Prepared by Alessia Zanatto, Paolo Galfano and Maria Chiara Turio Bohm
By means of Ruling No. 314 of 8 May 2023 (“Ruling No. 314/2023”), the Italian tax authorities provided important clarifications on the VAT treatment of transactions between an Italian branch (hereinafter also “Applicant”) and another branch of the same legal entity, established in the United Kingdom (“UK”) and participating in a VAT Group set up therein.
In particular, the case referred to in Ruling No. 314/2023 concerns ALFA SE Italia (i.e. the Italian fixed establishment of a German entity, ALFA SE) supplying and receiving services from the fixed establishment of the same legal entity located in London, ALFA SE UK, which is a member of a VAT Group set up in the UK.
The Applicant specified that the services supplied to and received from ALFA SE UK were considered relevant for VAT purposes and, therefore:
- ALFA SE Italia accounted for Italian VAT under the reverse charge mechanism, pursuant to Article 17(2) of Presidential Decree No. 633/1972, as regards to the invoices relating to services (other than those exempt or not subject to VAT) received from ALFA SE UK;
- ALFA SE Italia issued invoices for services provided to ALFA SE UK without applying VAT, pursuant to Article 7-ter of Presidential Decree No. 633/1972.
The Applicant also specified that, as a result of the election of the options provided for in Art. 36(3) and Art. 36-bis of Presidential Decree No 633/1972, the application of VAT through the reverse charge mechanism generated a debit position in the periodic VAT settlement, given the impossibility of recovering input VAT.
ALFA SE Italia therefore asked the Italian Revenue Agency:
- whether, following the withdrawal process of the UK from the European Union (EU), as from 1 January 2021, the transactions between the Italian branch, ALFA SE Italy, and the UK branch, ALFA SE UK, which is part of a VAT Group established in the United Kingdom, are outside the scope of VAT; and
- how to recover the Italian VAT unduly paid.
With reference to item 1. above, the Italian tax authorities, after clarifying that, as of 1 January 2021, UK qualifies as non EU country, recalled the guidelines provided by the Court of Justice of the European Union (“ECJ”) in its judgements in case C-210/04 (FCE Bank) and case C-7/13 (Skandia).
With its judgment in case FCE Bank, the ECJ stated that transactions between a principal establishment (head office) and a fixed establishment of the same legal entity are not relevant for VAT purposes. This principle has been upheld by the Italian tax authorities with the Resolution No. 81/2016, stating that “services between a foreign head office and an Italian fixed establishment or between an Italian head office and a foreign fixed establishment are outside the scope of VAT” and that this principle applies also in case of transactions with non-EU VATable persons.
According to Skandia judgment, the above principle is subject to an exception in the case where the head office and/or the branch participates in a VAT Group set up pursuant to Article 11 of Directive 112/2006/EC in an EU Member State. In fact, in this case, the head office and the branch are no longer a single taxable person for VAT purposes. The guidelines set out in Skandia judgment were implemented in the domestic VAT law on the Italian VAT Grouping (see Article 70-quinquies, par. 4-bis et seq. of Presidential Decree No. 633/1972).
With regard to the application of the principles of the Skandia judgment in case one of the two entities (fixed establishment or head office) joins a VAT Group set up in a non-EU country, the Italian tax authorities referred to the clarifications provided by the VAT Committee of the European Commission in the Working Paper No. 1025/2021 (regarding ECJ judgment in case C-812/19, Danske Bank) and the Working Paper No. 1027/2021 (concerning the interaction between the VAT Group, the new provisions on e-commerce and the OSS schemes).
