Tax Penalties: unlawfulness of the prohibition on the retroactive application of more favourable penalty regime

by Francesco Daniele Di Donato

In its recent judgment No. 1616, issued on 14 July 2026, the Second Instance Tax Court of Lombardy addressed one of the most controversial issues concerning administrative tax penalties, namely the legitimacy of the prohibition on the retroactive application of more favourable legislation laid down in Article 5 of Legislative Decree No. 87/2024. In this regard, the Court held that it was entitled to disapply that provision on the grounds that it conflicts with EU law and with the principles established by the Italian Constitutional Court.

The case

A.G. 68 Srl brought an action challenging the notice of assessment concerning the 2020 tax year, whereby the Italian Tax Authority imposed tax penalties for an inaccurate VAT return. The Tax Court of First Instance partially upheld the appeal, solely with regard to the amount of the administrative tax penalties, which, following the taxpayer’s arguments, were to be recalculated at the more favourable rate of 25%, pursuant to the favor rei principle.

The Italian Tax Authority appealed against that decision, arguing that the judgment under appeal was inconsistent with Article 5 of Legislative Decree No. 87/2024, which expressly prohibits the retroactive application of the more favourable penalty regime introduced in 2024.

In the second-instance proceedings, the respondent company entered an appearance and lodged a cross-appeal. In its defence submissions, the company sought the annulment of the contested notice on the ground that the tax assessed was lower than the amount actually due and, in the alternative, sought the annulment of the penalty on the grounds of its good faith, as evidenced by its having made a voluntary correction by filing a supplementary tax return. As a further alternative, it sought confirmation of the first-instance judgment, arguing that the more favourable 25% penalty should apply pursuant to the combined provisions of Articles 4, 5 and 13 of Legislative Decree No. 471/1997.

The unlawfulness of the prohibition

In the judgment under review, the Second Instance Tax Court of Lombardy dismissed both the Tax Authority’s main appeal and the company’s cross-appeal, thereby upholding the first-instance judgment.

In the Court’s view, the provision establishing the non-retroactivity of more favourable tax penalties is unlawful and must therefore be disapplied because it conflicts with the EU-law principle of lex mitior enshrined in Article 49 of the EU Charter of Fundamental Rights.

More specifically, the non-retroactivity rule is irreconcilable not only with the EU Charter of Fundamental Rights (the “Nice Charter”), but also with Article 7 of the European Convention on Human Rights, from which the principle of the retroactive application of the more favourable law may be derived.

The Second Instance Tax Court of Lombardy further explained that, on this specific issue, the Constitutional Court has recognised the application of the favor rei principle to penalties which are punitive in nature and function, considering such application to be consistent with Article 3 of the Italian Constitution. 

In light of these considerations, the Court held that Article 5 of Legislative Decree No. 87/2024 had to be disapplied insofar as it excludes the retroactive application of the new penalty regime, as that provision conflicts with EU law, and in particular with the principle of the retroactive application of the lex mitior.

Although the judgment forms part of a legal context characterised by significant divergence in case law, it is particularly noteworthy because the court expressly disapplied a provision of domestic law on the grounds of its conflict with EU law, thereby recognising the primacy of the latter. Such conflict cannot, in any event, be disregarded at the highest level of judicial review.