VAT on transactions: when the mutual agreement is subject to taxation?

The issue of whether payments made pursuant to settlement agreements are subject to VAT, which was already a matter of discussion in both doctrine and case law, also before the Court of Justice, has recently returned to the spotlight following the publication of two very recent rulings issued by the Tax Authority.

Such documents consist in the answers to interpellation n. 145/2021 and n. 212/2021, which have confirmed the VAT taxability of the sums paid by a taxpayer in fulfillment of a settlement agreement.

The Tax Authority's position is based on a strict interpretation of the provision contained in art. 3, paragraph 1, of Presidential Decree no. 633/72, pursuant to which "the provision of services against remuneration deriving from works contracts, procurement, transport, mandate, dispatch, agency, mediation, deposit and, in general, obligations to do, not to do or allow something, regardless of their source, are taxable".

According to the Tax Authority, the obligations arising from the settlement agreement - whether concluded during a judicial proceeding or before the latter begins - are covered by the application of the above-mentioned provision, because, upon the obligation of one of the parties (generally, with a monetary nature and therefore equivalent to a real remuneration), the other party agrees to do something positive (obligation to do), or negative (obligation not to do, or to allow).

The obligation of each party would, therefore, have the nature of "counter-value", with respect to the obligation of the other party, and, therefore, would be taxable.

This means that the application of the Value Added Tax would be justified by the typical synallagmatic nature of the transaction, which could not even be configured in the absence of a mutual obligation, i.e. a synallagma.

In this regard, art. 1965 of the Italian Civil Code provides that "the settlement is the contract with which the parties, by making reciprocal concessions, put an end to a dispute already started or prevent a dispute that may arise between them".

The bilateral relationship, which necessarily arises from a settlement agreement, would therefore appear to be taxable at the ordinary rate, regardless of whether the transaction originates from claims for damages, restoration of a quo ante situation or derives from claims for a penalty related to irregularities in the execution of the contract.

In fact, in the recent answer to interpellation n. 145/2021 (which was also essentially reproduced in the answer n. 212/2021) it is stated that "for the purposes of identifying the tax treatment applicable in practice, it is necessary to identify the "economic function" of the sums involved in the contract, which are relevant for the purposes of VAT, if paid in return for obligations to do, not to do or allow the counterparty to do so".

The Tax Authority's thesis, already set out in many previous rulings (see, ex multis, answer to interpellation n. 387/2019), has found important confirmation in the judgment n. 20233/2018 of the Supreme Court, where it has been stated that "the provision of services - also in an European perspective - is a transaction subject to VAT even when it is expressed in a simple non-doing operation or, as in our case, in an allowance as long as it is placed within a synallagmatic relationship".

The principle has also been expressed by EU case law and, in particular, by the European Court of Justice, which has ruled that "a supply of services is carried out 'for consideration' within the meaning of Article 2(1)(c) of Directive 2006/112, and therefore constitutes a taxable transaction, when there is a legal relationship between the supplier and the user under which there is an exchange of mutual supplies, in which the remuneration received by the supplier constitutes the actual countervalue of the service provided to the user" (cf, in these terms, CJEU, judgment of 2 June 2016, Case C-263/15, Lajvér Melioràciòs Nonprofit).

In this scenario, therefore, the payment made by one party, as a result of a settlement agreement, which provides a fee for the elimination and/or definition of the opposite disputed reasons, for the sole purpose of ending a lawsuit or preventing the establishment of the same, must be considered taxable.

"Standard clauses" which provide that the parties, "without any recognition of the opposing reasons, for the sole purpose of settling the dispute (or preventing the judgment)", recognise that one is in debt to the other for a certain amount, therefore generate (where the subjective requirement for VAT purposes is met) a taxable situation, with the consequent need, for the party that has received the economic service (i.e. the payment), to issue an invoice and pay the tax (at the ordinary rate, regardless of the nature of the underlying relationship).

The result is different if the payment made, even following an agreement, has or maintains its compensatory or restorative nature, but it is understandable the importance of a careful drafting of the text of the agreement, in order to avoid the application of the tax and the consequent obligations of invoicing and payment and, even more, the possibility of disputes, with the application of the relative sanctions, perhaps against both the parties involved.

Published by: Avv. Iacopo Bissi
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