Have you ever heard of VAT reverse charge? This mechanism applies in specific situations where the responsibility for accounting for VAT shifts from the supplier to the customer.
In simple terms, instead of the seller charging VAT and paying it to the Portuguese Tax and Customs Authority (Autoridade Tributária e Aduaneira – AT), the purchaser becomes responsible for calculating, declaring, and paying the VAT due.
In this article, we explain how the reverse charge mechanism works, when it applies, and how invoices should be issued correctly.
Reverse Charge VAT: What is it and how does it work?
Under the normal VAT system, a business adds VAT to the price of the goods or services it supplies to its customers. The supplier collects the VAT and subsequently remits it to the Portuguese Tax Authority.
Conversely, when purchasing goods or services, businesses receive an invoice that generally entitles them to deduct the VAT paid, provided the legal requirements for deduction are met.
The reverse charge mechanism is an exception to this standard process. Under this system, the customer, rather than the supplier, becomes liable for accounting for the VAT.
This is known as a reverse charge of VAT liability, whereby the obligation to assess and pay VAT rests with the purchaser instead of the seller or service provider.
Why does the Reverse Charge mechanism exist?
The reverse charge system was introduced primarily to combat VAT fraud and tax evasion, particularly in sectors that are more vulnerable to fraudulent practices.
The European Union has identified several industries where VAT fraud is more common, especially in cross-border transactions, where VAT may not be properly declared or remitted to the tax authorities.
By transferring the VAT liability to the purchaser, the reverse charge mechanism significantly reduces the risk of fraud while improving tax compliance.
In Portugal, the reverse charge regime is mandatory whenever the legal requirements are met and must be correctly applied by both the supplier and the customer.
Under Portuguese VAT legislation, the reverse charge mechanism applies to various transactions, including:
- Supplies involving greenhouse gas emission allowances, certified emission reductions, or emission reduction units;
- Construction services, including construction, renovation, repair, maintenance, conservation, and demolition of immovable property carried out under contracts or subcontracting arrangements;
- Intra-Community acquisitions of goods where the transport or dispatch of the goods ends in Portugal;
- Transactions involving scrap materials, recyclable waste, and certain recyclable products;
- Specific transactions involving real estate transfers, small agricultural producers, and investment gold.
These situations are governed by the Portuguese VAT Code (Código do IVA – CIVA), which establishes the legal framework for the application of the reverse charge mechanism.
Are There Any Exceptions?
Yes. In certain circumstances, particularly where the taxable person benefits from a VAT exemption under Articles 9 or 53 of the Portuguese VAT Code, the reverse charge mechanism may not apply.
Whether the reverse charge rules apply depends on the specific transaction and the VAT status of the parties involved.
For this reason, businesses should always confirm the correct VAT treatment before issuing an invoice.
How Should Invoices Be Issued Under the Reverse Charge Regime?
When a transaction falls within the reverse charge rules, the supplier must issue the invoice without charging VAT.
Instead, the invoice should clearly include the wording: “VAT Reverse Charge”
(or the legally accepted Portuguese wording “Autoliquidação de IVA”, where appropriate).
The customer is then responsible for self-accounting for the VAT and declaring it in the relevant VAT return, within the applicable deadlines.
Where the reverse charge mechanism applies, the relevant fields of the Periodic VAT Return must also be completed correctly by both the supplier and the purchaser, according to their respective reporting obligations.
Need Help Applying the Reverse Charge Rules?
Applying the reverse charge mechanism incorrectly may result in invoicing errors, VAT adjustments, or tax penalties.
If you are unsure whether a particular transaction falls under the reverse charge regime, consult your Certified Accountant to ensure your invoices and VAT returns comply with Portuguese tax legislation.