August 28, 2023
Italy's Enabling Law 2023 makes VAT changes
A recently enacted tax reform law will amend, among other things, some of the most important Italian value added tax (VAT) principles and rules with the aim of making the Italian VAT Law progressively and fully compliant with the relevant European VAT regulation. (For a broader look at the Italian tax reform law, see Global Tax Alert, Italy approves framework for major tax reform, including BEPS Pillar Two principles, 25 August 2023.)
Law No. 111 dated 9 August 2023 (better known as the Enabling Law for Tax Reform or, simply, the Enabling Law), published on 14 August 2023, delegates the Italian Government to issue, within the next 24 months, one or more legislative decrees providing a general review of the Italian tax system.
A brief summary of the main news introduced by Article 7 of the Enabling Law regarding VAT matters follows.
Review of VAT requirements
Article 7 para.1, let. a) of the Enabling Law aims to align the current Italian provisions on VAT requirements with those provided by the European VAT Law.
For example, Directive 2006/112/EC (the European Union Directive or EU Directive) defines the supply of goods as the transfer of the power to dispose of tangible property as owner, considering any residual transaction that does not constitute a supply of goods as a supply of services. Differently, Article 2 of Presidential Decree No. 633/1972 (the Italian VAT Decree), opting for a law interpretation of the requirement, defines the supply of goods as an act that imports the transfer of ownership (or of other rights) and the supply of services as that obligation resulting from specific contracts.
Review of VAT-exempt transactions
According to Article 7, para.1., let. b) of the Enabling Law, the rules governing VAT-exempt transactions, including those in relation to which "taxpayers may opt for taxability," will also have to be redefined.
The Tax Reform will, therefore, also affect the real estate sector, which is characterized by complex legislation that, to date, distinguishes between different VAT regimes based on the instrumental or residential nature of the asset and the categories of operators involved, providing a general exemption for the sale and lease of buildings.
Review of VAT rates
Article 7, para. 1, let. c), of the Enabling Law sets forth a "rationalization" in terms of both the number and measures of VAT rates that would allow, in line with the criteria identified by the European legislation, to standardize the VAT treatment of similar goods and services (also through reference to the combined nomenclature or statistical classification).
Review of the VAT deduction rules
A fundamental review will be conducted of the VAT deduction, which the Tax Reform is inclined to orient toward the actual use of goods and services utilized in transactions subject to VAT. More specifically, the Enabling Law appoints the Italian Government to take action on the following points.
Limitation on the application of pro-rata deductibility
To allow the VAT deduction to be applied consistently across all input transactions carried out by the same taxpayer, the mandatory application of the "general" pro-rata VAT will be removed. Application of the VAT will be limited to goods and services described as "mixed use," meaning they are used both for transactions for which a VAT deduction may be claimed and for VAT-exempt transactions. The use of the "mathematical" pro-rata application could be still used if the taxpayer considers it useful (e.g., for simplifying the calculation of the tax due).
Harmonization of VAT deductibility in the real estate sector
The exercise of the VAT deduction will also be substantially revised in the real estate sector to improve consistency in how the deduction applies based on the nature of the transaction for which goods or services were purchased. This right is currently excluded as per Article 19-bis.1(i) of the VAT Decree.
Deduction of goods and services purchased or imported
For goods and services purchased or imported, for which the tax point occurs in the year prior to the year in which the invoice is received, a VAT deduction may be claimed - at the latest - with the annual VAT return for the year in which the invoice is received. This overcomes the current provision of Article 1, paragraph 1, of Presidential Decree No. 100/1998, which provides that the VAT deduction cannot be exercised in the period in which the tax point occurs, but in the period in which the invoice is received.
Reduced VAT rate on imports of art work
To adopt Directive No. 2022/542/EU, the Enabling Law provides the possibility of reducing the VAT rate on the import of works of art.
Specifically, as a result of Article 1(1)(5) let. (b), of Directive 2022/542/EU (which must be implemented by Member States by 31 December 2024 and will apply as of 1 January 2025), a reduced VAT rate may also apply for imports of "works of art, collectibles or antiques" equal to that applied in the territory of the Member State in which the supply of the same good takes place.
Review of the VAT Group regulation
The Enabling Law also includes a review of the "all in, all out" principle, which to date inspires the VAT Group rules. The goal of the review is to simplify the procedures for accessing and applying this principle, reducing the range of entities that, to date, must be subject to the organizational, economic and financial obligations arising from joining the VAT Group.
Review of the VAT regulation of third-sector entities
Finally, the Enabling Law aims at rationalizing the regulation of third-sector entities and simplifying requirements related to activities of general interest.
Taxpayers and practitioners will need to review their deduction plans based on a different approach and a more generous prorate rule.
For additional information with respect to this Alert, please contact the following:
Studio Legale Tributario, Milan
Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor