ECJ Case C-94/19 VAT treatment of the secondment of staff

Prepared by Paolo Lucarini, Alessia Zanatto, BlertaBojaxhi, Paolo Galfano


On March 11, 2020 the European Court of Justice (“ECJ”) published the judgement in case C-94/19 «San Domenico Vetraria SpA», where the Court provided applicable principles to the VAT treatment to be attributed to the lending or secondment of staff. 

From an Italian point of view, art. 8, paragraph 35, law no. 67/1998, provides that “lending or secondment of staff in return of which only the reimbursement of the related costs has been paid, is not relevant for the purposes of VAT”.

As will be detailed below, according to the ECJ, the national legislation, which provides for the non-application of VAT on the secondment or lending of staff, is not in line with EU legislation.

In fact, the ECJ concludes the abovementioned judgement with the following principle “[…] article 2, point 1, of the Sixth Directive must be interpreted as precluding national legislation under which the lending or secondment of staff of a parent company to its subsidiary, carried out in return for only the reimbursement  of the related costs, is irrelevant  for the purposes  of VAT, provided that  the amounts paid by the subsidiary to the parent company, on the one hand, and that lending or secondment, on the other, are interdependent”.

It is therefore necessary to evaluate the consequences of the abovementioned judgement for the Italian operators whom make use of these contractual structures.

Lending or secondment of staff: national legislation

Before going ahead with the analysis of the facts at issue, it is worth to recall the national legislation, practice and some national case-law on the matter.

The secondment “takes place when an employer, in order to satisfy his own interest, temporarily places one or more workers at the disposal of another person for the execution of a given job” (art. 30, Legislative Decree no. 276/2003).

Under the above provision, the secondment of staff is a relationship that involves three parties:

  • the employer (home company) who, by virtue of his managerial and organizational power, transfers temporarily a worker to another company, while retaining his disciplinary power;
  • the host company, who is entitled to the benefit of the worker, by involving him in his own organisational structure and exercising the relevant managerial powers in relation to him; t
  • he secondee, who performs his activity for the benefit of another company, while remaining contractually bound to the posting employer.

Therefore, the secondment of staff entails a change in the way in which the worker’s basic obligation is carried out: the latter, while retaining the employment relationship with its original employer (home company) is requested to work for a third party (host company), designated by his employer.

The legal arrangements through which a worker perform his work activity in favor of a third party are (i) secondment; (ii) “staff leasing” (article 30, Legislative Decree 81/2015); (iii) “contract of services” (articles 1655, Civil Code and 29, Legislative Decree 276/2003).

The secondment differs from the “staff leasing”  for the different interest that the posting employer has:  in the secondment, the employer satisfies productive interests, such as the good performance of a subsidiary, of a controlled company, or the training of its staff, while in the “staff leasing” the staff agency realizes only economic interest/profit (Circular of the Ministry of Labour n. 3/2004 and n. 28/2005).

The secondment differs also from the “contract of services”, which consists in the performance of a service and not in the provision of personnel. In addition, the “contract of services” purpose is an economic/profit interest related to the service rendered, which is not the interest of the secondment.

In this respect, if the element which ties the three “legal arrangements” consists in making staff available in favor of a third party, the element that distinguishes them lies in the interest of the employer. In the secondment, the interest of the employer must be any productive interest, even of non-economic nature which, however, must be specific, relevant, concrete and persistent. This interest could not be a profit just for staff outsourcing. On the contrary, in the “staff leasing” and in the “contract of services” the interest of the employer is merely economic.

Based on the common practice, home companies seconding workers usually recharge to the host companies only the pure labor costs (remuneration, social security and contractual charges) to demonstrate no profit interest.

From a VAT perspective, art. 8, paragraph 35, law no. 67/1998, provides that “lending or secondment of staff in return of which only the reimbursement of the related costs has been paid, is not relevant for the purposes of VAT”.

According to the Italian Tax Authorities (among others, see Ruling no. 346E/2002), the abovementioned rule applies only if:

  • the contractual scheme used for the supply of labor is the lending or secondment of staff;
  • only the cost of the staff lent/seconded (remuneration, social security cost and contractual burdens) is reimbursed. If, on the contrary, the amounts reimbursed are higher (or even lower) than the cost, the entire amount is taxable for VAT purposes;
  • the staff used is linked by an employment relationship with the supplier company; th
  • e employee’s work activity, then, must be organized by the recipient company, within the framework of its own structure.

Before the request for a preliminary ruling which gave rise to the judgement at issue, another important case-law is the judgement of the Italian Supreme Court, Joint Sections, no. 23021/2011.

Confirming the opinion of the Italian Tax Authorities, also according to the Supreme Court, the secondment of staff is not relevant to VAT purposes only if what is paid by the recipient company consists in the reimbursement of a sum exactly equal to the remuneration, social security cost and other contractual burdens bearing on the seconding employer.

The request for a preliminary ruling

The judgement of the European judges follows the request for a preliminary ruling raised by the Italian Supreme Court no. 2385/2019.

With this request, the Supreme Court asked the ECJ to rule on the compliance with the VAT directive of the national legislation, which allows to consider the lending or secondment of staff by a parent company as not relevant for VAT purposes, in case only the reimbursement of the related cost is paid by the subsidiary.

Briefly describing the facts at issue, a director of Avir S.p.A., parent company of San Domenico Vetraria S.p.A., was seconded to the subsidiary with the position of director of one of its plants and the related cost items were charged to the subsidiary.

