The VAT exemption on leasing agreements: where’s the North Star?

Introduction

The VAT exemption applicable to the leasing of immovable property remains one of the most debated issues in indirect taxation, due to its economic relevance and the evolving case law surrounding it.

The position of the Portuguese Tax Authorities (PTA) has evolved in close connection with CJEU case law, after years of applying the so-called “bare walls” criterion, under which only contracts involving the passive availability of space – without equipment or services – benefited from the exemption.

Portuguese Tax Authorities vs. European Case Law

Traditionally, the PTA considered that, in the absence of movable assets or ancillary services, leasing qualified for the VAT exemption. However, when equipment, furniture, or related services (such as cleaning, maintenance, or security) were included, the transaction was no longer viewed as a ‘pure’ lease but rather as a taxable supply of services.

European case law reinforced this approach through judgments such as Lindöpark, Mirror Group, Seeling, Sinclair Collis, and Temco Europe, stressing that the exemption must be interpreted strictly, as an exception to the principle of VAT neutrality. Leasing was defined as the right, for consideration and for a fixed period, to occupy property with the exclusion of third parties.

A turning point came with the Mailat case (C-17/18, 19.12.2018), where the Court of Justice of the European Union (CJEU) ruled that leasing property together with essential goods and consumables could still constitute a single exempt supply, with the lease as the principal element.

The Particular Case of the Shopping Centres

A particularly complex issue arises with contracts for retail units in shopping centres, where the PTA frequently requalifies leases as atypical commercial exploitation agreements, thereby treating them as taxable services.

Domestic doctrine and case law highlight that such contracts exceed mere passive rental, involving structural services (cleaning, security, maintenance, promotion), common charges and variable rent linked to turnover. The prevailing outcome has been VAT liability.

However, recent rulings, notably by the Southern Central Administrative Court (case no. 1155/10.1BELRS), have taken the opposite view, treating services as ancillary and the contracts as true leases, thus exempt. This divergence has fueled further instability, given the integrated nature of shopping centres, which differ from ordinary lease arrangements.

What’s next?

The interpretation of the VAT exemption has shifted significantly: from the rigid ‘bare walls’ approach, to the broader Mailat ruling, and finally to divergent domestic case law on shopping centres. This ongoing instability undermines legal certainty and complicates VAT deduction strategies for both investors and operators.

As the VAT exemption on leasing agreements remains subject to significant interpretative volatility, proper advisory measures must be in place to prevent contingencies or the triggering of adverse tax consequences.