A law decree approved by the Senate of the Italian parliament on 6 November 2024 (Law Decree No. 131/2024) makes significant changes to the VAT treatment of the secondment of staff in Italy. The new rules will make such secondments of personnel taxable supplies for VAT purposes even if the consideration paid is simply a reimbursement of costs and will bring Italian VAT law in line with a 2020 decision of the Court of Justice of the European Union (San Domenico Vetraria S.p.A.). The amended Italian rules will apply as from 1 January 2025.
Staff secondment arrangements arise where an employer agrees to temporarily transfer one of its employees to another company but retains authority over the contractual employment relationship. The employee then carries out their duties for the benefit of the other company and that other company has managerial authority over the seconded employee.
Under existing Italian rules, secondment arrangements fall outside the scope of VAT; Law No. 67/1988 provides that “Loans or secondments of personnel against which only the reimbursement of related costs are paid are not to be regarded as relevant for value-added tax purposes.” This rule has given rise to considerable uncertainty among taxable persons because it is unclear why mere chargebacks are treated as outside the scope of VAT, while billing at a higher cost (e.g., with a mark-up) or even a lower cost seems to attract different VAT treatment.
In addition, treating staff secondments as outside the scope of VAT could undermine the VAT neutrality principle. In fact, the above provision has attracted criticism since it clearly seems to be out of line with EU VAT Directive No. 112/2006 (and, in the past, even with the Sixth EU Directive): under the directives, the secondment of staff is relevant for VAT purposes without any restriction.
These issues prompted the Italian Supreme Court to request clarifications from the CJEU in 2019 the San Domenico Vetraria S.p.A. case, with the CJEU issuing its decision on 11 March 2020. Briefly, the case involved the temporary secondment of a director of San Domenico’s parent company to San Domenico (the subsidiary). The parent company invoiced San Domenico for the costs incurred for the seconded director and VAT was applied to the fees San Domenico paid to the parent company with respect to the secondment. The case was referred to the CJEU after the Italian tax authorities took the position that the arrangement was outside the scope of VAT and disallowed any deduction for related input VAT (position eon which the judges of first and second instance agreed).
The CJEU held that, to the extent there is a reciprocal relationship between the secondment of staff and the consideration paid for that secondment, EU VAT law precludes national legislation that deems such arrangements as being outside the scope of VAT. In other words, if the services provided are mutually dependent on each other so that one would not take place without the other, the supply should, in principle, attract VAT. The court also stated that the amount of consideration for the arrangement is irrelevant to the analysis regardless of whether it is equal to, greater or less than the costs incurred by the employer. The recent law decree repeals the relevant section of Law 67/1988.
Law Decree No. 131/2024 puts an end to the controversy about the misalignment of Italian VAT rules with EU law. As from 1 January 2025, almost all services relating to the secondment of staff will be relevant for VAT purposes in Italy, whose application will vary based on the territoriality requirement (i.e., whether the secondment is within or outside Italy). However, the law decree will not affect secondments before that date that were in compliance with EU VAT rules.
Francesco Grandolfo
Marco Bonfiglio
BDO in Italy
Staff secondment arrangements arise where an employer agrees to temporarily transfer one of its employees to another company but retains authority over the contractual employment relationship. The employee then carries out their duties for the benefit of the other company and that other company has managerial authority over the seconded employee.
Under existing Italian rules, secondment arrangements fall outside the scope of VAT; Law No. 67/1988 provides that “Loans or secondments of personnel against which only the reimbursement of related costs are paid are not to be regarded as relevant for value-added tax purposes.” This rule has given rise to considerable uncertainty among taxable persons because it is unclear why mere chargebacks are treated as outside the scope of VAT, while billing at a higher cost (e.g., with a mark-up) or even a lower cost seems to attract different VAT treatment.
In addition, treating staff secondments as outside the scope of VAT could undermine the VAT neutrality principle. In fact, the above provision has attracted criticism since it clearly seems to be out of line with EU VAT Directive No. 112/2006 (and, in the past, even with the Sixth EU Directive): under the directives, the secondment of staff is relevant for VAT purposes without any restriction.
These issues prompted the Italian Supreme Court to request clarifications from the CJEU in 2019 the San Domenico Vetraria S.p.A. case, with the CJEU issuing its decision on 11 March 2020. Briefly, the case involved the temporary secondment of a director of San Domenico’s parent company to San Domenico (the subsidiary). The parent company invoiced San Domenico for the costs incurred for the seconded director and VAT was applied to the fees San Domenico paid to the parent company with respect to the secondment. The case was referred to the CJEU after the Italian tax authorities took the position that the arrangement was outside the scope of VAT and disallowed any deduction for related input VAT (position eon which the judges of first and second instance agreed).
The CJEU held that, to the extent there is a reciprocal relationship between the secondment of staff and the consideration paid for that secondment, EU VAT law precludes national legislation that deems such arrangements as being outside the scope of VAT. In other words, if the services provided are mutually dependent on each other so that one would not take place without the other, the supply should, in principle, attract VAT. The court also stated that the amount of consideration for the arrangement is irrelevant to the analysis regardless of whether it is equal to, greater or less than the costs incurred by the employer. The recent law decree repeals the relevant section of Law 67/1988.
BDO insight
Law Decree No. 131/2024 puts an end to the controversy about the misalignment of Italian VAT rules with EU law. As from 1 January 2025, almost all services relating to the secondment of staff will be relevant for VAT purposes in Italy, whose application will vary based on the territoriality requirement (i.e., whether the secondment is within or outside Italy). However, the law decree will not affect secondments before that date that were in compliance with EU VAT rules.Francesco Grandolfo
Marco Bonfiglio
BDO in Italy