The European Court of Justice contradicts the Italian Court of Cassation and Constitutional Court and rules that a partial payment of VAT is possible, provided that an independent expert certifies that there is no better alternative for the Tax Authorities

The case

A company filed a concordato preventivo proposal with the Court of Udine, providing for full payment of certain secured creditors and for partial payment of some lower ranking secured creditors, including VAT claims, which would receive no payments in the alternative of a bankruptcy liquidation.

In doubt whether the proposal would be admissible, with respect to the rule of Art. 182-­‐ter IBL which requires full payment of VAT within a so-­‐called “tax settlement”, the Court of Udine called on the European Court of Justice (ECJ) to rule whether European Law indeed mandates such a rule at Member State level.

The issues

The ECJ faces the issue whether a partial payment of VAT is admissible in a concordato preventivo proposal: both the Court of Cassation (with the decisions Nos. 22931 and 22932 of 4 November 2011) and the Constitutional Court (with the decision No. 225 of 24 July 2014) ruled out this, sticking to the rule set forth in Art. 182-­‐ter IBL, which was considered based on a European Law principle binding Member States to fully recover VAT claims.

It may be noted that some Italian lower courts have departed from these precedents (see recently the decision of the Court of Santa Maria Capua Vetere).

The decision of the Court

According to the ECJ, European law does not bar a concordato proposal offering a partial payment of VAT claims, upon two conditions: (i) the Tax Authorities claim cannot be better satisfied in the alternative of a bankruptcy liquidation and (ii) this is certified by an independent expert.

The ECJ recalls that Art. 4 third para. of the UE Treaty and Articles 2, 250 and 273 of the VAT Directive require each Member State to take any appropriate measures in order to attain full collection of VAT and that Member States enjoy some flexibility as to the choice of such measures, provided that a threshold is met, namely to ensure that collection activity is effective and to avoid discrimination among taxpayers.

Based on the foregoing, the ECJ allows a partial payment of VAT, underlying that a safeguard is provided by the certification by the independent expert in the sense that, due to the insolvency of the debtor, the Member State would not be in any case in a position to collect VAT for a higher amount than that offered under the concordato proposal. According to the ECJ, this does not violate Member States’ duty to guarantee full collection of VAT, since it does not amount to a general and unconditional waiver to collect the tax.

Commentary

The ECJ contradicts therefore the Court of Cassation and the Constitutional Court of Italy, which reached opposite conclusions based on the rule set by Art. 182-­‐ter IBL (“with respect to VAT […], the proposal can offer exclusively a delayed payment”) supposedly imposing a bar to partial payment of VAT as a general rule in concordato preventivo, applicable also when no “tax settlement” is proposed.

The ECJ based instead its ruling solely at European law level, not considering the argument based on Italian national laws on which the local Courts had focused.

The rationale offered by the ECJ is in line with the opinion – which is certainly to be followed – of those who had termed as unreasonable a solution imposing to impair the chances of recovery of the VAT claim, through an inevitable bankruptcy liquidation which can only limit recovery levels for the creditors: indeed, the ranking of the VAT claim within secured claims does allow distributions to the Tax Authorities in bankruptcy only after all higher ranking claims have been fully satisfied.

The decision of the Court will hopefully influence future case law on this issue, allowing concordato proposals offering only a partial payment of VAT without resorting to a “tax settlement” scheme. The decision cannot instead limit further application of the provision of Art. 182-­‐ter IBL, which is a rule of national law which will remain in force, although it was clearly based on an apparent principle of European law, which the ECJ has now ruled out.