In particular, the latter document states that:
- “the concept of VAT group under the VAT Directive and its effects should not apply to other groups with a similar setting established outside the Union. According to Article 11 of the VAT Directive, only persons closely bound by financial, economic and organisational links and established within a Member State having taken up the option may be regarded as a single taxable person. It follows that non-EU VAT groups should not be treated as a single taxable person in the EU VAT system” and
- “given that VAT groups established outside the Union should not have any effect in the EU VAT system …:
- the supplies of services from a company’s fixed establishment (or head office) in a third country to a fixed establishment of the same company in a Member State are disregarded for VAT purposes (FCE Bank ruling), irrespective of whether the company is a member of a non-EU VAT group;
- the supplies of services from a company’s fixed establishment (or head office) in a third country to a fixed establishment of the same company in a Member State that is a member of a VAT group there, shall be regarded as supplies between two separate taxable persons (Skandia ruling), irrespective of whether the company is also member of a non-EU VAT group”.
As noted by the Italian tax authorities, the above guidance have been transposed into the VAT Committee’s guidelines resulting from the 119th meeting on 22 November 2021 (see Document B – taxud.c.1(2022)2315070 – 1034), replacing those adopted as a result of the 105th meeting on 26 October 2015 (see Document A – taxud.c.1(2016)7465801 – 886).
On the basis of this latter document, the Italian tax authorities, with the Ruling No. 756/2021, has stated that the VAT Group set up in the UK is relevant for the purposes of the application of the principle expressed in Skandia judgment even after the so-called Brexit.
Therefore, in the light of the evolution of the guidelines of the VAT Committee of the European Commission, the Italian tax authorities expressly superseded the guidelines provided in its previous Ruling No. 756/2021 and concluded that “the supplies of services carried out between the two branches of the same entity (ALFA SE Italy and ALFA SE UK, the latter being a member of a VAT Group established in the United Kingdom), [are] … excluded from the scope of application of VAT, since the VAT Group set up in a third country (United Kingdom) is not comparable to a VAT Group set up in a Member State of the European Union”.
With reference to question 2., concerning the recovery of the VAT unduly paid by ALFA SE Italia as a result of the reverse charge mechanism on the invoices received from the UK branch, the Italian tax authorities referred to the provision of Article 6, para. 9-bis.3 of Legislative Decree No. 471/1997[1] and stated that:
- as a general rule, the purchaser/client liable for VAT may amend the incorrect application of VAT by means of accounting entries opposite of those erroneously made;
- however, where the purchaser/client has not exercised the right to deduct input VAT, he can recover the non-deducted VAT through the issuance of a credit note, provided that the time limit set out in Article 26(3) of Presidential Decree No. 633/1972 (i.e., one year from the date on which the taxable transaction was carried out if the requirements for issuing the credit note occur as a result of an agreement between the parties or in case of correction of errors on the invoice involving the application of Art. 21(7) of Presidential Decree No. 633/1972) has not expired. Alternatively, the purchaser/client can claim the so-called “anomalous refund”, pursuant to Article 30-ter of Presidential Decree No. 633/1972. The refund request must be submitted within two years from from the periodic VAT settlement – monthly or quarterly – relating to the month in which the incorrect invoices were received;
- lastly, it is not possible to recover the non-deducted VAT by amending the annual VAT return pursuant to Article 8(6-bis) of Presidential Decree No. 322/1998[2].
[1] This provision provides that: “if the purchaser/client wrongly accounts for VAT under the reverse charge mechanism to transactions that are not subject to VAT, in case of assessment both the VAT payable and the VAT deducted in the periodic settlements must be discharged, without prejudice to the right to recover any non-deducted VAT pursuant to Article 26(3) of Presidential Decree No. 633 of 26 October 1972, and Article 21(2) of Legislative Decree No. 546 of 31 December 1992”.
[2] As already clarified by the Italian tax authorities in the Circular letter No. 20/2020, par. 6.
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Contact Alessia Zanatto – Partner, PwC TLS Avvocati e Commercialisti
Contact Paolo Galfano – Director, PwC TLS Avvocati e Commercialisti
Contact Maria Chiara Turio Bohm – Senior Manager, PwC TLS Avvocati e Commercialisti