The Italian Supreme Court has addressed the criteria for distinguishing, for VAT purposes, between the sale of a building and the sale of building land. The decision focuses on the criteria to determine whether the transfer of buildings intended for demolition should be treated, for VAT purposes, as the sale of a building or as the sale of building land.
This distinction is relevant for VAT purposes because the sale of building land is always subject to VAT at the standard rate of 22%, without the application of the reverse charge mechanism. By contrast, the sale of buildings may be subject to VAT under the reverse charge mechanism.
The case concerned a property sale in which the demolition of the existing building was already envisaged at the time of the notarial deed. The parties treated the transaction as subject to VAT under the reverse charge mechanism, meaning that VAT was not charged in the invoice in addition to the purchase price.
The Tax Authority subsequently reclassified the transaction as the sale of building land, leading to the application of VAT at the 22% rate. This reclassification was upheld by the second-level Tax Court.
While referring the case back to the lower court for a decision on the specific facts, the Supreme Court clarified the interpretative criteria to be used in determining, for VAT purposes, the nature of the asset transferred in cases involving buildings intended for demolition, taking into account the case law of the Court of Justice of the European Union on VAT.
The Court made three observations that are particularly relevant from a practical tax perspective:
- The key issue is whether the demolition of the building located on the land constitutes an operation independent from the sale or whether it is so closely linked to it that the two transactions should be treated as a single supply for VAT purposes.
- The purchaser’s intention to demolish the building and construct a new one, even if recorded in the preliminary agreement, is not in itself sufficient to establish that a single supply exists. Consequently, such intention alone is not sufficient to reclassify the object of the transfer as building land rather than a building for VAT purposes.
- If the sale is accompanied by the conclusion of a contract for demolition and reconstruction works, the contractual arrangements must be analysed carefully. In particular:
- if the demolition contract is entered into by the purchaser, the demolition should generally be regarded as independent from the property transfer for VAT purposes;
- if the demolition contract is entered into by the seller, this circumstance may lead to the transaction being treated as a single supply for VAT purposes, in which case the transaction may be qualified as the sale of building land (subject to VAT at 22% without reverse charge) rather than the sale of a building (which may be subject to VAT under the reverse charge mechanism, subject to certain conditions).
The judgment does not address the cadastral classification of the property.
In this respect, it should be noted that, according to the Tax Authority (Ruling of 7 November 2022, No. 554), the transfer of buildings classified in the land register under category F/2 (derelict buildings) is subject to:
- VAT at the 22% rate, without the possibility of applying the reverse charge mechanism, as a transfer of a generic asset;
- registration tax, mortgage tax and cadastral tax in the fixed amount of EUR 200 each.
In such cases, therefore, the same VAT regime applicable to the sale of building land applies.
This treatment is based on the fact that such properties do not qualify as residential or instrumental buildings for VAT purposes, since they cannot be used as real estate units due to their severe state of disrepair. These typically include abandoned or unusable buildings (see Circular of the Italian Land Registry Agency No. 2 of 9 July 2010).
This concerns the VAT regime and transfer taxes, without prejudice to the fact that, from a contractual standpoint, the object of the transaction remains the buildings as identified in the Land Register.