TAXATION PREREQUISITES FOR VAT PURPOSES: OBJECTIVE, SUBJECTIVE, TERRITORIAL REQUIREMENT

TAXATION PREREQUISITES FOR VAT PURPOSES: OBJECTIVE, SUBJECTIVE, TERRITORIAL REQUIREMENT

In the complex world of entrepreneurship, VAT taxation is one of the crucial and often misunderstood issues: for those new to the business world, navigating the complex tax laws and mechanisms of Value Added Tax can seem like an inextricable maze. However, it is crucial to emphasize that gaining a thorough understanding of how VAT taxation works in Italy is not only a must for entrepreneurs, but also a crucial step for the success of the company and the business.

Therefore, this article aims to provide an introduction to the topic of VAT by distinguishing the 3 main prerequisites for the purpose of VAT taxation.


OBJECTIVE REQUIREMENT

VAT, or Value Added Tax, is an indirect consumption tax that applies in connection with the supply of goods and services, in the exercise of business or arts and professions and on imports by anyone. Regarding the objective requirement, governed by Articles 2 and 3 of Presidential Decree 633/72: 

  • with regard to transfers of goods, acts that transfer ownership or that constitute or transfer real rights of enjoyment over goods of all kinds are identified, including those that do not have the legal form of transfer in the strict sense such as commission contracts or assignment to partners. In any case, the onerous title of the performance is relevant; excluded are transfers of money or money receivables that do not constitute performance, as well as the assignment of credit, transfers and transfers of business or business units provided that the business is not liquidated but continued, transfers of assets in extraordinary transactions, unbuildable land for which registration tax applies; 
  • with regard to the transfer of services, a residual distinction is made between everything that is not a transfer of goods, i.e. transactions made on the basis of contracts of tender, transport, mandate, dispatch, agency, mediation, deposit and in general from obligations to do, not to do and to allow, whatever the source, i.e. contracts governed and not governed by the Civil Code, administrative acts, jurisdictional acts and so on. Again, the onerousness of the performance and the existence of a binding legal relationship between the parties is always relevant.

SUBJECTIVE REQUIREMENT

Pursuant to Articles 4 and 5 of Presidential Decree 633/72, a prerequisite for the application of the tax is that the supply of goods or services that are objectively taxable are carried out by entrepreneurs, professionals or artists in the performance of their activities, who through their presence manage to create added value to the goods and services traded.

Therefore, a transaction is included among those considered objectively taxable, the so-called VAT field, when it relates exclusively to the parties considered: if the fulfillment is carried out between parties other than those listed, such as private parties, it is out of the VAT field, so there is exclusion of tax. 

For taxation purposes, an enterprise is the activity carried out habitually (i.e., which is not occasional, such as operations carried out sporadically and without prior arrangement), including non-exclusive and of a commercial nature (art. 2195 Civil Code) or agricultural nature (definition art. 2135 Civil Code), although not necessarily organized in a typical form, i.e., dimensional aspects and, for example, whether or not it is registered in the register of companies are irrelevant. 

By way of example, the following may therefore be taxable persons: individual entrepreneurs, companies and commercial entities, public bodies; in addition, those who exercise arts and professions, in the form of self-employment (individuals, simple companies, associations without legal personality), non-subordinate (also excluding coordinated and continuous collaboration co.co.co. relationships), even non-exclusive, may also be taxable persons: in this case, the activity must be conducted according to professionalism, habituality and non-occasionality.


TERRITORIAL REQUIREMENT

According to Article 7-bis of Presidential Decree 633/72, under the heading "territoriality of the supply of goods," in order for a VAT-relevant transaction to take place, it is necessary that the supply of goods or the provision of services be deemed to have taken place in the territory of the State. Generally speaking, as far as the supply of goods is concerned, the transaction is deemed to be carried out in Italy when:

  • the good is in Italy at the time of its delivery or shipment, which is generally defined as the time of the transaction,
  • the good is national, i.e., when alternatively it is produced in Italy, is nationalized, is a non-EU product but permanently imported into Italy, is EU, is produced in other EU member states, is bound to the temporary import regime, or is a non-EU product but temporarily imported into Italy to be processed and then destined for international traffic.

The supply of immovable property is taxable in Italy if it involves immovable property existing in Italy at the time the supply is intended to be made, thus making the place where the supplier is based irrelevant.

Lastly, considering Article 7-ter of Presidential Decree 633/72, under the heading "territoriality of supply of services," for services considered generically, relevant services are considered to be performed in Italy when:

  • they are rendered to VAT-registered taxable persons established in the territory of the state, so-called B2B transactions,
  • they are rendered to non-taxable customers, i.e. private individuals, by taxable persons established in the territory of the state, the so-called B2C transactions

In the first case, the B2B transactions, the rule of relevance of the principal, i.e., the consumer, is introduced: services are considered to be made in Italy when they are made to taxable persons established in the national territory, it is not taxable if the place of business is abroad; in the second case, the B2C transactions, it turns out to be discriminating the criterion of relevance of the place of business of the professional: it is taxable for vat purposes the service made by a professional executor of the service resident in Italy, regardless of whether the private person is Italian or foreign.

 

Edited by: Daniela Di Camillo, Chartered Accountant and Statutory Auditor

You can download the article in PDF here

For more information:

danieladicamillo@valoreassociati.it

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