are, however, other cumulative requirements to be met:
the property must have been the object of a building rehabilitation promoted under the terms of the Legal Regime for Urban Rehabilitation or the Exceptional Urban Rehabilitation Regime;

following the intervention, the state of conservation of the property must rise two levels from the level measured in the initial inspection, and have at least a “good” level;
the energy efficiency and thermal quality requirements applicable to buildings must be met.


IMT

Urban buildings or autonomous fractions completed more than 30 years ago or in urban rehabilitation areas can benefit from an exemption if they meet the conditions to be exempt from IMI. In other words, provided that:
it is bought for rehabilitation, and the owner starts the work within three years of purchase;
it is bought already rehabilitated, and the property is intended to be the owner's own permanent home, or the owner rents it out as a permanent home.


REINVESTMENT EXPENSES: WE MUST DEMAND MORE CLARITY!

While there is no doubt about the contract invoice - all the work resulting from the contract counts as reinvestment for the tax authorities - the same cannot be said of work carried out and materials purchased by the owner.

It is not clear from the law what can be determined as work or material that can be reinvested. This leads to an almost case-by-case interpretation of what may or may not be accepted by the tax authorities. Consumers don't know from the outset whether the expenditure they are making (for example, buying a kitchen) will be considered reinvestment when calculating a possible capital gain.

We demand clear rules on what expenses can be considered reinvestment. The tax authorities can't just take the construction contract into account. In the case of a permanent home, the works and materials purchased by the owner, duly proven, must be accepted. In addition, the works have a physical existence. If the tax authorities have any doubts, they can carry out an inspection. There is no better proof than physical evidence.

We also want rules adapted to current reality, particularly in the case of energy efficiency works. What sense does it make for the tax authorities to accept as reinvestment the pipes of a heat recovery system, included in the construction work, and not the purchase of the heat recovery system by the owner? We will be sending our demands to the parliamentary groups.





Source: decoproteste