Edited by Felice De Lillo, Ivan Paviglianiti and Amélie Mammone
With a recent answer to a tax ruling request under publication, the Italian Tax Authorities defined the VAT treatment applicable to the supply of staff from an in-house company in favor of a Ministry. In the examined case, the Italian Revenue Agency ruled that the public supply of staff is out of the Italian VAT scope due to the absence of a link between the services subject to the memorandum of understanding signed between the Ministry and the in-house company.
The tax ruling under exam provides a prompt for some considerations on an institution – i.e. the supply of staff between public administrations – which only recently received first clarifications from the Italian Tax Authorities, following some jurisprudence and legislative news regarding supply/secondment of staff – as better detailed below – and particularly, the question raised in the tax ruling at stake.
As is known, the public supply of staff is a legal institute that has become widespread in practice. It was later defined by case law1 as the means through which the public administration, instead of establishing its own structure for performing the function assigned to it, employs the offices of another entity (to which the function itself is not delegated).
In this case, there is no change in the employment relationship, because the personnel of the entity providing the necessary structure for the task remains embedded in the latter for all aspects, and there is no separation between employment relationship and service relationship. The public supply of staff is usually established by specific Law provisions and it is ruled by the relevant Memoranda of Understanding.
With specific reference to VAT implications, this operation, generally considered, consists of a supply of services, falling within the tax scope when the subjective, objective, and territorial requirements are met, as also highlighted by the Italian Tax Authorities with the circular letter, No. 5/E, dated May 16, 2025.
In said interpretative document, the Italian Revenue Agency specified that, within the context of public supply of staff, the subjective requirement is met for the supplying entity, if the latter is an in–house company established in one of the legal forms referred to in art. 4, second paragraph, No. 1) of the Presidential Decree of October 26, 1972, No. 633.
With regard to the objective requirement, however, it is necessary to check whether the Law provisions or Memoranda of Understanding regulating the supply of staff provide for the allocation of financial resources by a public administration in favor of the supplying entity and whether this allocation represents the consideration for it.
Therefore, in the case under exam, the requesting Ministry had signed, with an in-house company2, a Memorandum of Understanding aimed at regulating the terms of the use of staff employed by said company, in accordance with specific Law provisions that had authorized the Ministry to use the company’s staff for the purpose of strategic institutional objectives provided for in the NRRP (National Recovery and Resilience Plan).
In particular, the Memorandum of Understanding provides that:
- the in–house company remains the employer of the staff on secondment, but the management of the secondment, the assignment of tasks, and operational goals remain in the hands of the managers of the Ministry where the personnel works;
- all costs related to the personnel on secondment shall be borne by the in-house company, as employer.
Based on the Memorandum of Understanding, therefore, in exchange for the supply of staff from the in-house company, the requesting Ministry is only obliged to reimburse the related salary costs incurred by the same company, in its quality of employer.
Given the objective uncertainty regarding the VAT treatment of public supply of staff, the Ministry, in the tax ruling request under discussion, asked the Italian Tax Authorities whether:
- with reference to the public supply of staff, as above described, it is possible to extend to the case at stake the VAT treatment related to the supply of staff (originally) set for by Art. 8, paragraph 35 of the Law of March 11, 1998, No. 67 (hereinafter also “Law No. 67/1998”). According to the above-mentioned Law provisions, supply of staff, for which only the reimbursement of the related cost is paid, is not relevant for VAT purposes (given the evident similarity of the two institutions, albeit operating in different systems);
- it is also applicable to the case under discussion, the exception provided by Art. 16-ter of the Law-Decree of September 16, 2024, No. 1313. This Law provision, by repealing said Art. 8, paragraph 35 of Law No. 67/1998 in relation to supply of staff stipulated or renewed starting from January 1, 2025, preserves the actions taken by taxpayers prior to that date, in accordance with the judgment of the Court of Justice of the European Union of March 11, 2020 in case C-94/19 (so-called “San Domenico Vetraria judgment”)4, or in accordance with Art. 8, paragraph 35 of the Law of March 11, 1998, No. 675.
This is in order to determine whether the legal relationship of public supply of staff between the Ministry and the in-house company is out of the Italian VAT scope in the specific case, where only the reimbursement of related salary costs is provided, similarly to supply of staff for which the provisions of Art. 8, paragraph 35 of Law No. 67/1988 mentioned above apply and, more generally, when the consideration and the direct link (between the supply and the consideration) characterizing the objective requirement requested by VAT regulations are missing.
