Italian Supreme Court: Loss-Compensating Transport Subsidies Fall Outside the VAT Base

Summary 

• Italy’s Supreme Court (Cassazione, Order No. 16741 of 28 May 2026) held that public subsidies paid to a local public transport operator to cover operating losses do not form part of the VAT-taxable amount where they are not directly linked to the price of the transport services. 

• Under article 73 of the VAT Directive (2006/112), a subsidy is taxable only where it constitutes consideration directly connected with the price of identifiable supplies – the economic function, not the contractual form, is decisive. 

• Calculated ex post on the operator’s losses and not linked to passenger numbers or fares, the Trento subsidies were excluded from the taxable amount, confirming the principles in Order No. 6969 of 23 March 2026. 

Extended article 

The Italian Supreme Court (Corte Suprema di Cassazione) has ruled that public subsidies granted to a local public transport operator to compensate for operating losses do not form part of the VAT-taxable amount where they are not directly linked to the price of the transport services. The case concerned a transport company that received subsidies from the Autonomous Province of Trento for operating local public transport in the 2017 tax period; the tax authorities treated the amounts as taxable consideration, while the taxpayer argued they merely compensated for losses and were not intended to reduce fares. 

Dismissing the tax authorities’ appeal, the Court reaffirmed the principles in Supreme Court Order No. 6969 of 23 March 2026: under article 73 of the VAT Directive (2006/112) and article 13 of the Italian VAT Act (Presidential Decree No. 633/1972), public subsidies form part of the taxable amount only when they constitute consideration directly connected with the price of identifiable supplies. Referring to ECJ case law – including Office des produits wallons (C-184/00), Commission v Germany (C-144/02), Le Rayon d’Or (C-151/13) and, most recently, Dyrektor KIS (C-615/23) – the Court reiterated that a subsidy is taxable only where it enables the supplier to charge a lower price than would otherwise apply. 

The decisive criterion is the economic function of the subsidy rather than the legal form of the relationship: the existence of a public service contract imposing obligations on the operator is not, by itself, sufficient to characterise the subsidy as consideration. Here, the subsidies were calculated ex post on operating losses, were neither determined by reference to passenger numbers nor intended to reduce fares proportionately, and so were excluded from the VAT taxable amount. The full text of Order No. 16741 of 28 May 2026 is available in Italian. 

Sources: Corte Suprema di Cassazione – official portal; CJEU – Case C-615/23 (Dyrektor KIS) via CURIA. 

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