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Ruling issued by the Italian Revenue Agency No. 1/2022

17 January 2022

The Italian Revenue Agency (ITA) issued certain clarifications regarding the VAT treatment of differentials (if any) arising from the execution of contracts regarding derivative financial instruments linked to changes in the electricity prices.

1. Premises

More specifically, the facts refer to a company (ALFA) that signs a "PPA" (Power Purchase Agreement) contract for the sale of electricity with a BETA company, based in a non-EU country.

BETA has stipulated a contract with the company GAMMA for the purchase of electricity produced and fed into the grid by the newly built photovoltaic plant located in Italy.

As stipulated in the signed PPA contract, ALFA purchases from BETA a quantity of electrical energy at a fixed price.

The purpose of the contract is to stablish the commitment from one party to pay the differential price to the other party.

2. Questions to ITA

  1. If it is confirmed that the PPA contract should be qualified as a derivative contract with the object of a bilateral risk linked to the determination of the price differential between the reference PUN and the indicated fixed price;
  2. If ITA can confirm the application of the provisions of ITA's ruling no. 77/1998, which states that "the sums, so-called differentials represent the object of the performance,… as they are aleatory contracts". This issue determines the relevant VAT treatment of such proceeds (if any).

3. ITA's opinion

When the contract signed between the Buyer and the Seller concern the purchase and sale of electricity with the commitment to pay the Price Differentials to cover the risk of fluctuations in the price of energy, this is a derivative financial contract (swap), that is an aleatory contract. Once the calculations have been made at the end of the agreed period, one of the parties is in debt to the other and must pay the difference.

The Italian Supreme Court with the judgement n. 8770/2020 established some principles relating to the classification of financial derivatives, whereby the swap is not considered merely as an exchange of cash flows, but an agreement on the measurement of risk based on previously identified forecast variables.

In terms of taxation, derivative financial transactions are governed, for VAT purposes, by art. 10 no. 4) of DPR n. 633/1972, that, among the transactions exempt from VAT, includes transactions relating to financial instruments. The purpose of this regulation is to recognize the exemption regime provided for in art. 135, paragraph 1, letters b) to f), of Directive EC/2006/112, including the new and varied investment instruments in the securities sector, in particular the so-called derivative contracts (futures, options, swaps).

The relative taxable amount must be identified in the amount of the same monetary differential, also taking into account Art. 4 of L. 146/1998, that established "For the purposes of the application of the tax on the added value, transactions deriving from repurchase agreements, which provide for the obligation to resell securities or currency on a forward basis, are to be understood as a unitary supply of financing services, with the difference between the forward consideration and the spot consideration as the taxable amount".

According to Italian tax Authority the clarifications provided by ruling no. 77 of 1998 must therefore be considered surpassed with specific reference to the determination of the taxable base of contracts relating to financial instruments that give rise to monetary differentials.

If you require any further information, please contact Michele Cicchetti and Tancredi Marino.

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