In its response to Interpretation No. 314 of 8 May 2023 ('Response No. 314/2023'), the Italian tax authority provided important clarifications regarding the VAT treatment of transactions between an Italian branch and a branch of the same UK-based entity participating in a VAT group.
In particular, in the case referred to in Reply No. 314/2023, the petitioner, ALFA SE Italia, i.e. the Italian permanent establishment of an entity governed by German law, ALFA SE, specified that it supplied and/or received certain services from the London permanent establishment of the same entity, ALFA SE UK, which is a member of a VAT Group established in the UK.
The petitioner specified that the services supplied to and/or received from ALFA SE UK were considered relevant for VAT purposes, and, specifically
- ALFA SE Italia integrated the invoices relating to services, other than exempt and non-taxable services, received from ALFA SE UK, applying the reverse charge mechanism, pursuant to Article 17, paragraph 2, of Presidential Decree No. 633/1972;
- ALFA SE Italia issued invoices for services rendered to ALFA SE UK, without applying VAT, pursuant to Article 7-ter of Presidential Decree No. 633/1972 for lack of the territorial requirement.
The petitioner also specified that, as a result of the exercise of the options pursuant to Articles 36(3) and 36-bis of Presidential Decree No 633/1972, the application of VAT through the reverse charge mechanism generated a debit position in the periodic settlement, given the impossibility of recovering the VAT on the portion of the taxable services received referable to the segregated activity in relation to which the option pursuant to Article 36-bis was exercised.
In light of the above, the applicant has therefore asked the Revenue Agency
whether, following the exit of the United Kingdom from the EU, the transactions between the Italian branch ALFA SE Italia and the London branch ALFA SE UK,
which is part of a VAT Group established in the United Kingdom, are irrelevant, for VAT purposes, as from 1 January 2021; and
what are the practicalities of recovering the additional tax wrongly paid by ALFA SE UK?
With reference to the first question, the Agenzia delle Entrate, after having clarified that, following the conclusion of the Withdrawal Agreement on 18 October 2019 between the United Kingdom and the European Union, the United Kingdom, as of 1 January 2021, qualifies as a third country with respect to the European Union, first of all referred to the positions expressed by the Court of Justice of the European Union ("CJEU") in the judgments rendered in case C-210/04 (FCE Bank) and case C-7/13 (Skandia).
As is well known, with the first of these rulings, the CJEU established the principle that transactions between a principal establishment (parent company) and a permanent establishment of the same legal entity are irrelevant for VAT purposes. This orientation was transposed into domestic practice with Resolution No. 81/2016, which affirmed that "services between a foreign parent company and an Italian permanent establishment or between an Italian parent company and a foreign permanent establishment are outside the scope of the tax" and that this principle "is also valid in relations with non-EU countries".
According to what is stated in the Skandia ruling, this principle is subject to an exception in the case where the parent company and/or the branch participate in a VAT Group set up pursuant to Article 11 of Directive 112/2006/EC in an EU Member State. In this case, the relationship of subjective identity between the two entities (branch and parent company) belonging to the same legal entity is broken. The guidelines expressed in the Skandia judgment were implemented by the Italian legislator when implementing the domestic VAT Group (see Article 70-quinquies, par. 4-bis et seq. of Presidential Decree No. 633/1972).
With reference to the applicability of the principles of the Skandia judgment in the hypothesis that one of the two entities (permanent establishment or parent company) of the same legal entity joins a VAT Group set up in a third country outside the European Union, the Revenue Agency referred to the clarifications provided by the VAT Committee of the European Commission in Working Paper no. No. 1025/2021 (commenting on the CJEU's judgment in case C-812/19, Danske Bank) and No. 1027/2021 (concerning the analysis of the interactions between the VAT Group and the so-called 'One Stop Shop' rules).