Extraordinary sale of business-use property excluded from VAT pro-rata calculation

The case concerned a non-profit foundation primarily engaged in VAT-exempt nursing home activities and, secondarily, in VAT-taxable property leasing.

To finance renovation works connected with its exempt activity, the entity decided to sell one of its business properties. Accordingly, in line with Italian GAAP, the property was reclassified from fixed assets to current assets, as it was no longer intended for long-term use but for disposal.

Due to the accounting treatment, the applicant argued that, since the property had ceased to be a “depreciable good” for income tax purposes, it should also lose that qualification for VAT purposes, and consequently, the sale should be included in the pro-rata deduction computation.

The applicant referred to two prior Rulings, which had linked the VAT notion of “depreciable goods” to the income tax concept of depreciable assets under Articles 102 and 103 of the Italian Income Tax Code.

The Italian Tax Authority rejected this interpretation and adopted a substance-over-form approach. It clarified that the pro-rata ratio reflects the taxpayer’s ordinary economic activity.

Therefore, transactions of an exceptional or occasional nature — such as the one-off sale of a business property — must be excluded, regardless of the asset’s accounting or tax classification. In this respect, it is the economic function of the asset that determines its VAT qualification.

 

Key takeaway / recommendation

In the past, the concept of “depreciable goods” for VAT purposes — and, in particular, for the exclusion of certain disposals from the pro-rata calculation — relied on definitions adopted for income tax and accounting purposes. The ruling marks a shift towards a more economically grounded interpretation, aligning the Italian approach with the EU notion of capital goods set out in Directive 2006/112/EC.

Entities engaged in VAT-exempt activities should carefully consider this substantive interpretation when determining their pro-rata deduction ratio, ensuring that extraordinary transactions are assessed based on their economic substance rather than on formal classifications.

 

Reference / Link to document

Italian Tax Authority, Ruling No. 231 of 8 September 2025

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