VAT exemption - even in subcontracting - for shipbreaking operations

Genova – By a resolution dated September 9, 2022, The Italian Revenue Office underlined the differences between the VAT exception pursuant to Article 8 bis letter e) and that provided for by Article 9 Presidential Decree no. 633/1972 in relation to shipbreaking services granted under a subcontract.

Indeed, on the basis of a procurement contract between the Seaport Authority and a Consortium, the latter set up a company, DELTA, the sole object of which was the performance of all the services relating to the unitary entrustment contract. The applicant company Alfa was entrusted only with the "Removal and demolition of the wreck of the ship". For the performance of the complex operational steps connected with the shipbreaking, the applicant used subcontractors. The work commissioned to the subcontractors concerned an entire phase of the shipbreaking process, which was carried out by using the subcontractor's personnel and means. The subcontractor issued the invoices to the client Alfa, which, in turn, re-invoiced Delta, being the VAT exemption applicable. On the other hand, the activity performed by the subcontractors related to individual services, which were invoiced directly to Alfa - with VAT or under a non-taxable regime depending on the service rendered - and paid directly by Alfa itself.

Consequently, the applicant had asked the Revenue Agency whether the invoices issued by the various economic operators (subcontractors) could be subject to the VAT exemption provided for in Article 8-bis(1)(e) or to that one set out in Article 9(1)(6) of Presidential Decree no. 633/1972.

The Agency has thus pointed out that the non-taxability of Article 8-bis, paragraph 1(e), first of all, requires for all types of vessels mentioned in subparagraph (a), including those for scrapping (as well as pleasure boats used for commercial purposes) to be used on the high seas (i.e. having carried out voyages beyond 12 nautical miles to an extent exceeding 70 % of the total voyages), in accordance with Article 148 of the VAT Directive).

Moreover, the special nature of the Vat exemption provided for in Article 8 bis precludes the possibility of extending its scope of application, as the subjective requirements of the contractors or the contractual schemes put in place for the implementation of the works are irrelevant to such scope.

According to the Agency, the principle established by administrative practice (see Resolution No. 356560 of 1986 referred to by Resolution No. 37/E of 2010), pursuant to which "(Article 8 bis of Presidential Decree No. 633 of 1972) [...] provides for the non-taxability of both the main contract (the one concluded between the principal and the shipyard or other subcontractor) and the immediately derivative contracts (i.e. those concluded between the shipyard or other subcontractor and one or more subcontractors) [...]", although originally applied in relation to shipbuilding operations, is also applicable to the other services included in letter e) of Article 8 bis, and therefore also to shipbreaking services.

Indeed, according to the Revenue Office, the VAT exemption regime applies to the main operations (including shipbreaking), and to all those operations which are necessary for their implementation (see Resolution No. 161/E of 30 July 2003).

More precisely, the following must be considered non-taxable under the aforementioned Article 8-bis:
-activities, even if subcontracted, constituting autonomous phases within the interventions referred to by the rule, being an integral part of said interventions;
- result guarantee contracts, in which the providers have organizational autonomy.

Thus, the VAT exception regime can apply to subcontracted services, if such activities are specifically aimed at carrying out a certain phase of the shipbreaking project (provided that the requirement of sailing on the high seas is met) and thus, in the present case, to both the invoices issued by Alfa and those issued by the subcontractors and re-invoiced by Alfa itself to Delta. On the contrary, according to the Revenue Office, subcontracted services that take the form of single operations, and need to be coordinated with others in order to achieve a stage of the removal/demolition operation, are to be taxed according to the ordinary rules.

Finally, with regard to the exemption under Article 9 (1)(6), which recognises the applicability of the VAT exception to 'services supplied in ports, freight terminals, airports and border railway stations that directly reflect the operation and maintenance of facilities or the movement of goods or means of transport', the Agency thus confirms its geographical scope as limited to activities carried out in the port area, such activities being structural works on existing facilities, having as their immediate purpose their operation and maintenance or their modernization, expansion, and upgrading (see Circular No. 41/E of 21 April 2008), even if rendered by different subjects (i.e. subcontractors).

It follows that it is necessary to assess, on a case-by-case basis, whether the subcontracted services represent autonomous services rendered in the context of carrying out the shipbreaking operation (and therefore they are subject to the ordinary regime) or an integral part of an autonomous phase of that operation (not taxable under Article 8 bis).