The Italian VAT reform on personnel secondment

The Ruling examines the case of a secondment arrangement in which the consideration due to the seconding company was equal to the reimbursement of the pure cost actually incurred for each employee (including all social security and insurance contributions), without any additional mark-up.

The seconding company – which probably submitted the request for the Ruling before the issue of the New Provision – sought clarifications on the VAT treatment of the personnel secondment.

The request for a Revenue Agency Ruling was made because the Old Provision excluded from the scope of VAT secondment arrangements whereby the consideration due to the seconding company was equal to the mere costs of the personnel seconded, without any additional mark-up. This regime was based on the assumption that, in such a case, the seconding company was rendering its service free-of-charge, due to the fact that it merely recharged to the company benefitting from the secondment the original personnel costs incurred by it for the seconded employees. The supply of the secondment service for no consideration implied that the transaction was not deemed relevant for VAT purposes. 

Conversely, a supply of service relevant for VAT purposes was deemed to be performed whenever the seconding company charged a consideration exceeding the pure costs of the personnel. In a such a case, the entire consideration (i.e. personnel cost plus mark-up) was subject to VAT.

The Court of Justice of the European Union addressed the Italian VAT regime of secondment arrangements in its ruling of 11 March 2020, Case C-94/19 and found it incompatible with Directive 2006/112/EC. According to the European Court of Justice, personnel secondment constitutes a taxable service transaction in the occurrence of two requirements:

• the existence of a transaction between the parties in which a price or consideration is stipulated, i.e. the existence of a consideration, even if limited to the mere reimbursement of the related costs borne by the seconding entity (therefore also in the lack of a mark-up);
• the presence of a direct link between the service supplied and the consideration received, i.e. the existence of a contractual relationship between the parties.

With the New Provision the Italian legislator intended to align the Italian VAT rules applicable to personnel secondment arrangements with the European Court of Justice indications.

As a consequence, the New Provision repealed the Old Provision and set out that, going forward, all personnel secondment agreements are subject to VAT regardless of the consideration structure (pure recharge of cost or recharge of cost plus mark-up).

The new rules entered into force on 1 January 2025; however, the legislator provided that they apply only to secondment agreements entered into or renewed from 1 January 2025, so that agreements entered into up to 31 December 2024 will continue to be subject to the Old Provision up to their expiration. 

The Italian Revenue Agency, following the principles of the European Court of Justice and applying the New Provision, confirms in the Ruling that the secondment agreements entered into or renewed from 1 January 2025 will fall within the scope of VAT, even if the relevant consideration due corresponds to the pure personnel costs; indeed,  the reimbursement of the relevant costs is directly linked with the secondment service so that the transaction at stake shall be deemed as falling within the scope of VAT.

The shifting from a secondment arrangement falling out of the scope of VAT to a transaction in any case falling within the scope of VAT will de facto increase the consideration due for the secondment by the 22% VAT rate. 

However, given the tax neutrality of the VAT system, the applicability of VAT will not result in an actual increase of the relevant cost for all those VAT persons benefitting from a full VAT deduction right in respect of the VAT suffered on their purchases. Conversely, it will indeed result in an actual increase of the relevant cost for those VAT persons which suffer limitations to their VAT deduction right, such as financial institutions, insurance companies, healthcare operators, etc.. 

Based on the above, the effects triggered by the New Provisions shall be carefully evaluated by all taxpayers, based on their VAT deduction right status. This is true also in the very common case of cross-border secondment of personnel between companies belonging to the same group. Indeed, whenever a foreign group company seconds personnel to its Italian affiliate(s) or branch, the relevant B2B transaction qualifies as a supply of "ordinary" services subject to VAT in Italy under the reverse charge mechanism. Conversely, the secondment of personnel by an Italian entity to a foreign affiliate would not trigger any Italian VAT due to the lack of the territoriality requirement. 

Authored by Serena Pietrosanti, Maria Cristina Conte, and Noemi Gerbasi.