Third-Party Litigation Funding activities could be VAT exempt in Italy

The activities of Third-Party Litigation Funding (TPLF) may, under certain conditions, be considered as financial activities, therefore qualify as VAT exempt financial services.

The TPLF, as outlined by the EU Parliament, provides for the financing of disputes by third parties who, in return, receive a share of the disputed monetary amount.

The Italian Tax Authority clarified that the services rendered by TPLF could qualify as a VAT exempt if:

• the agreement has a financial purpose (i.e. making available financing resources to support litigation expenses);
• the funder is supervised by the Bank of Italy; and
• the funder runs the risk to lose its investment in case of negative outcome or, conversely, gains part of the plaintiff's claim in case of positive outcome.

In the past, the Italian Tax Authorities took the view that the obligation undertaken by a VAT entity, who allowed a litigation funder (which was not a supervised entity) to acquire its litigation’s rights for consideration, should be viewed as a VAT taxable supply.

This demonstrates how a case-by-case analysis is imperative when it comes to assess the VAT treatment of services provided by litigation funders.

Key takeaway

To determine whether the service of a TPLF qualifies for the VAT exemption provided for in the VAT Decree for financial activities, a case-by-case analysis is required, giving particular attention to the subjective conditions of the litigation funder and the relevant contractual provisions.

Reference

• Italian Tax Authority, Ruling No. 83 of 28 March 2024