Alert - Italy - VAT - Complex Transactions - Revenue Agency Opinion

Italian Revenue Agency released an opinion on the correct qualification for Italian VAT purposes of the supply of maintenance services on helicopters in case the consideration is charged through the mechanism of invoicing flight hours at the hourly rate (so called “PBH" contracts). (see opinion n. 4 of 23 February 2022). This type of contract is frequently used in the industry, but the VAT treatment is not always certain.

Although the opinion is referred to a specific contract and industry, the general principles outlined could be applied to complex contracts and transactions.

The request referred to a situation where the PBH contract was signed between Italian customers and an Italian Service Stations acting in its own name but on behalf of a EU Manufacturer.

Under a PBH contract, the service supplier commits to maintain constant the airworthiness, i.e. the efficiency, suitability and safety to fly of the aircraft, through a periodic maintenance service, including technical assistance, maintenance, overhaul/repair and replacement of mechanical and electronic components, updating of technical documentation, etc.

As a result, the PBH contract, provides for composite or complex services (operations concerning both the provision of services and the supply of goods). Indeed, the PBH contract provides the performance of the services related to the maintenance of the helicopters, which may be scheduled in advance or provided on request. Such services take place according to the so-called "standard exchange method", which involves the replacement by the service provider at pre-established intervals of inefficient/used components with efficient ones.

The customer/buyer pays a price established on the basis of the flight hours of the helicopter.

The Revenue Agency confirmed that the transactions covered by the PBH contract should be qualified as a supply of service, irrespective of the fact that the replacement of spare parts could be part of the service. As a result, the service should be treated for VAT purposes as a generic service, pursuant to article 7-ter of the Italian VAT Decree (territorially relevant in the country where the purchaser, subject to VAT, is "established" for VAT purposes).

The Revenue Agency made reference to the conclusions of the EU Court of Justice, in its judgment of September 4, 2019, Case C-71/18. According to the EU Courts, "when a transaction consists of a series of elements and acts, all the circumstances in which it takes place must be taken into account in order to determine whether that transaction involves, for VAT purposes, two or more separate supplies or a single supply" (see also Judgment 17 December 2020, C-801/19, Judgment 4 September 2019, KPC Herning, C-71/18, EU:C:2019:660, paragraph 35 and case law cited therein). "Indeed, in certain circumstances, several formally distinct supplies, which could be provided separately and thus give rise to taxation or exemption separately, must be regarded as a single transaction when they are not independent” (judgment of 4 September 2019, KPC Herning, C-71/18, EU:C:2019:660, paragraph 37 and case-law cited therein).

So, the Revenue Agency confirmed that a transaction has to be regarded as unique where two or more elements or acts supplied by the taxable person are so closely linked as to form, objectively, a single united economic supply, the split of which would be artificial in nature. This is also the case when one or more supplies constitute a main supply and the other supply or supplies constitute one or more ancillary supplies to which the same tax treatment of the supply applies. In particular, a service must be considered ancillary to a principal service when, for customers, it does not constitute an end in itself, but rather the means of making the most of the principal service offered by the provider (judgment of 4 September 2019, KPC Herning, C-71/18, EU:C:2019:660, paragraph 38 and case law cited therein).

Moreover, the Revenue Agency underlined that to establish determine whether the services provided are independent or constitute a single complex supply, it would be important to identify the main elements of the transaction in question, taking into account all the circumstances which are relevant for the transaction under review (judgment of 17 January 2013, BGŻ Leasing, C224/11, EU:C:2013:15, paragraph 32).