The Italian Supreme Court (Corte di Cassazione) has reaffirmed that VAT deduction on the acquisition and management of properties must be determined based on the actual use of the property in an economic activity, irrespective of its cadastral classification (Decision No. 31506/2025).
The Court emphasized that VAT neutrality – a fundamental principle governing the operation of this tax as set forth primarily in the EU VAT Directive – must be guaranteed to economic operators.
Accordingly, the Court held that VAT deduction must be permitted on the acquisition, maintenance, renovation, or management of residential properties where such properties are allocated by the owner to an economic activity.
The case law
It follows that Article 19-bis1, paragraph 1, letter i) of Italian VAT Law – which provides for the non-deductibility of VAT relating to buildings classified in the Land Registry as residential (with limited exceptions) – must be disapplied.
Article 19-bis1, paragraph 1, letter i) excludes VAT deduction on:
- the purchase of residential properties, and
- their maintenance, renovation, and management.
The only exceptions provided by that provision are for:
- companies whose exclusive or principal business activity is the construction of residential properties, and
- companies engaged in VAT-exempt rental activities.
According to the consistent jurisprudence of the Supreme Court, VAT is deductible – notwithstanding the above provision – if residential properties are used in the context of an economic activity (Decision No. 23296/2025).
Tax Authority’s view
The Revenue Agency (Agenzia delle Entrate) has recognized this interpretation with respect to buildings classified in the Land Registry as residential only in certain cases, not on a generalized basis. For example, the Agency allows VAT deductibility where residential properties are used for tourist accommodation activities with hotel services, but not if they are used for other types of rental business (see Ruling No. 60 of 2024).
The non-deductibility provision described above is inconsistent with the VAT system. Moreover, the tax system already provides other provisions suitable for addressing any improper VAT deduction connected to residential properties.
Outlook
The foregoing constitutes one of the tax obstacles to the development of investment in the living sector by institutional real estate investors. The flow of institutional capital into this sector can promote the increase and improvement of the supply of residential properties.
From another perspective, the above VAT rule is inconsistent with the energy efficiency improvement objectives for the building stock provided for in the EPBD (Energy Performance of Buildings Directive) – which must be transposed by May 29, 2026.
Italy’s upcoming VAT reform should remove these obstacles, guaranteeing VAT deduction and neutrality with respect to residential properties allocated to economic activities.