In recent years in the EU, investments in the living sector have grown steadily, becoming as important as traditional commercial sectors. In Italy, the living sector in 2022 recorded an investment volume of around EUR1 billion, mainly concentrated in Milan (52%), followed by Rome and Turin, with an overall growth of 35% compared to the previous year (as reported in Dils – Italian real estate market 2022).
The growth of the living market has also show domestic and international operators are focusing on the serviced apartment/short-rent business model to meet the needs of both tourists and businesspeople. According to data released by Aigab (Italian Association of Short Rental Managers) in 2022 the short rent/serviced apartments sector generated around EUR11 billion in terms of national GDP, compared to the EUR28 billion generated by the entire hotel sector.
The serviced apartment business model involves providing domestic and international travelers and businesspeople with fully furnished apartments, along with a certain number of “ancillary services” aimed at making their stay more comfortable and convenient. Focusing on the current Italian legal framework, we were wondering whether it’s ready to meet the challenges of these new business models from a civil law, town-planning and tax standpoint.
Civil law insights
It’s not easy to classify the legal relationship between the operators of the serviced apartments and the final guests in a typical contract. Given that the business model consists of offering guests furnished premises with some additional services, the contract offered to the guests can’t be qualified as “lease contracts” nor a “bed and breakfast contract” under Italian law.
Based on the Italian Civil Code, a lease contract assumes that the object of the contract is only the enjoyment of the premises (sometimes with relevant equipment) against the payment of a rent, without additional services. Bed and breakfast contracts require the serving of food and drinks at breakfast and a very short stay. So it’s difficult to decide what type of contract to offer guests of serviced apartments under Italian law.
Article 1322 of the Italian Civil Code provides that the “parties may also conclude contracts that do not belong to the types having a particular regulation, provided however that they are aimed at realizing interests deserving protection according to the legal system.” Based on this provision, the contractual relationship with the guests of serviced apartments might fall in the category of “non-typified” agreements (contratti atipici) under article 1322 of the Italian Civil Code. They’re different agreements such as lease agreements, supply agreements (by means of which the supplier undertakes to provide to the other party periodic or continuous performance of tasks) and service agreements (through which one party undertakes the execution of works or services against a consideration). The contract in question can be classified as a “non-typified” agreement as a “residence agreement or housing contract.” The lawfulness of housing contracts can also be supported in the light of several case law rulings.
The Italian Supreme Court has clarified that housing contracts differs from lease contracts. In lease contracts the object of the service to be provided is limited to the enjoyment of the property. In housing contracts the enjoyment of the premises is linked and integrated by a series of services of a generic hotel nature (eg changing linen, laundry, administration of utilities, equipped kitchen, day and night concierge service, laundry services, cleaning services, mail services), which assume an equal importance with respect to the enjoyment of the accommodation (Supreme Court ruling 1067/1987 and 11859/1992). Housing contracts should not be considered a lease relationship even though the guests have made only partial use of the ancillary services, since it’s essential that such services exist and that they’re part of the content of the relevant agreement (Supreme Court ruling 4763/1999).
But, given the increasing use of these kind of “non-typified” contracts – including in the Italian market – it’s important that the legislator intervenes to typify and regulate the terms, conditions, and limits of this kind of contract.
Town planning insights
From a town-planning standpoint, the category of “serviced apartments” is not clearly ruled by national and regional laws. So, when an operator has to verify the zoning compliance of a serviced apartments project to be implemented in Italy, they have to interpret two types of regulations: the urban law – at regional and municipal level – and the regional tourism regulations.
As far as urban law is concerned, the national regulations provide for only five destinations of use (residential, tourist, industrial and office, rural, commercial). Each region can regulate with its own regulations, respecting the principles outlined at national level.
To complete the regulatory framework, the most detailed level of standards is contained in municipal regulations. The category of “serviced apartments” should fall under the residential function at a town planning level.
But it’s also necessary to verify the applicability of regional regulations on tourism, as many regions qualify the provision of services in residential units as “non-hotel activities.”
The most common qualification is “holiday houses and flats” (case e appartamenti per vacanze – CAV). They’re offered to the final guests through a housing contract. These categories provide for services such as changing linen, cleaning, possibly breakfast to be offered in residential units.
The important points to analyze are:
- Check exactly what services are to be offered and compare them with those indicated in the regional regulations.
- Make sure the intended use is residential.
- Ensure that any regional legal limits are not exceeded (eg some regions set a maximum number of CAVs allowed in certain properties).
In any case, it’s not possible to point to a complete and definitive paradigm on the “serviced apartments” under an urban planning perspective. Feasibility studies must be carried out on a case-by-case basis.
Finally, from a tax law point of view, the uncertainty regarding the qualification of the contract to be applied to the serviced apartment business also has consequences in terms of VAT.
As VAT would become a cost for the final customer, its applicability should be taken into consideration in the pricing of the fees. This may have an impact on the operator’s business plan.
Under European and Italian VAT Law, rental fees on lease agreements related to residential properties are exempt from VAT, unless the landlord is the company that built the property or carried out significant renovation works (eg refurbishment, restructuring) on the property. In the latter case, the landlord can apply VAT to the rental fees and VAT is applied at the rate of 10%. The same tax treatment (exemption or VAT at the 10% as the case may be) would also be applicable to those “essential services” (like the availability of furniture, Wi-Fi, heating, air conditioning, utilities) that are strictly related to the enjoyment of the property and as such can be considered strictly ancillary to the lease agreement.
For housing contracts, the operator would include the provisions of significant additional services. In some cases this could even jeopardize the enjoyment of the apartment as a primary service by making the latter a mere component of a more complex service. And the ordinary VAT at the rate of 22% could become applicable to the entire fee. One way to limit this risk would be to charge separately for the rent and for the additional services.
Finally, if, from civil law and administrative perspective, the leasing of the property together with the provided services can be qualified as accommodation facilities by the applicable touristic laws, VAT would become applicable but at the reduced rate of 10%.
Given this uncertain scenario, when looking at serviced apartments, a case-by-case analysis of the services offered and of the applicable administrative laws is fundamental to better ascertain the potential VAT applicability.