Italy: Obligation to report information and withhold tax on short-term rentals upheld (CJEU judgment)

The Court of Justice of the European Union (CJEU) today held that provisions introduced into Italian law in 2017 requiring the reporting of information and withholding of tax with respect to short-term property rentals are not precluded by EU law. However, the court held that the obligation to appoint a tax representative constitutes a disproportionate restriction on the freedom to provide services.

The case is: Airbnb Ireland and Airbnb Payments UK (C-83/21)

As explained in a release [PDF 131 KB] from the CJEU, the 2017 Italian law establishes a new tax regime that applies to contracts for the rental of residential property by natural persons outside a commercial activity for a maximum period of 30 days, whether concluded directly with the lessees or through the involvement of property intermediaries.

• Effective 1 June 2017, income from such rental contracts is—when the owners concerned have opted for that preferential rate—subject to a withholding tax at a rate of 21%.
• In addition, data relating to the rental agreements must be reported to the tax authority.
• When they receive rents, or take part in their collection, persons who act as property intermediaries must, as tax collectors, withhold 21% of the amount of the rents and pay it to the Treasury. Non-resident persons who do not have a permanent establishment in Italy are obliged to appoint, in their capacity as persons liable to pay the tax, a tax representative.

The taxpayers brought an action seeking to invalidate the new tax regime. 

The court held that the three obligations under the new tax regime fall within the field of taxation and are therefore excluded from the scope of certain directives relied on by the taxpayer. Thus, the lawfulness of the three measures must be examined solely in the light of the prohibition on restrictions to the freedom to provide services within the EU laid down in Article 56 of the Treaty on the Functioning of the European Union (TFEU).

The court first observed that the obligation to collect and communicate to the tax authority data relating to rental contracts concluded following property intermediation applies to all third parties, whether they are natural or legal persons, whether or not they are resident or established in that territory, and whether they act via digital means or via other means of putting the parties in contact. Thus, such an obligation does not contravene the prohibition laid down in Article 56 TFEU since it is applicable to all operators exercising their activity on the national territory.

In addition, the obligation to withhold tax at source is also incumbent both on providers of property intermediation services established in a member state other than Italy and on undertakings which have an establishment in Italy. The court therefore rules that such obligation may not be regarded as prohibiting, impeding or rendering less attractive the exercise of the freedom to provide services.

However, the obligation to appoint a tax representative in Italy applies only to certain providers of property intermediation services without a permanent establishment in Italy. Since that obligation requires them to take steps but also to bear the cost of paying that representative, such constraints cause, for those operators, a hindrance of such a kind as to deter them from providing property intermediation services in Italy, in any event in the manner they wish to do so. That obligation must thus be regarded as a restriction on the freedom to provide services prohibited, in principle, by Article 56 TFEU. Although that tax measure pursues the legitimate objective of ensuring the effective collection of tax, which may be capable of justifying a restriction on the freedom to provide services, it nevertheless exceeds what is necessary to achieve that objective. That measure applies without distinction to all providers of property intermediation services without a permanent establishment in Italy who have chosen, in the context of providing their services, to collect rents or consideration relating to the contracts covered by the 2017 tax regime, or to intervene in the collection of those rents or consideration. However, that measure makes no distinction based on, for example, the volume of tax revenue collected or liable to be collected annually on behalf of the Treasury by those providers. Moreover, the fact that the tax authority has already received information concerning the taxpayers is such as to facilitate its supervision and, therefore, contributes to the disproportionate nature of the obligation to appoint a tax representative.