In this respect, the absence of a direct link was demonstrated, according to the applicant, by the lack of a specific economically appreciable interest attributable to the in-house company, underlying the existing legal relationship.
In general terms, the absence of a significant economic interest should make irrelevant not only the supply of staff on the specific case under review by the Italian Tax Authorities, but also any case of supply of staff, even following the entry into force of the Law news, above described, regarding staff secondment, as properly suggested by the Ministry in application of the principles ruled by the European Court of Justice in the “San Domenico Vetraria” ruling.
Furthermore, for supporting its argument, the applicant highlighted that it was only obliged to reimburse the salary costs incurred by the company in relation to the staff used on the basis of a Memorandum of Understanding (which has an administrative regulatory nature) according to which the in-house company operates as an auxiliary structure of the Ministry for the performance of its institutional functions.
Indeed, due to an explicit Law provision, in this case the in-house company is obliged to support the Ministry through the supply of staff, in order to facilitate the latter in achieving its institutional goals. In this context, the reimbursement of expenses related to the cost of staff supplied would not represent the consideration in return of a supply for VAT purposes, by consisting, conversely, a mere reimbursement of the costs that have been charged to the in-house company (as employer) according to the Memorandum of understanding.
On the contrary, according to the applicant, the amounts due by the Ministry for supplied staff were out of VAT scope because they do not constitute consideration (contractually agreed), in exchange for a service (supply of staff) rendered for consideration under Article 3 of Presidential Decree. No. 633/1972, similarly to the supply of staff, falling within the meaning of Article 8, paragraph 35 of Law No. 67/1988 and to which the principles ruled by the Court of Justice of the European Union with the judgment “San Domenico Vetraria” apply (of which the first legislation is an expression).
In this respect, by agreeing with the applicant’s arguments, the Italian Tax Authorities ruled that the amounts due by the Ministry to the in-house company, as reimbursement of the expenses incurred by the latter, do not represent the necessary condition for benefitting of the supply of staff from the same company, as the relationship between the parties is not regulated by an agreement.
On the contrary, the Ministry’s obligation to reimburse the costs for the supply of staff is provided by a specific Law provision and it consists of a mere fulfillment set by the Memorandum of Understanding, with the aim of providing the in-house company with the necessary resources to meet the ordinary burdens due as employer.
Given that said sums are not paid by the requesting Ministry as consideration in exchange for a specific service, the Italian Revenue Agency has ruled that they do not fall within the scope of VAT, by stating that there is no “direct link between the service supplied and the said sums” in this case. Therefore, in the lack of this requirement, the transaction at stake is outside the VAT scope.
Based on this analysis, the Italian Tax Authorities specified that, in this case, such conclusions are valid for the existing relations and until the natural expiration of the agreements stipulated according to the Law and, in any case, no later than December 31, 2026 (deadline of supply of staff provided in the Memorandum of Understanding in force between the parties).
In conclusion, the answer to the tax ruling has provided the Italian Tax Authorities the opportunity to analyze a topic that has remained unexplored so far, by adopting the arguments and the criteria proposed by the applicant and6 anticipated within the circular letter No. 5/E, dated May 16, 2025 (published after the submission of the tax ruling request under discussion, which introduced the topic).
The answer to the tax ruling at stake represents the first official tax practice about public supply of staff and, more specifically, about the necessity to verify the existence of a direct link between a sum paid by the public administration and the supply of staff by the employer party, for considering the operation in the VAT scope.
Therefore, after the specific request of the applicant, the answer to the tax ruling fits within the interpretative framework aimed at determining the VAT treatment of sums paid (for many reasons) by public administrations to both public and private entities. Furthermore, it represents a practical application of the interpretative criteria provided by the Italian Tax Authorities in the circular letter No. 34/E, dated November 21, 2013 (and referred to in the tax ruling in question) dealing with public contributions.
Given the necessity to check, on a case-by-case approach, the VAT treatment of public supply of staff, in-house companies and public administrations will have to carefully assess the Laws and contractual framework that regulate the relevant relationship. Particular attention should then be paid to the interests arising from the contractual agreements, to determine the correct VAT treatment.
Such analyses are appropriate and recommendable, not only to prevent any challenge (with the risk of penalties) from the Italian Revenue Agency on the VAT treatment applied, but, also, to evaluate any corrective actions (e.g., VAT recovery), where the tax is not due.
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