Italy Loses Company Car VAT Refund Case In ECJ

by Ulrika Lomas, Tax-News.com, Brussels

19 September 2006

The European Court of Justice has ruled that the Italian government was wrong to apply a tax measure which prevented business persons from reclaiming value-added tax on company cars.

Italy first introduced the rules, which prevent company car buyers from claiming back VAT unless the vehicle was used strictly for corporate purposes, in the 1970s as a 'temporary' measure, but the law has been renewed several times and continues to stand.

Under European Union legislation, while temporary changes to VAT rules are sometimes permitted, member states cannot permanently change their VAT laws without the approval of the European Commission in the interests of keeping pan-European VAT laws as uniform as possible.

According to the ECJ, the Italian VAT laws in the case in question are "far from temporary and have been applied in a structural way for more than 25 years."

The case reached the ECJ after a small company in northeastern Italy attempted to deduct VAT on company cars that were not part of the enterprise's direct operations. The request was rejected by tax authorities but a local court referred the case to the ECJ.

Following the judgment, Economy Ministry Undersecretary Vincenzo Visco announced that company car owners would be able to recalculate their tax bills and request refunds for car purchases sometime between the end of November and the middle of December.

The impact on the Italian government's already stretched budget is not yet clear, but estimates reported in the international media have suggested that repealing the law will cost EUR2.5 billion (US$3.2 billion) annually in tax revenues, while the government could face a tax refund bill in the region of EUR10 billion.

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