Restrictions on VAT recoverability in relation to residential property in Italy
ItalyAccording to Italian VAT law, the rental income related to the leasing of residential property is generally exempt from VAT, regardless of the activity carried out by the lessor. In some specific cases – including where the property falls within the definition of social housing - the lessor may nonetheless opt for VAT.
However, even where VAT is charged on the rent, VAT on costs relating to the property is still blocked by the Italian VAT authorities. This is because, when it comes to residential property, input VAT can be recovered only by construction companies (i.e., companies whose main business is the construction of real estate).
Even if the position of the Italian Tax Authority is in line with the Italian VAT law, it seems to be contrary to the principle of fiscal neutrality. Regardless as to whether the property is classified as residential or not – there is a clear VAT taxable exploitation of it. Such a strict interpretation may also create distortion considering that the Italian Tax Authority allow input VAT recovery in relation to residential property exploited for hospitality activities.
However, this interpretation may soon be revised with an expected Legislative Decree in the framework of the Italian tax reform currently pending in Italy. This decree is set to eliminate the restriction on VAT recoverability associated with the cadastral classification of residential buildings, as currently stipulated by the Italian VAT legislation.
key takeaway
VAT cannot be recovered on costs linked to residential property used as social housing, even if the option to apply VAT on the rent is exercised. This rule should remain valid until the Legislative Decree that should overcome this interpretation is issued in order grant a wider application of VAT neutrality.
