According to the ECJ, Articles 2(1)(c) and 24(1) of the Principal VAT Directive preclude national legislation that exempts staff secondments from VAT: if a direct link exists between the secondment and the payment made to the secondee’s employer, then, irrespective of the amount of the payment, there is a supply of services that should be subject to VAT (Case C-94/19 San Domenico Vetraria). Whilst the decision was made in the context of Italian legislation relating to staff secondments, similar legislation in respect of staff leasing is likely to be impacted as well.

Background

In 2004, Avir S.p.A. seconded one of its directors to a subsidiary, San Domenico Vetraria S.p.A. (SDV), to act as manager of one of SDV’s sites. Avir invoiced SDV the costs for the seconded manager, adding VAT. SDV’s claim to deduct that VAT as input tax was denied by the Italian tax authorities on the basis of Article 8(35) of Law No. 67/1988 which provides that “the lending or secondment of staff carried out in return for only the reimbursement of the related costs is not relevant for VAT purposes”.

The Italian Supreme Court requested a preliminary ruling from the ECJ in respect of the compatibility of this rule with EU law. The question was whether the distinction between the secondment of staff (being outside the scope of VAT) and other ways of making labour available (being subject to VAT), as drawn by the Italian legislation, was at odds with the principle of fiscal neutrality.

The ECJ decision 

The ECJ decided that Article 2(1)(c) of the Principal VAT Directive must be interpreted so as to preclude national legislation under which the lending or secondment of staff of a parent company to its subsidiary, carried out in return for only the reimbursement of the related costs, is irrelevant for the purposes of VAT, “provided that the amounts paid by the subsidiary to the parent company, on the one hand, and that lending or secondment, on the other, are interdependent”.

This decision was reached on the basis that:

• A supply of services for consideration is subject to VAT. “For consideration” requires a legal relationship between the supplier and the recipient pursuant to which there is reciprocal performance, i.e. there is a “direct link” between the remuneration received by the supplier and the services received by the recipient
• The secondment in the case at issue was pursuant to a contract between Avir and SDV
• If there was a direct link between the service provided by Avir (i.e. the secondment of the director) and the consideration provided by SDV (in the form of the reimbursement of costs), the transaction would have to be regarded as a supply of services for consideration and, thus, subject to VAT. A “direct link” would exist if: (a) SDV’s payment was a condition for the secondment, and (b) SDV made the payment in return for the secondment. The amount of the consideration is irrelevant: it may be less than, equal to or greater than the costs incurred by Avir for the seconded manager

Implications 

The impact of the decision is not limited to the specific rule under scrutiny (Article 8(35) of Law No. 67/1988), but will likely extend to similar rules on staff leasing (Legislative Decree No. 276/2003). In respect of intra-group supplies of staff, it may, however, be possible to limit this impact by adopting Italian VAT grouping.

Whilst the Italian tax authorities should not be able to request the payment of VAT in respect of past secondments if no VAT was included on the invoice (as previous ECJ decisions indicate that, if the VAT exemption has already been applied, tax authorities may neither reopen definitively closed periods nor issue tax assessments for open periods (C-326/15 and C-605/15)), the Italian tax authorities did request the payment of VAT in a similar case concerning an impermissible VAT exemption for driving lessons (C-449/17) (Ruling No. 79/E/2019). It remains an open question what approach they will adopt here…