With orders no. 12342 of 3 May 2026 and no. 17429 of 2 June 2026, which followed the twin judgments nos. 7899 and 7900 of 31 March 2026, the Italian Supreme Court (Corte di Cassazione) has consolidated its position that the so-called “booked interest income” criterion is not an appropriate method for determining the deductible portion of input VAT on mixed-use purchases for taxpayers carrying on separate activities under Article 36 of Presidential Decree no. 633/1972.
The rulings concern banks and financial companies which, in the tax years under audit, carried on both leasing activities (typically subject to VAT) and lending activities (typically VAT-exempt), and had determined the deductible VAT on purchases used for both activities on the basis of turnover.
In its tax assessments, the Italian Revenue Agency (Agenzia delle Entrate) challenged the use of the turnover criterion, arguing that the booked interest income criterion was more accurate. This criterion compares only the interest income of the two activities, that is, only their remuneration component. The criterion had been upheld by the lower tax courts in Lombardy.
The Supreme Court set aside all of those decisions, holding that turnover remains the ordinary criterion and that an alternative method is permitted only if it is shown in practice to be more accurate.
According to the Court, the booked interest income criterion, “by excluding the VAT that the company pays on the entire instalment, and therefore on the (significant) portion relating to the repayment of the financing granted to the customer, namely the principal, thus breaches the principle of neutrality from both a legal and an economic standpoint. Moreover, by taking into account remuneration alone (which is what the booked interest income criterion amounts to), there is a risk of favouring the profit of the economic activity carried on. This would endorse an interpretation of the tax rules that makes them dependent on the profitability of the activity and, ultimately, on business risk, which is not an objective criterion and which, above all, conflicts with the principle of neutrality, which cannot be made conditional on the profitability of the economic activity carried on.”
This line of case law now appears settled and provides strong arguments in the many pending disputes concerning similar assessments. The lower tax courts are also revising their approach in light of the Supreme Court’s decisions (see Court of Tax Justice of Second Instance of Lombardy, judgment no. 1787/2026; Court of Tax Justice of First Instance of Milan, judgment no. 3008/2026).
