What is Direct Identification for VAT Purposes?
VAT (Value Added Tax) is a community tax on consumption. It applies at every stage of the production and distribution of certain goods or services. It requires the supplier/service provider to charge the customer the tax amount proportionally to the consideration (the so-called “rivalsa”). If a business or professional established in another EU Member State, or in a non-EU country, carries out transactions in Italy that are relevant for VAT purposes, the law allows registration in compliance with tax obligations through two alternative methods:
- appointment of a tax representative;
- direct identification
Such identification does not affect the taxpayer’s fiscal residence, as they maintain their status as a non-resident in Italy. For further details on fiscal residence, please refer to the dedicated section.
The institution of identification serves exclusively to ensure compliance with the obligations and the exercise of the rights provided under VAT legislation for transactions territorially relevant in Italy. This article focuses on the aspects relating to direct identification. For further information on VAT tax representation, please refer to the dedicated article.
Direct Identification in Italy: When Is It Possible?
Direct identification allows non-resident entities to fulfil VAT registration obligations without having to appoint a tax representative.
- For entities resident within the EU, direct identification occurs automatically;
- For entities resident outside the EU, direct identification applies only if Italy signed a specific agreement with that country (e.g., Norway, the United Kingdom).
Conversely, the following entities cannot access direct identification:
- Non-resident entities with a permanent establishment in Italy. In such cases, the company must open an Italian VAT number (partita IVA) is always mandatory (Revenue Agency Ruling No. 327/E of 2008), according to the ordinary procedure applicable to resident entities. It should be noted that the opening of a VAT number coincides with the establishment of the foreign branch in Italy;
- Entities resident in non-EU countries with which Italy has not concluded a convention cannot be directly identified in Italy and must therefore appoint a tax representative resident within the Italian territory.
For more information on the opening of a permanent establishment in Italy, please refer to our dedicated service.
When Is Direct Identification Mandatory?
Articles 17, paragraphs 2, 3 and 4 of Presidential Decree No. 633 of 1972 define the cases in which the obligation arises. Entities must either proceed with direct identification or appoint a tax representative. In general, all non-resident entities that carry out supplies of goods or services in Italy are required to identify themselves for VAT registration purposes.
Direct identification constitutes an alternative to the appointment of a tax representative. This means that three scenarios may arise:
- Businesses that choose to make use of direct identification must first close the VAT position of any previously appointed tax representative by submitting form AA7/10 or AA9/11;
- Businesses that open a permanent establishment in Italy must apply for an Italian VAT number associated with the permanent establishment. They may transfer any VAT credit accrued during the period of direct identification (Revenue Agency Ruling No. 108/E of 2011);
- Businesses that decide to switch from direct identification to tax representation may transfer the VAT credit accrued.
Italian VAT Registration: Procedure
Pursuant to Article 35 of Presidential Decree No. 633 of 1972, a non-resident entity may apply for an Italian VAT number by submitting form ANR/3 to the Operational Centre of Pescara (Centro Operativo di Pescara). They can also submit the application electronically.
It is essential that they obtain the VAT number prior to carrying out any transaction that is territorially relevant in Italy.
The ANR/3 form must include the following information:
- personal details of the applicant or, in the case of a legal entity, of at least one of its legal representatives;
- the foreign tax authority that supervises the applicant’s activity;
- the VAT or tax identification number assigned in the country of residence;
- the undertaking to make accounting records available within the time limits prescribed by Italian law.
Once the Operational Centre of Pescara verifies the regularity of the documentation submitted, it allocates the VAT number.
Obligations and Compliance Requirements for the Directly Identified Entity
Once the VAT number has been obtained through direct identification, the non-resident entity must fulfil the obligations. They must also exercise the rights connected with transactions that are relevant for VAT purposes.
The non-resident entity is exempt from:
- the obligation to issue electronic invoices (Article 1, paragraph 3, Legislative Decree No. 127/2015);
- the obligation to keep VAT registers, originals of issued and received invoices, and any other accounting documentation.
However, the non-resident entity must:
- present accounting records at the time of identification;
- sign all documents relating to the management of its VAT position (e.g. the annual VAT return, Intrastat recapitulative statements, and the TR form for quarterly refund claims of deductible surpluses);
- pay the tax via the electronic Form F24;
- communicate any changes to the information declared by submitting an additional ANR/3 form;
- notify the cessation of the activity by submitting the ANR/3 form.
Consequences of Late VAT Registration
In its Ruling No. 31/E of 2005, the Italian Revenue Agency clarified the consequences of late VAT registration by a non-resident entity.
Late VAT registration constitutes a breach of the taxpayer’s obligations under Articles 17 and 35-ter of Presidential Decree No. 633/1972.
In particular, the foreign taxpayer may incur penalties for:
- failure to issue invoices;
- failure to pay VAT;
- failure to file the VAT return.
Despite the possible penalties, the Revenue Agency clarified that late identification does not cause forfeiture of the right to deduct VAT related to transactions already carried out. This is valid provided that the taxpayer can demonstrate that such transactions were connected with an economic activity that had already commenced.
In practice, the non-resident company or professional must pay penalties for the formal infringement but will not lose the right to recover the VAT relating to the transactions previously performed.
