Real estate projects remain a driver of foreign direct investment in Portugal. In particular, there is a continuous growth in the segments of hospitality and student housing, and increasing interest in commercial assets and hybrid projects that combine, for example, branded residences and boutique resorts in prime locations.

The legal and tax framework is highly competitive compared with other European jurisdictions, but to benefit from the full range of tax benefits and improve the after‑tax returns requires adequate structuring from an early stage, given the need to have a coherent interplay between the project and the applicable tax regimes. The interaction between corporate income tax (CIT), VAT, and property taxes should be correctly mapped into the project’s business plan, including the initial funding, project financing, and exit strategy.

This article sets out practical, market‑ready approaches – focusing on the vehicle choice under CIT and VAT planning – to preserve value without compromising commercial objectives.

Corporate special purpose vehicles (SPVs) remain a market standard, being the most familiar option for investors and straightforward to operate. Despite the interesting move towards a progressive reduction of the CIT rate (from 20% in 2025 to 17% in 2028), the volatility of the supply chain and international economic uncertainties may have a detrimental impact on the SPVs’ overall tax burden over time.

To manage such volatility, the real estate market has been evolving towards fund-like structures similar to Luxembourg SICAFIs (collective investment undertakings, or SICs), which ensure less exposure to tax impacts during the development phase. The special tax regime for SICs exempts rents, capital gains, and investment income from CIT at the vehicle level, with taxation being deferred to distribution or exit. This shifts the burden to the investor’s perimeter and can materially improve cash compounding during the holding period.

SICs are flexible. They suit build‑to‑rent and operational rental models, and they can also support buy‑to‑sell strategies across real estate and securities. For non‑resident investors, withholding tax is typically capped at 10% on distributions made by real estate SICs and may be reduced to 0% on vehicles investing in securities, compared with 25% on distributions from standard SPVs.

Conversely, SICs carry higher running costs than SPVs due to the requirement to appoint a fund manager and additional compliance costs, but also as they are annually subject to stamp duty at 0.0125% on net asset value. Also, as they cannot undertake operational activities, SICs are frequently paired with operating SPVs (OpCos) for day‑to‑day asset management. This allows international joint ventures between institutional investors (targeting real estate assets) and regional or global operators that may undertake the business operation of assets such as resorts, branded residences, office parks, and short-to-long-term rentals.

Such profitable cooperation may be ring-fenced per project and adjusted under the governance model agreed between investors. This may also be harmonised with flexible financing structures, combining bank facilities with the issuance of notes (Interbolsa notes) that also allow for a tax-friendly environment for foreign lenders, particularly alternative lenders that are focused on these types of real estate projects.

A further point is on the EU directives landscape. The Portuguese approach to applying the Parent‑Subsidiary Directive and the Interest & Royalty Directive to SICs is not yet harmonised. The tax authorities have signalled a restrictive view on SICs’ eligibility for this purpose, particularly on whether these vehicles should benefit from the directives’ withholding tax exemptions. That interpretation is open to challenge given the legal characteristics of SICs, so investors may consider potential disputes to eventually challenge the leakage created by the withholding tax on profit distributions.

In Portugal, real estate transactions such as property acquisitions or leasing are commonly VAT exempt, often resulting in irrecoverable input VAT on development or refurbishment costs. This issue may significantly impact investment returns, particularly in structures using SICs, which benefit from an income tax exemption solely at the level of real estate income – rents and capital gains (typically treated as exempt transactions). Therefore, it is essential to carefully structure transactions to allow for VAT recovery without jeopardising the CIT exemption regime available to SICs.

Portugal, in line with EU practice, allows for the waiver of the VAT exemption in real estate transactions under specific conditions. For example, both parties involved must be VAT-able persons with a deduction right exceeding 80%, and the asset must have been used exclusively for VAT-able activities throughout. Where these criteria are met – such as when acquiring property in a build-to-rent project – the regime can be highly effective and compatible with SIC structures focused on operational rental income.

In this context, and based on the authors’ experience, two sectors have faced particularly significant challenges regarding VAT management. The first relates to “tourist resorts under plural ownership”; i.e., developments with a dual commercial aim:

• Sale, typically to individuals; and

• Use for the purpose of direct operation as tourist accommodation.

Developers may sell completed units to private individuals (VAT-exempt transactions, with no option to apply the waiver) or operate them as tourist accommodation (VAT-able transactions), with uncertainty as to when and under what circumstances each operation takes place.

In another example, following a share deal involving a hotel operator, the acquirer may refurbish the property and then lease its operation to another entity. Because the arrangement results in a lease between the property owner and the operator, the SIC tax exemption regime applies to the rental income. However, VAT incurred on refurbishment may not be recoverable, as the lease and potential sales of units are typically VAT exempt and do not meet the waiver criteria.

Given these constraints, effective mitigation lies in carefully structuring transactions to achieve commercial objectives and a tax model that meets the legal requirements and guidance from Portuguese tax authorities on similar projects; notably, maximising VAT recovery, where feasible. Solutions may include the transfer of a going concern, alongside strategic use of European and Portuguese case law to support input tax deduction. Securing advance rulings from the Portuguese tax authorities, considering hybrid operating models, and dynamically managing the VAT pro rata – adjusted to the project’s phases and evidenced intended uses – may materially enhance VAT neutrality without jeopardising the CIT regime for SICs.