Non-genuine service contracts and VAT deductibility: contract certification does not bind the tax court

Abstract

In Order No. 26027 of 1 October 2026, the Italian Supreme Court revisited the tax consequences of service contracts whose genuine nature is challenged by the Tax Administration. The Court reaffirmed that entitlement to deduct VAT and the deductibility of costs for IRAP purposes depend on a substantive assessment of the contractual relationship against the criteria laid down in Article 29 of Legislative Decree No. 276/2003. Formal contractual compliance, compliance with social security obligations and certification of the contract are relevant factors, but none is conclusive in itself.

The formal characterisation of the service contract at the heart of the tax dispute

The dispute arose from a tax assessment issued by the Italian Revenue Agency, seeking to recover additional VAT and IRAP together with interest and penalties, in respect of contractual relationships between a manufacturing company and several cooperatives engaged to provide warehouse handling, assembly, packaging and goods-handling services.

According to the Tax Administration, although the invoices issued by the cooperatives formally related to services performed under service contracts, the underlying arrangements in fact amounted to an unlawful supply of labour. The Administration therefore denied the deduction of VAT and, for IRAP purposes, disallowed the costs deducted by the contracting company.

The company challenged the assessment, arguing that the service contracts were genuine. In support of its position, it relied, inter alia, on the cooperative’s compliance with social security contribution and remuneration obligations, the certification of the contract and the due diligence carried out in relation to its contractual counterparty. On that basis, the company contended that it had discharged its burden of proof and had demonstrated that it had not participated in the tax fraud allegedly committed by its counterparties.

The company’s challenge was successful at first instance, and that decision was upheld on appeal. In particular, the appellate court found that the contracting company’s awareness of its alleged involvement in the fraud attributed to the cooperatives had not been sufficiently established. In reaching that conclusion, it attached significance to the formal compliance of the contractual arrangements and to the checks carried out by the company.

The Italian Revenue Agency appealed to the Supreme Court, arguing, in particular, that the appellate court had applied the wrong legal test by focusing on the taxpayer’s good faith rather than on whether the service contract was, in substance, genuine.

The genuineness of the service contract must be assessed by reference to its actual performance

The Supreme Court upheld the Tax Administration’s ground of appeal, finding that the appellate court had applied a legal test that was inappropriate to the issue before it.

According to the Supreme Court, the central question was not whether the contracting company had knowingly participated in fraud committed by the cooperatives, but whether the relationship formally characterised as a service contract genuinely possessed the substantive features of such an arrangement.

Under Article 29 of Legislative Decree No. 276/2003, the assessment must focus on the manner in which the contractual relationship was actually performed. In particular, it is necessary to determine whether the contractor independently organised the resources required to perform the services, effectively exercised organisational and managerial authority over the workers, and bore the business risk associated with the activity.

The tax court must therefore examine the economic and organisational substance of the relationship. In particular, it must determine whether the workers were actually managed and directed by the contractor or whether, instead, they were permanently integrated into the contracting company’s production process and subject to its managerial authority and direction.

Of particular significance is the Court’s treatment of the documentation relied upon by the taxpayer. The formal validity of the contract, the DURC (Documento Unico di Regolarità Contributiva, a certificate attesting compliance with social security contribution obligations), the traceability of payments and even the certification of the contractual relationship are all relevant factors that may properly be taken into account. None of them, however, precludes either the Tax Administration or, subsequently, the tax court from examining how the service contract was actually performed.

In other words, certification does not prevent a discrepancy between the contractual structure formally adopted by the parties and the actual manner in which the relationship was performed from having tax consequences.

It follows that, where the Tax Administration challenges the genuineness of a service contract, the court must ascertain whether the substantive requirements laid down in Article 29 are in fact satisfied. It cannot confine its assessment to the formal validity of the contract or compliance with social security obligations, nor can it regard the absence of evidence that the contracting company was aware of any fraud committed by the contractor as decisive.

The Supreme Court therefore set aside the judgment under appeal and remitted the case to the lower court for reconsideration.

The ruling consolidates an approach already established in the case law of the Italian Supreme Court, according to which a non-genuine service contract may affect both entitlement to deduct VAT and the treatment of costs for IRAP purposes.

Its practical significance, however, lies above all in the warning it conveys to businesses: ensuring that a service contract is formally and properly documented is a necessary safeguard, but is not, per se, sufficient. In the context of a tax audit, what ultimately matters is the taxpayer’s ability to demonstrate that the contractor retained genuine organisational autonomy in the actual performance of the services. It is therefore the substantive reality of the arrangement, rather than the formal correctness of the contractual documentation alone, that ultimately determines whether its tax treatment can withstand scrutiny.