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Articles:

Italy - Tax authorities reverse position on VAT treatment of branch transactions

19 June 2023

Italy’s tax authorities issued a ruling (Ruling No. 314/2023) on 8 May 2023 that provides updated guidance on the VAT treatment of the provision of services between two permanent establishments of the same entity (a German company in the case at hand), where one PE is established in Italy and the other is located in the UK, where the latter belongs to a UK VAT group. Departing from its previous position (in Ruling No. 756/2021), the tax authorities determined that such transactions are outside the scope of Italian VAT and thus irrelevant for VAT purposes in Italy.

The tax authorities had ruled in 2021 that:

  • A fixed establishment that: (i) is not a legal entity distinct from the company of which it is a part; (ii) is established in different EU member state from that company; and (iii) receives services from that company should not be treated as a taxable person by reason of the costs imputed to it in respect of the supply of those services (referencing the FCE Bank decision of the Court of Justice of the European Union (CJEU), where the court held that services provided between parts of the same legal entity should be disregarded for VAT purposes). 
  • This rule does not apply where one of the parties is a member of a VAT group (based on the principles set forth in the CJEU decision in the Skandia case, in which the court held that services supplied by a principal establishment in a third country to its EU-established branch is a taxable transaction if the headquarter or the branch is part of a VAT group).
  • These principles apply regardless of whether the transaction is between EU member states or between a member state and a third country.

This led to the conclusion that transactions between an Italian branch and its related UK headquarters (or UK branch of a related nonresident company) that was part of a UK VAT group were relevant for VAT purposes in Italy even if the UK is considered a third country as from 1 January 2021 due to Brexit.

What has changed and why?

On 25 October 2021, the European Commission published Working Paper No. 1027/2021, which states that “the concept of a VAT group under the VAT Directive and its effects should not apply to other groups with a similar setting established outside the Union.”

The conclusions in the Commission’s report clearly influenced the Italian tax authorities’ decision in the May 2023 ruling. Following Brexit (i.e., as from 1 January 2021), the provision of services between an Italian branch and its related UK permanent establishment of the same entity falls outside the scope of Italian VAT because the UK is considered a third country.

It is also worth noting that this principle could have consequences for the handling of VAT that is incorrectly deducted or paid in Italy as from 1 January 2021; such VAT may be recoverable in certain situations.


Francesco Grandolfo
Marco Bonfiglio
BDO in Italy