VAT | Italy | Staff secondment: VAT treatment submitted to the European Court of Justice

With Order no. 2385 issued on 29 January 2019 (hereinafter also referred to as the "Order"), the Italian Supreme Court requested the European Court of Justice to rule on the compatibility between national legislation concerning the VAT treatment applicable to staff secondment without mark-ups - i.e. with only reimbursement to the primary employer the cost incurred for the seconded staff (including social security charges, fringe benefits, etc..) - and the EU one

The Order is of notable interest as it is intended to call into question a well-established practice and, most of all, it is extremely widespread among corporate groups.

In fact on several occasions when Italian Tax Authorities were questioned on this point, they argued that staff loans (even if made between companies not belonging to the same group) do not meet the conditions for the application of VAT when amounts paid by the "host" company are exactly equal to the remuneration due to the employee "loaned" as well as the relevant social security charges. For the Italian Tax Authorities, in fact, in such cases, the amounts paid cannot be deemed as a consideration, but rather as a simple reimbursement of the labour costs (see Resolution no. 502712/1973, no. 505366/1974, no. 500013/1976, no. 410670/1979 and no. 411847/1981). This thesis was then overtaken by Resolution no. 363853/1986, with which the Italian Tax Authorities clarified that "when an independent service may qualify as a "staff loan", it can be subject to VAT pursuant to Art. 3 of Presidential Decree no. 633 of 26 October 1972, regardless of whether the circumstance of the relevant consideration corresponds directly to the reimbursement of the cost".

However, uncertainness arising from this "change of mind" was short-lived because of the rule introduced by Article 8, paragraph 35, of Law No. 67/1988 (i.e. the 1988 Finance Act), which clarified that "loans or secondments of staff for which only the reimbursement of the cost paid are not to be considered relevant for the purposes of value added tax".

In recent years, the Italian Supreme Court has mainly considered the VAT treatment to be reserved to staff secondments characterised by a refund not exactly equal – even when higher or lower - to the cost sustained by the primary employer for the seconded staff, these results were not always consistent. In fact, the principle initially declared was that only the mark-up was to be considered taxable for VAT purposes (see Italian Supreme Court no. 19129/2010 and no. 19132/2010). However, this principle has since been overtaken by the sentence no. 23021/2011 of the Italian Supreme Court, which stated, in these cases, the taxable amount for VAT purposes of the entire amount charged.

In this framework, the recent Order No. 2385 has raised new doubts about the compatibility between the aforementioned internal legislation – which exclude from the VAT scope staff secondments with reimbursements equal to the cost incurred by the primary employer – and the EU legislation considering that pursuant Art. 59 of Directive 2006/112/EC, staff secondment is deemed to be a supply of services and that  supply of services is effected ‘for consideration’ if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance. In this regard, the fact that the price paid for an economic transaction is higher or lower than the cost price is irrelevant (See, inter alia,Court of Justice, C-520/14).

Finally, it should not be disregarded that, should the Court decide that the reimbursement of costs incurred by the primary employer for staff seconded is fully taxable for VAT purposes, there should be a clear disparity with the treatment applicable to the staff leasing agreement, for which it has been expressly provided that the reimbursement of staff’s costs incurred by the supplier are excluded from the taxable amount, resulting in the VAT only applying to the fee received by the supplier.

In conclusion, it can now be understood that the different types of staff secondment – even when similar – will each be subject to different VAT treatment.