Non-operating companies - Court of Justice opens to refunds of VAT credits

In its recent ruling on March 7, 2024 (C-341/2022), the Court of Justice ruled that Italian legislation limiting the right to deduct VAT charged to non-operating companies is in contrast with European law.

Art. 30, para. 4, of Law No. 724/1994 provides, for VAT purposes, that non-operating companies (i.e., companies whose amount of revenue is less than the profitability percentages identified in the first paragraph of the aforementioned Art. 30):

•   cannot ask for a refund or use as horizontal compensation any excess credit resulting from the VAT return; as well as

•    lose the possibility of carrying the aforementioned VAT excess as a credit (with, therefore, the impossibility of using it in vertical compensation, offsetting any VAT payable), if, for three consecutive tax periods, they carry out VAT-relevant transactions in an amount lower than the amount of revenue they should achieve by applying the profitability percentages referred to in the first paragraph of Article 30. In this case, a presumption of non-exercise of economic activity would operate and, therefore, the company would lose the status of "VAT taxable person" (with the cited consequence of not being able to deduct VAT).

The aforementioned legislation was brought to the attention of the Luxembourg Courts, as it was considered by the national court (in this case, Italian Corte di Cassazione) to be potentially in conflict with Article 9 of the VAT Directive (where it disallows the nature of VAT taxable person to non-operating companies, in case of failure to pass, for three consecutive years, the operativeness test) and with Article 167 of the VAT Directive, as well as with the principles of neutrality and proportionality (where, again under the aforementioned conditions, the legislation prevents the right to deduct VAT paid, when purchasing goods and/or services).

The Court of Justice, recognizing the doubts raised by the Supreme Court, confirmed that:

•    anyone who engages in "an economic activity" (Article 9 VAT Directive) is a VAT taxable person, and this is the case regardless of its purposes and/or results; so that it is not possible to anchor this qualification to the achievement of certain thresholds of revenue and/or turnover;

•    the right to deduct VAT (in order to ensure the neutrality of the tax) can be denied to the taxable person only "if it is proven, in the light of objective elements, that it is fraudulently or abusively invoked." The consequence of this is that national legislation that prevents the right to deduct VAT, solely on the basis of the amount, considered insufficient, of VAT-relevant transactions carried out, must be considered contrary to EU law.

Extremely significant is the impact of the aforementioned ruling in Italian legal system, where it mandates the disapplication (with ex tunc effect) of the second sentence of Article 30 of Law No. 724/1994.

The immediate consequence (even in the absence of domestic transposition of this ruling, by the Italian Legislator) is the possibility, for non-operating companies that have failed the operability test for at least three years, to:

•    take the excess VAT credit to vertical compensation, if applicable, after submitting appropriate VAT supplementary returns;

•    where the deadline for submitting the supplementary return has definitively expired (or the company has become operational again in the meanwhile), request a refund of the excess credit, generated by the recovered deductibility of the VAT paid. A similar consequence (i.e., a similar right to claim a refund) occurs if the nonoperating company is in one of the situations that allow the filing of refund claims, as well as in the case of its liquidation.

Since the potential economic values at stake are significant, it is important for companies to scrutinize (with the help of their professionals) their own situation to proceed (if appropriate) expeditiously (also in order to avoid the potential running of prescriptive deadlines) with the necessary refund claims and/or supplementary returns.

Avv. Paolo Visconti