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03/09/18 11:03

The pros and cons of VAT group registrations

Studio TCL also analyses requirements for determining the fiscal residence of natural persons

Stefano Quaglia (Studio CTS)

Stability Law 2017 (L. 11.12.2016 n. 232, art.1 paragraphs from 24 to 31) introduced the new “VAT Group”.

Absolutely different and not to be mistaken with the group VAT concept, the “VAT Group”, consists in creating a single VAT taxable entity, operating individually, although each company, still legally independent, would loose VAT independence.

All companies joining a VAT group must be closely bound by the following financial, economic and organizational links.

Within a VAT group, all supplies of goods or services made by any member of the group are treated as having been made by the group as a whole. Furthermore, supplies of goods or services among members of the VAT group will not be subject to VAT.

The VAT group regime is illustrated by D.P.R. 633/1972, V bis section (paragraphs from 70-bis to 70-duodecies), which provides particularly interesting information on the aforementioned restrictions at paragraph 70-ter.

According to this paragraph, the companies joining the group must perform the same core business and economic activities or the activities must be complementary, ancillary and auxiliary with respect to one or more group members.

An organizational bound implies a 'jure or de facto' coordination among decision-making bodies, while a financial bound implies that member companies must be subject to a common control, through a direct or indirect participation. 

 

The pros and cons of VAT group registrations

 

The VAT group is an optional regime, binding for three years and automatically renewable. The application can be submitted online and, to be enforced in 2019, it must be submitted by November 15th, 2018.

In essence, a new VAT registration number will be issued for the group as a whole and the group will be entitled to submit one VAT declaration on behalf of all member companies.

The regime is particularly interesting for exclusively or partially VAT exempt businesses, such as insurance companies, banks, healthcare, gambling and betting sectors, real estate and mixed holding companies.

A primary benefit would certainly be given by being entitled to qualify transactions carried out within the VAT group as “not relevant for VAT purposes”. This occurrence would prevent all actions related to pro-rata non-deductible VAT rights on all these transactions, which in fact are no longer qualified as VAT transactions, therefore potentially cutting down tax revenue and minimising the risk of VAT investigation on the so called Transfer Pricing among companies joining the same VAT group.

A further advantage is given by the fact that administration costs, invoicing and fulfilments would be conveyed on the company controlling the group, essentially providing substantial saving.

For the time being, the main disadvantage would be the upgrade of the related information system and administrative procedures.

For VAT group a single VAT return and declaration is required, therefore, besides envisaging specific sections within VAT registers of each member company, IT infrastructures shall be standardized to provide a single VAT accounting scheme.

A large number of companies are currently evaluating whether creating a VAT group pursuant to the new rules.

 

Stefano Quaglia

Matteo Macciò

PKF Studio TCL – Tax Consulting Legal

Genoa / Milan – studiotcl@tclsquare.com

 

Requirements for determining the fiscal residence of natural persons continues to be the focus of attention awaiting new rulings

 

The fiscal residence in Italy of natural persons

Residence requirement is an essential element in order to verify tax obligations in Italy. Our country applies the principle of worldwide taxation. Who is resident in Italy is taxed on his income produced anywhere. This principle does not apply to non-tax resident natural persons, that are taxed in Italy only for income there produced.

Tax residence determination, therefore, is very important for those people producing income even outside national borders (for example sports champions, artists, etc.), or foreign people living in Italy only for job reasons but maintaining his interests in their country of origin, or for Italian residents who transfer their residence abroad for work or family needs.

In general terms, in order to determine the fiscal residence of natural persons in Italy, it is very relevant the article 2 of the D.P.R. n. 917/1986 ("TUIR"), that consider  natural persons those who, for most of the tax period, (i) are registered in the population registers of the resident population, (ii) are resident in Italy or (iii) are domiciled in the territory of the State pursuant to the Civil Code.

Given this article, it would appear fairly simple to identify the "limit" of tax residence: who resides in Italy for 183 days out of 365 is considered resident, who moves abroad before 183 days (indicatively before 3rd of July) should not be considered Italian resident. Unfortunately, as it often happens, in our country it's all a bit more complicated ... a jurisprudential orientation of the Court of Cassation, which seems at least formalistic and not very shareable, is growing.

The judgement n. 16634 of 25 June 2018 follows the Cass. nn. 21970/2015 and 1215/98. The Court, judging the case of a person transferred to the United Kingdom, where he worked and paid taxes, not registered with AIRE, decided to consider the criterion of registration in the Italian registry as an element of formal nature which precludes any further verification. Basically, if the cancellation from the registry and the simultaneous registration with the AIRE (register of residents abroad) does not take place, Tax Authority is legitimated to consider the subject as tax-resident in Italy, irrespective of any effective proof of foreign residence.

This position appears in contrast with the basic principle of ability to contribute. For this principle, there must be an effective link between the person and the territory, otherwise there are no obligations to contribute to public spending (Italian Constitution - Article 53). It is the basis of any tax levy.

On the other hand, the principle established by the Court does not take into account double taxation conventions. They are agreements that the Italian State stipulates with other countries in order to settle the issues concerning fiscal aspects and which are binding source for the two contracting states, prevailing over any internal source of law (Article 75 TUIR and Article 117 of the Constitution). These conventions, among other provisions, establish also a series of specific criteria in order to identify the tax residence of a persons in one of the two states. In general, the OECD criteria are applied (they are taken as basis for each convention but they can be modified in agreement between the contracting states). They establish to consider the tax residence in the country where there is the "main residence" of the person (substance than formalism). If this criterion is not applicable, it must be verified where the person's "center of life interests" is situated.

The tax residence is essentially where the person holds the center of his affections, typically where the family resides. Finally, if the previous criteria are not applicable, it is considered the place where the subject "habitually resides”. It seems clear that the criterion adopted by the Supreme Court regarding the formalism of the registration with the registry office is in contrast with the OECD measures.

Lastly, in order to identify tax residence, it is interest to notice that, since 2007, Italian citizens canceled from the population register of the resident population and transferred to non-white list countries (countries that previously belonged to black list countries) are considered resident in Italy, unless differently proven.

This is a provision of law (paragraph 2 bis art 2 TUIR) with a substantial anti-tax avoidance aim.

The burden of proof of real residence in the specific country with privileged taxation (often Montecarlo and San Marino) is overturned to tax payer.

On this matter, the Supreme Court, adopts a line that can be defined in contrast with what described above. The judgment of the Court of Cassation n. 19410 of 20 July 2018 establishes that all the proofs / evidences that the taxpayer submits must be considered in order to demonstrate his actual residence abroad. Italian tax Authority and Tax Commissions had judged the provision of law as right, without the necessity of justifying the reconfiguration of the taxpayer's residence and judging the proofs / evidences adduced by the subject, as mere formalisms. On the contrary, the Supreme Court established that the substance prevails over the form, judging the decision against the tax payer, who had submitted a series of evidences in order to support his foreign residence (lease, payment receipts, air tickets, proof of activity carried out, etc.) that could be considered invalid only in the case that  their unreliability was proven.

Therefore, waiting Supreme Court ruling, perhaps with joint sections ruling, in case of transfer to and from abroad for long periods, it is recommended to fulfill all the necessary formalisms, such as AIRE registration. It is also recommended to keep clear and verifiable where the center of life interests is situated and where the habitual residence is located.

 

Massimiliano Albertini

PKF Studio TCL – Tax Consulting Legal

Genova / Milano – studiotcl@tclsquare.com

 

 

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