VAT recovery in the event of a defaulting debtor

The Italian Revenue Agency, through its answer to ruling no. 386/2022, published last July 20th, recently provided some clarifications on the subject of variation notes for VAT purposes. The subject of the ruling is governed by art. 26 of the Presidential Decree 633/1972, which was reformulated in 2021by means of article 18 of the so called “Sostegni-bis” Italian Decree.

 

The Revenue Agency’s response provides clarifications with respect to the right to deduct VAT. In fact, in the event the debtor is in default, the transferor who has already paid the tax to the Treasury, will be able to benefit from the chance to recover this sum through the issue of a VAT variation note.

 

By means of the above-mentioned response, the Revenue Agency explains the proper procedure to follow regarding the methods and timing in a list of circumstances, listed here below.

  • Unilateral termination of the agreement for ongoing and periodic services: it is possible to invoke the contract’s termination provision if payment is not made. In fact, non-payment, as stated by article 1456 of the Civil Code, results in contract termination from the first outstanding invoice. Therefore, in the present case, the prerequisite for executing the downward variation automatically occurs.

 

  • Attempts at judicial recovery of amounts – Partnerships : given the particular position of the partners, in addition to the possibility of issuing a VAT variation note, actions may be brought against the partners with unlimited liabilities.

 

  • Attempts at judicial recovery of amounts – Corporations: if the enforcement against the company is unsuccessful and a termination for non-performance has not been initiated yet, it is possible to issue the variation note for VAT purposes. If there are guarantees from third parties, legal action may be taken against them.

 

  • Bankruptcy of corporations and partial payment of the guarantor: in order to limit the cases in which the right to VAT deduction is not allowed, the possibility of proceeding by deduction of the tax is provided. This possibility is granted from the date the debtor’s declaration of bankruptcy or from the date it is conclusively determined that the action would fail due to a lack of assets.

 

  • Termination and recognition of default following a settlement agreement: according to the Italian Tax Authority, this circumstance meets the requirement for a reduction under Paragraph 3 of article 26 of the VAT regulations. Since this is a contract designed to elicit mutual concessions to put an end to a disagreement, the amount indicated in the variation note will be equal to the amount subject to waiver of collection.