OUR INSIGHTS AT A GLANCE
- The Italian VAT law foresees that "the lending or secondment of staff in respect to whom only the related cost is reimbursed shall not be regarded as relevant for the purposes of VAT"
- In the San Domenico Vetraria SpA case, the Court of Justice of the European Union ("CJEU") was asked whether such provision was compatible with the EU VAT Directive and concluded that it was
- As the supply of staff between members of a VAT group does not fall within the scope of VAT and no VAT needs to be charged on the reimbursement of the costs requested by the employer, the outcome of this case law has no impact on secondment of staff within the framework of a VAT group, which remains a solid option to mitigate tax exposures
Background and question referred to the CJEU
In this case, the Italian company Avir seconded one of its directors to its subsidiary company, San Domenico Vetraria. Avir issued invoices with VAT to San Domenico corresponding to the reimbursements of the (salary) costs incurred for the seconded director. In its VAT returns, San Domenico considered that the input VAT was deductible and exercised its VAT deduction right on these amounts.
The Italian VAT law foresees that "the lending or secondment of staff in respect to whom only the related cost is reimbursed shall not be regarded as relevant for the purposes of VAT". In other words, and based on the Italian VAT law, the reimbursement of salary costs should not be seen as a service falling within the scope of VAT and should therefore not be subject to any VAT. On that basis, the Italian VAT authorities were of the opinion that San Domenico was not entitled to recover the input VAT on the invoices issued by Avir as VAT should not have been charged.
Noticing that the provision of labour is subject to VAT in Italy (in contrast to the reimbursement of costs linked to seconded staff), the Italian Supreme Court of Cassation raised the question of the compatibility of the above-mentioned Italian provision with the EU VAT Directive.
Position of the CJEU and potential impacts
Noticing that there is a direct link between the service supplied (the secondment) and the consideration received (the payment made to Avir) and irrespective of the amount of the payment, the CJEU ruled that this transaction is a supply of services falling within the scope of VAT. On that basis, the CJEU concluded that the Italian legislation is contrary to the EU VAT Directive.
The Luxembourg VAT law does not include any similar provision based on which the reimbursement of staff costs would fall outside the scope of VAT. As a general rule, payments made in consideration of seconded staff are considered as VAT taxable from a Luxembourg VAT perspective.
The outcome of this case has no impact on the specific situation of secondment of staff within the framework of a VAT group. The supply of staff between members of a VAT group does not fall within the scope of VAT and no VAT needs to be charged on the reimbursement of the costs requested by the employer. The VAT grouping constitutes a robust alternative to mitigate VAT exposures and to, notably, avoid a VAT leakage on the costs related to an employee seconded to a member of the VAT group.
Originally published April 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.