Navigating VAT on Improvements to leased or Loaned Assets

The landscape of Value Added Tax (VAT) reimbursement concerning improvements made to assets not directly owned by a business has been subject to considerable debate. Recent clarifications from the tax authorities, specifically Resolution 20/E of March 26, 2025, shed light on the conditions under which businesses can reclaim VAT paid on renovations, expansions, or transformations of third-party properties.

This article delves into the nuances of these regulations, examining the evolving interpretations and providing practical insights for businesses seeking to optimize their VAT recovery strategies. Understanding these rules is crucial, especially given the increasing prevalence of leasing and borrowing arrangements in modern business operations. According to a 2024 report by Eurostat,leasing accounts for approximately 30% of capital investments across the EU,highlighting the meaning of VAT considerations in this area.

Ancient Context: Divergent Interpretations of VAT Law

Historically, the Italian Revenue Agency has maintained a cautious stance on VAT refunds for improvements to third-party assets. Their initial position, outlined in resolution 179/E of December 27, 2005, stipulated that VAT reimbursement was only applicable to cushionable goods – assets that depreciate over time and are owned by the claimant. This interpretation excluded improvements to leased or loaned properties, as these enhancements technically accrue to the property owner.

However, this rigid interpretation faced challenges in the courts. Conflicting jurisprudential views emerged, creating uncertainty for businesses.Some courts argued that if a clear link existed between the improvements and the business activity, VAT deduction, and consequently reimbursement, should be permitted, nonetheless of the asset’s removability or autonomous functionality. Other courts adhered to the Revenue Agency’s stance, emphasizing the need for the VAT to relate to the purchase of a depreciable asset.

The initial interpretation of VAT law created a disparity, leaving businesses uncertain about their eligibility for VAT refunds on essential property improvements.

The Landmark Ruling: United Sections Decision No.13162 of 2024

A pivotal moment arrived with the United Sections of the Court of Cassation’s ruling No. 13162 of 2024. This landmark decision aimed to harmonize the divergent interpretations and provide a definitive guideline on VAT reimbursement for improvements to third-party assets. The court emphasized the equivalence of the conditions of deduction and reimbursement of VAT.

The court clarified that the term purchase of cushionable goods should be interpreted broadly to encompass assets available to a business under a legal title that guarantees their detention for a period of time appreciably long, such as a lease or loan agreement. Crucially, the assets must be instrumental to the business’s operations.This interpretation aligns with the EU’s VAT directive (2006/112/EEC), which focuses on the economic substance of an investment rather than its strict legal classification.

United Sections of the Court of Cassation, Ruling No. 13162 of 2024

The concept of “shock-absorbable asset” cannot be correctly understood in the legal context of VAT with reference to the regulatory provisions on direct taxes… Rather, it is necessary to refer to the notion – large and substantially economic – of “investment goods” which is that used in the “Refuse” directive.

Implications for Businesses: A Shift in Perspective

Following the United Sections’ ruling, the Revenue Agency’s previous restrictive interpretation, as expressed in resolution 179/E/2005, is now considered outdated. Businesses that undertake improvements, transformations, or expansions on properties they lease or borrow are now, under most circumstances, entitled to VAT reimbursement. this right is contingent upon meeting the standard legislative requirements and demonstrating that the assets are instrumental to their business activities for a medium-long time, signifying a considerable investment.

This shift in perspective offers significant advantages for businesses, especially those operating in sectors that rely heavily on leased or borrowed properties, such as retail, hospitality, and manufacturing. By claiming VAT refunds on property improvements, these businesses can reduce their capital expenditure and improve their overall financial performance.

Key takeaways and practical Advice

• Review Existing Leases: Assess current lease agreements and identify any capital improvements made to the property.
• Gather Documentation: Compile all relevant invoices, contracts, and financial records related to the improvements.
• Consult with Tax Professionals: Seek expert advice to ensure compliance with the latest VAT regulations and optimize your reimbursement claims.
• Understand the “Instrumentality” requirement: Be prepared to demonstrate how the improvements are essential to your business operations.

By proactively addressing these points, businesses can navigate the complexities of VAT law and unlock the potential for significant financial benefits.