Country-specific: Italy

Italian Tax Authority, Ruling no. 212 of 22 April 2022

According to the Italian Tax Authority a settlement agreement (accordo transattivo) aimed at settling a dispute between the parties – concerning the violation of a non-competition agreement signed between an employer and an employee – should qualify as supply of services taxable for VAT purposes due to the existence of reciprocal performance link between the assumption of an obligation not to do something, which takes the form of the waiver of litigation, and the payment of a sum of money as consideration for the assumption of such an obligation.

DLA Piper comment: The sums agreed under settlement agreements are relevant for VAT purposes when they are paid as consideration for the supply of goods or services, ie as a result of an exchange between the parties. Indeed, according to Article 2, par. 1, let. c) of the EU VAT Directive “the supply of services for consideration carried out within the territory of a Member State by a taxable person acting as such” shall be subject to VAT. In application of the EU provision, pursuant to Article 3 of the Italian VAT Decree taxable services are services for consideration depending on obligations “to do, not to do or to permit, whatever their source”.

As clarified by the ECJ (recently with ruling C-263/15 and C-463/14) “a supply of services is effected for consideration within the meaning of Article 2(1)(c) of Directive 2006/112, and hence is taxable, only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient”.

In light of the above, as already stated in previous rulings (Italian Tax Authority Ruling no. 145/2021 e n. 179/2021 and also by the Italian Supreme Court, Judgement no. 23668/2018) the Italian Tax Authority stated that the assumption of an obligation not to do something for a consideration, which may take the form of the waiver of litigation in the context of a settlement agreement, create a synallagma (i.e. a reciprocal performance) between the parties relevant for VAT purpose, regardless of the economic function of the agreement.

As analysed by Assonime with Circular Letter no. 26/2021, the strict interpretation of the Italian Tax Authority might be subject to multiple criticism. Indeed, a balance should be made between the content of the settlement agreement and the will of the parties, i.e. the contractual relationship underlying the settlement agreement. For instance, the consideration provided for in a settlement agreement could also be compensatory (as in the present case) in the light of the underlying contractual relationship between the parties and, therefore, qualify as not relevant for VAT purposes. Similarly, in the absence of an underlying contract, it should be assessed on a case-by-case basis whether the consideration provided for in a settlement agreement relates to a supply of services or, instead, qualifies as a mere supply of money not relevant for VAT purposes.

Therefore, in light of the ongoing debate, it is advisable to carry out a case-by-case analysis.