Down payment based on a preliminary agreement – VAT deduction

The Court of Cassation, with the decision n. 24671 of 3 October 2019, concerning the VAT treatment related to the down payment based on a preliminary real estate sale agreement, has incorporated the principle established by the European Court of Justice referred to the joined cases C-660/16 and C-661/16 of 31.05.2018, according to which the determining factor for the VAT deduction is represented by the certainty of the future transaction to which the preliminary is prearranged.

The considered case by the Supreme Court is very important because, in the circumstance in which the final and definitive agreement does not follow the preliminary agreement, complaints by the IRS are frequent and related an alleged non-existence and elusiveness of the transaction, leading to not recognize the deduction of VAT.

The non-existence of a transaction subject to VAT – which must in any case be verified on the basis of the analysis of factual elements – may well take the form of a preliminary contract that form the beginning both parties are aware that the final agreement could not be carried out (EU Court of Justice, joined cases C-660/16 and C-661/16).

Such a situation would therefore lead to depriving the act of significant effects for VAT purposes and qualifying it as “non-existent”, with the consequences of the non-deductibility of VAT.

As a corollary thereof, the judges recall that, in addition to the mandatory existence of the operation, the payment of a down payment and the issue of the related invoice is subject to VAT on the date on which the invoice is issued or in which payment is made, limited to the amount billed or paid, is a necessary condition for the VAT to be deducted.

The general principles that are therefore established by the judges, in terms of the legitimacy of VAT deduction relating to the down payment for a preliminary real estate agreement, are:

  • Non-elusive nature of the underlying transaction to the preliminary, ascertainable through the interpretation of the preliminary contract.
  • The right to deduct VAT arises in relation to the receipt of the down payment.