Urban Renovation Regime
Aiming to simplify and stimulate urban renovation, Law no. 32/2012, dated of August 14, has changed the legal frame applicable to urban renovation, notably (a) allowing more flexibility in the procedures for the creation of Urban Renovation Areas; (b) creating simplified procedures for the approval of urban renovation projects and (c) creating the concept of "individual urban renovation projects", applicable to projects that may be located outside of urban renovation areas for constructions built more than 30 years ago.
This simplification of procedures provided a significant contribution to urban renovation, which became more reliant on the initiative of private developers and less dependent on the initiative of the municipalities and other public entities.
Within the creation and simplification of procedures for the approval of urban renovation projects, a simplified licensing procedure, based on a swift Previous Communication (comunicação prévia) may be appointed as one of the most decisive changes enacted by the referred law.
This simplified procedure may be applicable, on the one hand, to projects located in urban renovation areas in accordance with approved urban renovation detail plans and, on the other hand, to the new concept of "individual urban renovation projects".
Works on Leased Properties
Under the same legislative initiative, the Portuguese Government also enacted Law no. 30/2012, dated August 14, 2012, amending the legal framework for the execution of works in leased properties, focused on simplifying the execution of construction works by landlords on leased buildings, based on simpler and easier requirements for the termination of old lease agreements.
This regime was recently subject to new amendments, approved by (i) Law no. 43/2017, dated of June 14, which introduced some additional requisites that limit substantially the possibilities whereby landlords may terminate old lease agreements for conducting renovation works, and (ii) Law no. 13/2019, dated February 12, which introduced additional restrictions to the termination of lease agreements, notably, by granting to the tenants, in most cases, the right to be reinstated in the leased premises, pursuant to the execution of the works, prevailing as a general rule the suspension of the lease agreement during the period of execution of the works.
The Portuguese tax system has a wide range of benefits applicable to urban renovation, as follows:
- In terms of VAT, the urban renovation construction contracts are subject to a reduced rate of 6%. In this regard, we note that the application of a reduced VAT rate is subject to certain conditions, notably that the construction contract qualifies as an urban renovation contract (“empreitada de reabilitação urbana”). In this regard, recent experience shows that Tax Authorities require additional supporting documentation to evidence compliance of this requirement.
- The renovation of immovable property, directly contracted with the National Fund for Urban Renovation (“Fundo Nacional de Reabilitação do Edificado”) by its management company is also subject to the reduced rate of 6%.
- In terms of Municipal Property Tax there are two applicable exemptions (which are alternative and not cumulative):
- Exemption for buildings or units (inserted in buildings) built more than 30 years ago;
- Exemption for buildings or units (inserted in buildings) located in urban renovation areas.
- For the application of this type of exemptions, the following cumulative requirements must be met: (i) the buildings or units are subject to renovation of buildings according to the concept of "renovation of buildings" provided for in the Urban Renovation Legal Regime ("Regime Jurídico da Reabilitação Urbana"); and (ii) as a consequence of this intervention, the conservation status goes up two levels in relation to the conservation status before renovation, with a minimum level of "good" (certified by the Municipality) and complies with applicable energy efficiency and thermal quality requirements.
- The above exemptions are valid for a period of three years, counting from the year the renovation works were completed, which may be renewed upon request, for an additional five years period (only in the case of properties used for personal and permanent residence or residential long-term lease).
- At the Property Transfer Tax level there are also exemptions for urban renovation, in the same periods referred to Municipal Property Tax:
- Exemption for the purchase of property to be renovated, provided that the purchaser starts the renovation work within three years from its purchase;
- Exemption applicable to the first acquisition of the property after the conclusion of the renovation works, provided the acquirer is an individual that will use the property for personal and permanent residence, when located in an urban renovation area.
- For the application of these exemptions, the cumulative requirements concerning Municipal Property Tax must also be verified.