VAT refund for non-resident EU subjects owning permanent establishment in Italy

In order to obtain a regulatory framework's overview, it is required to look back over the past years. The first EU censure of Italian regulations on VAT refund to non-resident taxable subjects dates back to 2009 with the judgment of the Court of Justice EU C-244/08. In 2009, at the time of judgment, the applicable art. 38-ter of Presidential Decree 633/1972 ("VAT Decree") provided that an EU taxable person, resident for VAT purposes in another Member State but having a permanent establishment in Italy, could not exercise the right to deduct VAT in the VAT settlement of the permanent establishment when the operation generating the VAT credit, whose deduction was requested, had not been carried out by the permanent establishment but directly by the main one. In this case, the taxable person was required to apply for the refund of the aforementioned tax in accordance with the procedures of the eighth and thirteenth directives. Hence, if the permanent establishment was not involved in the transaction that had generated the VAT credit, the refund could be allowed exclusively directly from abroad, without any possibility of converging the VAT credit of the main office in the VAT position of its permanent establishment in Italy. 

Following the aforementioned EU judgment, the Italian legislator promptly intervened in order to adapt the internal rule. With the modification carried out in 2009 in the then art. 38-ter, now recast in the current art. 38-bis2 of Presidential Decree 622/72, the EU subject with a VAT credit accrued in Italy and a permanent establishment here, can no longer request the refund of the VAT credit from abroad but this should necessarily flow into the VAT position of the permanent establishment. It could be lawful to think that this change has brought from one extreme to the other, without probably fully grasping the ratio of the EU dictates. As a matter of fact, it has gone from an obligation for a non-resident EU entity to request the refund directly from abroad, without being able to access the VAT deduction through the permanent establishment (if the permanent establishment did not intervene in the operation), to the prohibition of obtaining the refund from abroad, necessarily having to resort to the VAT deduction with the permanent establishment's VAT position - even if the permanent establishment did not intervene in the operation source of the VAT credit.

In order to fully comprehend the principles of EU censorship, however, it is worth recalling the outcome of the judgments of the Court of Justice with cases C-318/11 and 319/11, in which the Court ruled out that a person residing in a Member Country and also established in a second Member Country may be denied the right to VAT refund pursuant to Directive 2008/9/EC by the tax authorities of the latter when the taxpayer does not have the opportunity to carry out taxable active transactions and thus to generate VAT debt. The prohibition of direct refund "by electronic portal" therefore does not derive from the mere existence of the permanent establishment but from the concrete possibility of using it to carry out operations that generate VAT debt in the country of establishment and consequently to allow a more efficient recovery of the VAT credit through deduction. 

Given the current internal regulatory framework and its strict interpretation, in our view not compliant with Community case law, EU subjects not resident in Italy but established here not only have no possibility of choosing the most efficient method of recovery of the VAT credit accrued in Italy (deduction through the VAT position of the permanent establishment or the refund directly from abroad through "electronic portal") but also must necessarily submit to the strict rules, provided for residents, for obtaining the refund, for instance: the possibility of requesting the refund of the only minor deductible surplus of the last three years (pursuant to art. 30 of Presidential Decree 633/1972) or the obligation to provide a bank or insurance guarantee in favor of the Financial Administration for requests for refunds exceeding Euro 30,000 (pursuant to art. 38-bis Presidential Decree 633/1972).

This obviously makes a noticeable difference in treatment between a non-resident subject without a permanent establishment that carries out operations in Italy directly from abroad, with respect to the foreign subject that carries out from abroad the passive transactions relevant for VAT purposes in Italy and that here has a permanent establishment, although not involved in the operations that have determined the VAT credit.

Ultimately, this suggests that a regulatory intervention by the Italian legislator is desirable, in order to adapt the internal rule to the EU principles on the subject, or make it possible for non-residents to obtain direct refunds from abroad, when there is a permanent establishment in Italy, but in the absence of active operations of the latter that generate a VAT debt.

The refund from abroad should be definitely feasible, if the permanent establishment in Italy not only does not carry out taxable active operations but also does not have technical and human resources required to carry out operations in Country.