Clarification by the Italian tax authorities on input VAT deduction incurred on the purchase of residential buildings

Edited by Alessia Zanatto, Maria Chiara Turio Bohm, Andrea Carbone

By means of Ruling no. 392, dated July 24, 2023 (“Ruling no. 392/2023“), the Italian tax authorities provided important clarifications regarding the deductibility of input VAT for transactions involving the purchase of residential buildings intended for tourist rental, as taxable transactions for VAT purposes.

In the case of the Ruling no. 392/2023, the applicant, ALFA S.R.L., is a company whose main corporate purpose is real estate rental business. Specifically, according to the company’s articles of association, ALFA may carry out real estate and related activities such as, among others, the management and operation of recreational, sports and tourism activities even through the management of hotels, resorts, vacation houses, room rentals, bed & breakfasts, residences and restaurants. The company has outlined its intention to purchase a building, owned by the company “Immobiliare DELTA S.R.L.,” to be used for tourist rentals. This building will continue to be managed by DELTA[1], which, in order to pursue the tourist rental business, carried out considerable renovation work on it.

ALFA S.R.L. has, therefore, reported that the purchase of the property will be subject to VAT at the reduced rate of 10% since it was carried out within 5 years from the completion of the renovation work carried out by DELTA.

The applicant asked the Italian tax authorities for clarification regarding the deductibility of the VAT incurred on the purchase of the building, which is qualified as residential building (cadastral category A/7) and intended to be used for a real commercial activity (tourist rental). In fact, the uncertainty concerns the provision of Article 19 bis-1, paragraph 1, point i), Presidential Decree no. 633/1972[2]. In fact, this rule provides for the objective non-deductibility of the VAT paid on residential buildings purchased by a taxable person, without providing for express exceptions in the case where such properties are intended for tourist-hotel activity, i.e., a real economic activity. In addition, for the purpose of qualifying residential and instrumental properties, the Italian tax authorities, through various practice documents, has clarified that the cadastral classification thereof[3] is diriment, regardless of their actual use.    

The Italian tax authorities provided a positive answer to the question posed by ALFA, based on the following arguments:

  • the rationale for the objective non-deductibility provided by the above mentioned law is to avoid undue tax deductions in cases where the purchase relates to goods (in this case, residential buildings), or services related to said goods, which are likely to be used promiscuously, either in the business activity or for purposes unrelated to it;
  • Resolution no. 18/E/2012, by which it was clarified that when “residential buildings, (n.d.r. are) used by the taxable person as part of an activity of an accommodation type (management of vacation homes, room rentals, etc.) that involves the performance of services taxable to VAT, they must be treated, regardless of cadastral classification, in the same way as buildings instrumental by nature. It follows that the purchase and maintenance expenses related to the aforementioned properties are not affected by the nondeducibility referred to in Article 19 bis1, paragraph 1, letter i), of Presidential Decree no. 633 of October 26, 1972,” and that “as a result of the taxability of the accommodation services under consideration, in keeping with the general principles of VAT, the tax on the purchase of goods or services pertaining to said types of services is deductible even though it relates to units that from the cadastral aspect are presented as residential.[4];
  • the consistent case law guidance according to which: (i) the VAT deduction “postulates a necessary correlation between the goods and services purchased and the activity carried out, in the sense that they must be inherent to the company, even if they are non-instrumental goods in the proper sense, as long as they are concretely intended for the purpose of production or exchange within the scope of the activity of the company itself” and (ii) therefore, since “the assessment of the instrumentality of a purchase with respect to the entrepreneurial activity must be carried out in concrete terms, taking into account the actual nature of the asset in correlation with the purposes of the business, not already in purely abstract terms” it must be excluded that “the right to deduct VAT can be denied on the basis of the abstract cadastral classification of the property, giving instead prevalence to its actual destination[5].

On the basis of the above, the Italian tax authorities, therefore, considered as deductible[6], in the hands of ALFA, the VAT paid at the time of the purchase of the property, on the assumption that the tourist accommodation business is continued by the applicant even if through an outsourcer (DELTA Srl), on the basis of a disclosed agency agreement, conferred by the applicant ALFA, under which the legal acts performed by the agent produce their effects directly in the hands of the principal.

The Italian tax authorities then clarify that the relevant services are subject to VAT at the rate established by no. 120) of Table A, Part III, annex to Presidential Decree no. 633/1972, i.e., 10%.  

[1] Acting as an outsourcer.

[2] The provision states that “the tax on the purchase of buildings, or portions of buildings, for residential use is not deductible, nor is the tax on the rental or maintenance, rehabilitation or operation thereof, except for enterprises whose exclusive or main purpose of their business is the construction of said buildings or portions. The provision does not apply for persons engaged in activities that give rise to exempt transactions under number 8) of Article 10 that result in the reduction of the deduction percentage under Article 19, paragraph 5, and Article 19-bis.” 

[3] See Circular no. 182/E of July 1, 1996, Circular No. 27/E of August 4, 2006, Resolution no. 119/E of August 12, 2005, Reply no. 844 of December 21, 2021, Reply no. 25 of January 13, 2023.

[4] In the same sense also: Ruling No. 844/2021, Resolution no. 117/E/2004 and Circular 12/E/2007.

[5] See Cass. Ord. June 12, 2020, No. 11333 and sent. March 9, 2016, No. 4606.

[6] In line with this response from the Italian tax authorities, it is recalled that the enabling act for tax reform, which provides in Article 7 the guiding principle and criteria of “harmonizing the criteria for deductibility of VAT related to buildings to those provided for in the legislation of the European Union.” In particular, the explanatory report states that “The second corrective to the rules of deduction (number 2), pursuing the same purpose highlighted above [the deduction more closely aligned with the actual use of goods and services used in the performance of taxable transactions, ed.], it specifically concerns the real estate sector within which the exercise of the deduction is currently excluded [Article 19, bis 1, letter i), of Presidential Decree No. 633 of 1972] in relation to the VAT due on the purchase, rental, management and renovation of residential buildings for businesses other than those that exclusively or prevalently carry out construction activities in the residential sector. This objective non-deductibility will, therefore, have to be revised in order to make, in this sector as well, the exercise of the deduction consistent with the nature of the transaction for which the purchased good or service is used.”

For a deeper discussion, please contact:

Alessia Zanatto

PwC TLS Avvocati e Commercialisti


Maria Chiara Turio Bohm

PwC TLS Avvocati e Commercialisti

Senior Manager