The Italian Budget Law for 2018¹ has implemented, with effect from 1 January 2018, the principles set in the Court of Justice of the European Union Skandia judgment (C-7/13).² The new provision brings within the scope of Value Added Tax (VAT) certain head office-branch and branch-to-branch transactions, where one or both parties are members of VAT groups. The provision reflects the Skandia decision, which held that VAT groups are separate taxpayers for VAT purposes.

This clarification forms part of the new provisions under Italian VAT grouping rules. Under these new rules, businesses will be able to form VAT groups from 1 January 2019. In particular, Articles 1(984) and (985) of the Italian Budget Law have introduced paragraphs 4-bis to 4-sexies in Article 70-quinquies of the Italian VAT Law, which state the following:

• Transactions (both supplies of goods and services), made by an Italian VAT-grouped company (or branch) to its overseas branch (or head office) are treated as supplies made by the Italian VAT Group to a third party. Likewise, supplies from the overseas branch (or head office) to its Italian VAT-grouped head office (or branch) are also within the scope of VAT.
• Transactions made by an Italian company or branch to its overseas branch (or head office), locally VAT-grouped in another European Union (EU) Member State, are supplies for VAT purposes. Similarly, supplies made by the overseas branch or company VAT-grouped in another EU Member State to its Italian branches or head office (whether grouped or not in Italy) are within the scope of VAT. This is commonly referred to as the "reverse Skandia."

The new provisions also state that, if consideration is provided for the transactions, the taxable amount has to be the open market value pursuant to Article 13, paragraphs 1 and 2 of the Italian Tax Law implementing Article 80 of the EU VAT Directive.

Impact on businesses

The new provisions apply to transactions carried out as from 1 January 2018. Impacted Italian businesses that receive services from overseas branches or head office will need to account for Italian VAT under the reverse charge mechanism.

This is likely to create significant additional VAT costs for businesses that are not entitled to recover their VAT costs. For other businesses, this should be financially neutral but will result in additional compliance costs.

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ENDNOTES

¹ Law No. 205 of 27 December 2017, published on 29 December 2017, in the Official Gazette No. 302, Ordinary Supplement No. 62.

² See EY Global Tax Alert, CJEU issues Skandia judgment holding VAT due on intra-group supplies, dated 23 September 2014.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Studio Legale Tributario, Rome

• Nicoletta Mazzitelli
  nicoletta.mazzitelli@it.ey.com
• Valentina Casale
  valentina.casale@it.ey.com
• Emma Greco
  emma.greco@it.ey.com

Studio Legale Tributario, Milan

• Stefano Pavesi
  stefano.pavesi@it.ey.com
• Anselmo Martellotta
  anselmo.martellotta@it.ey.com
• Marco Cantisani
  marco.cantisani@it.ey.com

Studio Legale Tributario, Treviso

• Fabio Babolin
  fabio.babolin@it.ey.com

Studio Legale Tributario, Turin

• Anna Paola Deiana
  anna-paola.deiana@it.ey.com

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ATTACHMENT

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