Tax Delegated Law 2023: Proposals for an extensive revision of the VAT system in Italy

published on 3 April 2023 | reading time approx. 4 minutes

On 16 March 2023, the Council of Ministers approved the tax delegated law aimed at revising the Italian tax system. Through this measure, the government is given the authority to issue legislation over the next two years that will radically change the national tax system. Although as of today there is no final legislation, since the government is supposed to issue the appropriate legislative decrees, the main proposals for action on tax matters have already been announced.

With reference to VAT, changes are planned to harmonize national legislation with EU legislation, eliminating the misalignments that exist today. In this regard, the main interventions in the field of VAT concern the rationalization of the current rates, the revision of the rules on exemption and deduction, and the introduction of specific provisions with reference to the regulation of VAT groups, works of art and Third Sector entities.

Alignment between national and EU legislation

The reference is to the misalignment items that have emerged because of the recent criteria developed by the Court of Justice. In particular, the legislative measure will concern the territorially based presumption of taxation for the supply of goods, considering that the national legislation (Article 7-bis, paragraph 1 of Presidential Decree No. 633/1972) jointly regulates the supply of goods with transport and without transport, whereas the Community legislation (Article 32 of the VAT Directive 2006/112/EC) tends to keep the two cases separate. The harmonization of the national rules with those of the EU will also refer to the objective precondition of VAT, through the transition from the legal concept typical of the Italian legal system to the substantive economic concept emphasized in the EU legal system.

Rationalisation of the number and measure of rates

The main objective of rationalizing the number and measure of rates is to provide for a homogenization of the VAT treatment of similar goods and services, considering their social relevance and in conformity with EU law. The review of the number of rates, their measure and the taxable sectors must be consistent with the obligations undertaken through the implementation of the recent European VAT Directives that have given priority to issues such as eco-sustainability, digitalization, and health.

In line with the standards set forth in Directive 2006/112/EC (EU VAT Directive), as amended by the recent Directive 2022/542/EU, the following rates will have to be adopted:

one standard rate of not less than 15 per cent;
a maximum of two reduced rates of not less than 5 per cent;
one reduced rate of less than 5 per cent;
a so-called “zero rate”, i.e., an exemption with the right to deduct.

Preferential treatment may only be provided for specific categories of goods and services, listed in Annex III of Directive 2006/112/EC.

In this regard, particular attention should be paid by the national legislator on the identification of goods and services with greater social relevance, already partly subject to reduced rates also with recent regulatory measures (Decree-Law No. 197/2022), which should be identified by rewriting the rules to define the links more correctly between customs and statistical classification of goods and services, to solve the current regulatory uncertainties.

Revision of the rules on deductions

On the topic of VAT deductions, the draft enabling act contains three different measures:

The main proposal concerns the modification of the general pro rata criterion, allowing the taxable person to apply this mechanism only to mixed-use goods and services, and to adopt, in the remaining cases, an analytical criterion focusing on the relevance of the goods and services acquired to the individual transactions based on their nature.
Regarding deductions, there is also an intervention concerning the real estate sector, in which the VAT due on the purchase, rental, management and renovation of residential buildings is currently non-deductible for companies other than those that exclusively or prevalently carry out construction activities in the residential sector. The aim is to revise the non-deductibility mechanism to make the deduction consistent with the nature of the transaction for which the purchased goods or services are used.
Lastly, it is also proposed to allow the deduction of VAT stated on purchase invoices relating to transactions carried out in the preceding year in the period in which the tax is due or in the period in which the invoice is received, thereby replacing the current provision whereby the deduction may only be exercised in the period in which the invoice is received.

Revision of the rules on exemption

The regulations governing exempt transactions will be revised in order to align the domestic provisions with those of the EU. The purpose of this provision is to give coherence and consistency to complex legislation which, in certain sectors, is characterized by numerous exemptions. This is the case, for example, in the real estate sector, where the applicable regime generally provides for VAT exemption for the supply and leasing of buildings but varies according to the instrumental or residential nature of the buildings and the type of operators.

VAT group rules

There will also be a simplification of the criteria and conditions for exercising the option to set up a VAT group. The purpose of the revision will be the conditions for access to the regime, including the “all-in, all-out” criterion, according to which all entities bound to each other by financial, organizational, and economic relations are bound to form the VAT Group. In essence, the aim is to overcome these constraints by simplifying the procedures for accessing and changing the perimeter of the VAT Group.

Third Sector

The reform of the Third Sector has also extended to non-commercial entities the perimeter of application of the rules on exclusion and exemption for VAT purposes, originally intended only for non-profit organizations. There will be a rationalization of the rules and a simplification of the obligations relating to the typical activities of these entities.

Art, antiques and collectors' items

The tax provision will also have an impact on the art world. To transpose Directive 2020/542/EU, imports of works of art and supplies of works of art, antiques and collectors' items will be subject to a reduced rate.

Moreover, the right to opt for the application of the margin scheme will be granted to resellers (VAT taxable persons) for the supply of works of art, collectors' items, or antiques to which a reduced rate has not been applied at the purchase stage.