The company San Domenico Vetraria S.p.A. received invoices from its parent company showing amounts corresponding to the costs incurred for the seconded director, taxable for VAT purposes, and considered the VAT charged as deductible.

The Italian Tax Authorities challenged that those reimbursements fell outside the scope of VAT since they did not concern supplies of services between the subsidiary and its parent company. Hence, the tax assessment against the subsidiary for undue VAT deduction.

The judges, after recalling the principles laid down at European level to define the relevance of a supply of services for VAT purposes (i.e. the existence of a service, a consideration and a direct link between the service rendered and the consideration received), ruled that “it is not necessary […], for VAT purposes, that the exchange is profitable, since the result of the economic transaction is irrelevant […]”.

In this regard, added the Court, “[…] it doesn’t seem relevant […] the fact that the expenses incurred by the subsidiary correspond to the amount of remuneration and expenses for employees incurred by the parent company and, therefore, by a third party other than that one who in the end bears the related burden”.

According to the judges, the economic nature of the activity of the parent company seems arising from to the necessary interest that the latter must have in relation to the secondment. Furthermore, the amount of the sums paid by the recipient company, equal to the amount of remuneration and other expenses to be incurred for the employee, as such not insignificant, could lead to consider that this economic activity has resulted in a supply of services carried out for consideration.

Finally, the referral request also highlighted an unjustified difference in the VAT treatment between the various schemes through which the “provision of staff ” can be implemented, which could affect the principle of fiscal neutrality.

The judges referred to the provision of staff by employment agencies, which differs from the secondment by the nature of the interest, “identifiable in the lucrative one of the employment agencies“. In this latter case, for VAT purposes, always a taxable transaction would take place, in relation to which the reimbursement of the remuneration and the other social and contractual burdens would be considered for the sole purpose of determining the taxable base (i.e. in the sense that these charges are not considered as to be included in the taxable base of the transaction, which consists only of the fee requested by the agencies).

Having said the above, the request for the preliminary ruling asked to clarify whether the EU VAT directive “[…] allows, or prevents, that a national legislation excludes from the scope of the sixth VAT directive the case in which a parent company makes available to another, controlled by it, by secondment scheme, its own staff, only for the reimbursement of the relative costs”.

The judgement of the European judges on the legitimacy of the VAT treatment of the secondment and the effectiveness of the judgment

The European judges refer to the general principles for defining the existence of a supply of services for VAT purposes, i.e. a supply of services is carried out “for consideration” and represent a taxable transaction only when a legal relationship exists between the provider and the recipient according to which an exchange of reciprocal performances takes place.

In the case at issue, according to the judges, it appears that, in the context of the legal relationship of the secondment, there was an exchange of reciprocal performances, “namely the secondment of a director from Avir to San Domenico Vetraria, on the one hand, and the payment by San Domenico Vetraria to Avir of the amounts invoiced to it, on the other”.

The judges reject the arguments of the EU Commission, which argued that, in the case at issue, there wasn’t the existence of a direct link between the provision of staff and the payment (according to the Commission, in the absence of a payment higher than the costs borne by Avir, the secondment object of the main proceeding did not take place with the aim of receiving a consideration).

The crucial point, reading the judgment, is to define whether the provision of staff and the payment mutually affect each other, in other words if one is carried out only on condition that the other is carried out, and vice versa.

The European judges refer the referring court to verify the abovementioned circumstance.

In the presence of such reciprocity, it should be concluded for the existence of a direct link. And, in the presence of such a link, the secondment would constitute a taxable supply of services for VAT purposes. The fact that the amount paid was equal to, higher or lower than the costs would be irrelevant.

The judges conclude by stating that a national legislation, according to which the lending or secondments of staff of a parent company to its subsidiary, in return of which only the reimbursement of the related cost is paid, are not relevant for VAT, is not compliant with the EU VAT Directive. This provided that the amounts paid by the subsidiary in favor of the parent company, on the one hand, and these lending or secondments, on the other, are interdependent.

Considerations from a VAT perspective

Coming to the effectiveness of the judgement in our national legislation, there are several elements that lead to believe that the principles laid down in such a judgement would not be directly applicable.

First, the European judges refer the verification of the existence of the direct link between payment and performance to the national judge.

Furthermore, due to the prohibition of the so-called “reverse direct effect”, the Italian State could not assert the effectiveness of a judgement of the ECJ in the presence of national legislation not in line with the EU VAT directive.

Therefore, the judgment of the ECJ should have no effect on the past. In the future, national legislation should be amended to take account of the above principles.

Considering the above judgment, however, it will be necessary to reconsider the secondment/lending contracts of staff currently in place.

Considerations from a Labor law perspective

 From a labor law perspective, it is questionable whether the reciprocal conditioning of the respective performances (i.e. between the lending or secondment of staff and the payment), means a priori the existence of an economic interest/profit.

In such a case, it is uncertain whether the secondment, genuine from a labor law perspective, might be compromised by qualifying as an “illicit staff leasing”. The staff leasing needs a specific license to be performed.

Let’s Talk

For a deeper discussion please contact:

Paolo Lucarini

PwC TLS Avvocati e Commercialisti

Individual Tax – Partner

Alessia Angela Zanatto

PwC TLS Avvocati e Commercialisti

VAT – Associate Partner

Blerta Bojaxhi

PwC TLS Avvocati e Commercialisti

Individual Tax – Manager

Paolo Galfano

PwC TLS Avvocati e Commercialisti

VAT – Manager