Flash News NA 2025/10/10
VAT Reverse Charge: The Mechanism in Construction Services in Portugal
This article explains the VAT reverse charge mechanism applicable to construction services in Portugal. It analyses when it applies, the conditions under which the buyer must “self-assess” the tax, and the practical consequences for both service providers and acquirers of construction services.
1. What is the VAT Reverse Charge?
The VAT reverse charge is a mechanism in which, in certain transactions, the buyer (customer) — not the supplier — becomes liable to account for the VAT.
In Portugal, this rule applies to specific construction services when the purchaser is a VAT-registered person who carries out operations giving them the right to deduct input VAT (in full or partially).
So, if a contractor provides construction, repair, refurbishment, maintenance, demolition, installations, painting etc., and the client is a VAT-registered entity with deduction rights, the client must self-assess the VAT rather than the contractor charging it.
It is important that the services qualify as “construction services” under the legal definition — including construction, renovation, alteration, repair, conservation, rehabilitation, demolition as well as installation and mounting tasks tied to the property.
2. Conditions for Applying the Reverse Charge
Two cumulative conditions must be met:
1. The transaction involves construction services.
2. The purchaser is a VAT-registered person in Portugal carrying out operations that entitle them to deduct the VAT (in whole or in part).
When these conditions are satisfied, the supplier should not charge VAT on their invoice. Instead, the invoice must include the note “VAT – Self-assessment” (Portuguese: “IVA – Auto liquidação”), pursuant to paragraph 13 of Article 36.º of the Portuguese VAT Code.
However, certain exceptions and boundaries exist:
• Pure supply of goods without installation or assembly is excluded from the reverse charge rule.
• When goods with installation or assembly are delivered as part of the construction work, the reverse charge applies if the goods are integrated in the work.
• Movable goods that are not materially connected to the property, or that are clearly separate movable items, are excluded.
3. Practical Impacts for Suppliers and Purchasers
For service providers (contractors):
• Must avoid charging VAT in cases subject to reverse charge and must include the wording “VAT – Self-assessment”.
• Should include the relevant amounts in the designated line (field) in their VAT tax return (for example, in form 06, field 8).
For purchasers of construction services:
• Must self-assess the VAT, i.e. take responsibility for the VAT owed on the service received.
• In their VAT return, they should enter the taxable base (fields 1, 3, or 5 as applicable) and the VAT due in field 102 of annex 06-A.
• If eligible, they may deduct that VAT as input VAT if the conditions for deduction are met legally.
Accurate documentation, internal controls, and correct declaration practices are essential to avoid non-compliance and VAT errors.
4. Illustrative Examples
Imagine a painting company performing wall finishing and decorative works for another company that is VAT-registered and entitled to deduct VAT. In that case, the recipient (the client) must self-assess the VAT, not the painter.
If the same painting company sells paint materials without installing or applying them, that portion may not fall under the reverse charge, so standard VAT may apply.
Another scenario: if a public entity (which may not deduct VAT) commissions construction works, the reverse charge may not apply depending on its VAT deduction status.
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Conclusion
The VAT reverse charge regime is especially relevant in the construction sector in Portugal. When the legal conditions are met — construction services rendered to VAT-registered entities with deduction rights — the buyer must self-assess the VAT, altering the obligations for both parties.
Understanding the eligibility, procedures, and exceptions is crucial for accurate compliance and fiscal risk management.
Nominaurea provides accounting and tax consultancy services tailor-made for construction and service sectors, guiding clients through the regulatory complexities and ensuring secure, efficient compliance with VAT obligations.
