Italy: 40 per cent VAT deduction for cars until 2025

In principle, the authorization to apply a limitation on VAT deduction to the extent of 40 per cent on motor vehicles, by way of derogation from Articles 26 and 168 of Directive 2006/112/EC, was requested by the Italian Government after the 2006 ruling in Case C-228/05 (Stradasfalti) in which the EU Court of Justice declared contrary to EU law the limitations established at the time in Italy with reference to the deduction of VAT paid on expenses incurred for the purchase/import of motor vehicles.

 
The EU Council authorisation was granted by Decision 2007/441/EC, initially until 31 December 2010, subsequently extended for a further four times (by Decision 2010/748/EU until 31 December 2013, by Decision 2013/679/EU until 31 December 2016, by Decision 2016/1982/EU until 31 December 2019 and by Decision 2019/2138/EU until 31 December 2022) and – as mentioned – lastly reconfirmed with the recent Decision 2022/2411/EU of 6 December 2022, as a result of which, until 31 December 2025, the flat-rate deduction of 40 per cent of the VAT paid on expenses relating to road motor vehicles will apply, i.e. on those relating to the purchase, importation, leasing or hire, modifications, repairs and maintenance as well as on expenses relating to the purchase of fuel and lubricants, as provided for by Article 19-bis1 paragraph 1 letter c) and d) of Presidential Decree 633/72.

 
It should be noted that in accordance with Article 5 of Directive 2007/441/EC, road motor vehicles are all vehicles, other than agricultural or forestry tractors, normally used for the carriage by road of persons or goods whose authorised mass does not exceed 3,500 kilogram and whose number of seats, excluding the driver's seat, does not exceed eight.

 
The limitation does not apply, however, to vehicles

• which are used exclusively in the exercise of the activity of a business, art or profession (e.g. car hire compa­nies, driving schools, vehicles used for the maintenance of the transport network)
• used in the course of the business activity (e.g. taxis)
• used by agents or sales representatives

with the consequence that VAT paid in the aforementioned cases is fully deductible, unless there are restric­tions arising from the carrying out of exempt or non-taxable transactions (Ministerial Order No. 6/2008).

 
For vehicles granted for use to employees, the VAT treatment to be applied differs depending on whether the car is made available free of charge or with a specific charge.

 
For cars granted free of charge as a benefit, the deduction is allowed at a flat rate of 40 per cent. In addition, pursuant to Article 3, paragraph 6, letter a) of Presidential Decree No. 633/1972, the rules on self-consumption do not apply to the employer and, therefore, the supply is not liable to VAT.

 
On the other hand, for vehicles purchased by the employer (or acquired by leasing or renting) and granted for use to employees against a specific consideration, VAT is fully deductible. If the agreed consideration is lower than the “normal value”, the taxable base is adjusted to the fringe benefit for IRPEF (personal income tax) purposes.

 
Finally, it should be noted that the discipline in question does not apply to motorbikes with an engine capacity greater than 350 cubic centimeters, for which VAT is non-deductible, unless they are goods forming part of the business' own activity.