Real estate investors in Portugal face a critical decision before purchasing or developing property: the choice of legal vehicle and tax structure can materially change returns over the life of a project. CIT (corporate income tax) and VAT planning are not afterthoughts. They must be mapped into the business plan from day one, particularly for projects involving development, refurbishment, rental operations, or mixed-use developments. Getting the structure right early avoids costly restructuring later.
Choosing Between SPVs and SICs
Most real estate projects still use special purpose vehicles (SPVs) because they are straightforward to operate and familiar to investors and lenders. A shift is underway toward fund-like structures called SICs (collective investment undertakings), which offer significant tax advantages for the holding and operational phases.
The difference matters in cash flow. SPVs pay standard corporate income tax on rental income and capital gains. SICs defer taxation at the vehicle level, meaning rental income, capital gains, and investment income are not taxed until they are distributed to investors or the investment is exited. For projects with multi-year holding periods, this deferral compounds returns substantially. Portugal’s CIT rate is declining from 20% in 2025 to 17% in 2028, which benefits both structures, but SICs reduce exposure to tax volatility during development and holding phases.
For non-resident investors, withholding taxes on distributions from SICs are typically capped at 10% on real estate income and may be reduced to 0% on securities, compared with 25% from standard SPVs. This difference is material for international capital structures.
SICs require appointment of a professional fund manager, incur additional compliance costs, and are subject to annual stamp duty at 0.0125% on net asset value. They also cannot undertake operational activities themselves, which is why they are frequently paired with operating SPVs (OpCos) for day-to-day management. This pairing works well for joint ventures between institutional investors targeting assets and operators running hotels, branded residences, office parks, or rental portfolios. The structure can be ring-fenced per project and adjusted through a governance agreement, creating flexibility without tax leakage.
VAT Recovery: The Hidden Cost of Refurbishment
In Portugal, real estate transactions such as property acquisitions and leases are typically VAT exempt. Developers and investors incur unrecoverable input VAT on renovation, refurbishment, and development costs. For projects with millions in renovation budgets, unrecoverable input VAT can equal 5-15% of project cost.
Portugal allows investors to waive the VAT exemption on property acquisitions under specific conditions. Both buyer and seller must be VATable persons with input deduction rights exceeding 80%, and the property must have been used exclusively for VATable activities. These criteria are met in build-to-rent projects, where the waiver regime is highly effective and compatible with SIC structures focused on operational rental income.
Two scenarios create particular complexity. First, tourist resorts with plural ownership (developments sold to individuals and operated as commercial accommodation) face uncertainty about when VAT applies and when it does not. Second, hotel acquisitions followed by refurbishment and lease to an operator create a VAT trap: the lease qualifies for SIC tax exemption, but refurbishment costs may not be recoverable because the lease transaction is VAT exempt and does not meet waiver criteria.
Mitigation requires careful structuring from the outset. Solutions include transfer of a going concern, strategic use of case law to support deductions, and advance rulings from Portuguese tax authorities. VAT pro rata must be dynamically managed across project phases, adjusted to evidenced intended uses. This maximizes recovery without jeopardizing the CIT exemption regime available to SICs.
A note on EU directives: Portuguese tax authorities have signaled a restrictive view on whether SICs should benefit from the Parent-Subsidiary Directive and the Interest & Royalty Directive. This interpretation remains open to challenge, and investors may consider potential disputes to address withholding tax leakage on profit distributions. Professional tax advice is essential here.
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