VIES Registration
The VIES (VAT Information Exchange System) is a database that lists all entities intending to carry out intra-Community transactions that are relevant for VAT purposes. EU taxable persons who want to register in the VIES must submit an application to the Operational Centre of Pescara (Centro Operativo di Pescara).
Registration in the VIES serves two main purposes:
- for EU Member States, to monitor intra-EU transactions and the taxable persons carrying them out;
- for taxable persons, to verify the VAT numbers of their EU counterparties.
Directive (EU) 2018/1910 (Recital 7) recognised the substantive, rather than merely formal, nature of VIES registration. It allows taxable persons to benefit from the VAT exemption regime applicable to intra-Community supplies of goods. Consequently, registration in the VIES database has become a mandatory condition for the application of the exemption.
This position has thus overridden the previously established national case law (Italian Supreme Court decisions No. 25651/2018, No. 10006/2018, No. 4662/2020) and EU case law (CJEU, Case C-653/18, para. 25; CJEU, Case C-21/16), which had considered that the absence of VIES registration did not preclude the VAT exemption, considering it merely a formal requirement.
What Is the Reverse Charge Mechanism and How Does It Work?
The reverse charge mechanism is a VAT accounting procedure designed primarily to prevent fraud and tax evasion.
When a non-resident entity performs transactions for the benefit of a taxable person established in Italy, the VAT is not paid by the foreign supplier. Instead, the Italian recipient pays the VAT.
Article 17 of Presidential Decree No. 633/1972 specifies the situations in which this mechanism applies.
In transactions subject to the reverse charge mechanism:
- The non-resident entity does not have to issue an invoice, provided that it is directly identified for VAT purposes in Italy;
- Although the Italian recipient pays VAT, the non-resident entity carries out the transaction.
How can you pay VAT in Italy?
Non-resident entities can pay VAT through two different methods:
- Submitting the electronic Form F24, using a personal identification number (PIN code), home banking services, or an authorised intermediary. In this case, the entity must hold a bank or postal account in Italy;
- Making a cross-border bank transfer through the target system for international payments.
How does the VAT refund work?
Non-resident entities that are directly identified and that carry out taxable and non-taxable transactions in Italy must submit an annual VAT return pursuant to Article 38-bis. Direct identification grants such entities the same rights and obligations as resident VAT taxpayers, including the right to deduct or obtain a refund of VAT.
The Revenue Agency processes the VAT refund under the ordinary procedure applicable to Italian VAT taxpayers. This can be done through one of the following methods:
- submitting the annual VAT return, or
- submitting the interim electronic application (Form TR).
The taxpayer or an authorised intermediary may file both documents. The Revenue Agency does not require the submission of any additional documentation.
For non-resident entities that have appointed a tax representative, pursuant to Article 17, paragraph 3, of Presidential Decree No. 633/1972, such representative is entitled to claim the VAT refund. The annual VAT return, through which an annual refund may be requested, must be submitted between 1 February and 30 April of each year.
The non-resident entity, on the other hand, must submit the quarterly refund applications within the following time frames:
- from 1 April to 30 April for the first quarter (January–March);
- from 1 July to 31 July for the second quarter (April–June);
- from 1 October to 31 October for the third quarter (July–September).
The Revenue Agency issues refunds normally within three months from the date of the request. Should this period be exceeded, the taxpayer is entitled to interest at the annual rate of 2%.
Failure to Pay VAT: Administrative Penalties
In the event of failure to pay VAT, the taxpayer is subject to a series of administrative penalties.
The Legislative Decree No. 471/1997 (now incorporated into the Consolidated Act on Tax, Administrative and Criminal Penalties, Legislative Decree No. 173/2024) sets out the offences and the related penalties concerning Value Added Tax. The main provisions include:
- Failure to Submit the Annual VAT Return When Tax Is Due (Article 5, paragraph 1):
- Penalty equal to 120% of the VAT due, with a minimum of €250;
- Penalty equal to 75% of the VAT due, if the taxpayer submits the omitted return more than ninety days late, but before the expiry of the assessment period. In any case, it applies before the taxpayer has received formal notice of access, inspection, audit, or the initiation of any administrative assessment activity.
- Failure to Submit the Annual VAT Return When No Tax Is Due (Article 5, paragraph 3):
- Penalty ranging from €250 to €2,000;
- Penalty ranging from €150 to €1,000, if the taxpayer submits the omitted return more than ninety days late, but before the expiry of the assessment period. In any case, it applies before the taxpayer receives formal notice of access, inspection, audit, or the initiation of any administrative assessment activity.
- Incorrect or Inaccurate Return — i.e. VAT reported lower than due or excess VAT credit claimed (Article 5, paragraphs 4, 4-bis, and 4-ter):
- Penalty equal to 70% of the higher VAT due or the lower VAT credit; minimum €150;
- Penalty ranging from 105% to 150% if the violation is committed through the use of false invoices or other fraudulent documentation, non-existent transactions, or through deceptive or fraudulent conduct;
- Where no fraudulent or deceptive conduct (such as use of false invoices) occurs, the penalty is reduced by one third if the higher tax or lower credit assessed is less than 3% of the declared tax or credit and, in any case, less than €30,000 in total.
- Unlawful VAT Refund Claim (Article 5, paragraph 5): penalty equal to 22% of the refunded credit unduly claimed.
