On March 26, 2025, the Plenary Session of the Tax Litigation Division of the Supreme Administrative Court (STA) issued a ruling with decisive implications for the urban rehabilitation sector and for taxpayers who have applied the reduced 6% VAT rate to their construction contracts, under item 2.23 of List I of the VAT Code.

The decision harmonizes case law in determining that the mere location of a project within an Urban Rehabilitation Area (ARU) is not sufficient to qualify for the reduced 6% VAT rate. According to the STA, it is also necessary for the construction contract to be part of an Urban Rehabilitation Operation (ORU), aligned with the strategic objectives defined for the ARU and compliant with the legal framework for urban rehabilitation (RJRU).

The ruling clarifies three key points on the matter:

The application of the reduced rate requires not only that the project be located within an ARU, but also that it is part of an ORU formally approved by the municipal assembly and with legal effect. Failure to meet this second requirement constitutes a breach of the tax legality principle.

The newly harmonized case law excludes from the scope of item 2.23. the construction of new buildings on previously undeveloped land – even if within an ARU. The reduced VAT rate is therefore limited to the rehabilitation of pre-existing buildings.

The ruling dismisses the notion that a simple municipal certificate is sufficient to prove that a construction contract qualifies as an Urban Rehabilitation Operation. Formal approval of the ORU is required.

This decision is binding on administrative courts and authorizes the Tax Authority to retroactively claim the difference between the 6% and the standard 23% VAT rates, within the four-year statute of limitations. As a result, construction companies may face large-scale tax adjustments on previously executed contracts.

We believe this ruling may have a serious impact on real estate development and could trigger a wave of tax litigation.