The Italian Budget Law for FY 2017 has introduced new VAT Unit rules. In particular, as of 1 January 2018, taxable persons established in Italy will be able to set up a VAT Unit pursuant to article 11 of the Council Directive 2006/112/EU.

For the time being, the conditions to set up a VAT Unit are the following:

• The taxable persons shall be closely bound to one another by a financial link. In particular, each taxable person shall be directly or indirectly controlled by the same Italy based taxable person or by an entity based in a Country with which Italy has entered into an agreement on the mutual exchange of information.

• The taxable persons shall be closely bound to one another by an economic link. In particular, each taxable person shall carry out one or more of the following business activities:

– Activities having the same core business as those of the other taxable persons.

– An activity which is complementary or interdependent to the one carried out by other members of the VAT Unit.

– An activity from which the other members of the VAT Unit actually benefit.

• The taxable persons shall be closely bound to one another by an organizational link. In particular, the management of each taxable person shall be coordinated by operation of law or from a factual standpoint.

The above three requirements should exist jointly. However, should the financial link exist and be proven, the economic and organizational links are deemed to exist unless the Tax Authority reaches different conclusions. In case an option for the VAT Unit is exercised, all the taxable persons bound to one another by the above links shall be included in said VAT Unit according to the "all-in, all-out" principle. The option for the VAT Unit shall be exercised for at least three years. As a result of the participation in the VAT Unit, all the taxable persons, legally independent, are regarded as a single taxable person for VAT purposes, (ie, the VAT Unit). Given that, all the VAT provisions are applicable to the VAT Unit and all VAT formalities shall be carried out by the VAT Unit through the controlling entity or, in the absence of a controlling entity, by the taxable person with the highest turnover or revenues. All the members of the VAT Unit remain nevertheless jointly and severally liable for the VAT liabilities. Under the new VAT Unit regime, the following VAT rules apply:

• Supplies of goods and services carried out between members of the VAT Unit are out of the scope of Italian VAT.

• Transactions carried out by a member of the VAT Unit vis-à-vis an external entity are regarded as carried out by the VAT Unit itself.

• Transactions carried out by an external entity vis-à-vis a member of the VAT Unit are regarded as carried out vis-à-vis the VAT Unit itself.

The new VAT Unit regime is an alternative to the VAT Unit regime currently existing within the Italian VAT legislation (under which VAT credits and liabilities of each taxable persons are set off within the VAT Unit with each taxable person maintaining its independency for VAT purposes) which remains in force. The legislation currently in force exclusively provides for the general main rules governing the VAT Unit. In the next months, the law and Tax Authorities documents interpreting and completing such rules, as well as the actual instructions to set up and manage the VAT Unit, shall be issued and will be the subject of subsequent alerts.