Italy to change VAT Rules on Residential Property – Introduction
Italy’s Value Added Tax (VAT) regulations regarding residential property appear on the brink of a significant change.
Current position
Currently, rental income from residential properties generally enjoys a VAT exemption.
This includes scenarios such as social housing, where landlords may opt to apply VAT.
However, the Italian VAT authorities restrict the recovery of VAT on costs related to these properties, a constraint primarily aimed at entities outside the construction industry—the only sector currently allowed to reclaim input VAT on residential real estate expenses.
This longstanding policy strictly adheres to the Italian VAT law. However, it has sparked concerns about whether it is consistent with the fundamental VAT principle of neutrality, particularly given the properties’ taxable use.
This rigid approach can lead to market distortions, notably contrasting with the more flexible VAT recovery rules applied to residential properties used in the hospitality sector.
The solution?
To rectify these issues, a new Legislative Decree is expected as part of an ongoing tax reform in Italy.
This decree proposes to eliminate the current restrictions on VAT recovery that are based on the cadastral classification of buildings.
The intention is to extend the principle of VAT neutrality more broadly, ensuring fair treatment across different uses of residential property.
Italy to change VAT Rules on Residential Property – Conclusion
For now, the existing regulations remain in effect: VAT on expenses for residential properties, even those opted for taxation, cannot be reclaimed.
The upcoming decree, however, promises a significant shift towards a more inclusive and neutral application of VAT rules in the residential property sector, aligning tax practices with market realities and ensuring equity among different property uses.
Final thoughts
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