VAT Deduction and Simulated Transactions: Cassation Ruling 16580/2025 on Sham Interposition

In the complex landscape of tax law, the issue of Value Added Tax (VAT) deductibility is a crucial point for businesses. Often, the line between legitimate tax planning and an evasive or simulated transaction can be thin and a source of litigation. In this context, the recent ruling by the Court of Cassation, judgment no. 16580 of June 20, 2025, offers important clarification on the principles governing the right to deduct VAT, emphasizing the actual execution of commercial transactions and the risks arising from sham interposition.

The Supreme Court, with this decision, reiterates a fundamental principle: the right to deduct VAT is not an automatic entitlement based solely on the existence of an invoice, but is strictly linked to proof of the actual execution of the underlying transaction. Let's examine the details of this ruling and its implications.

Context of the Ruling and the Legal Principle

The case examined by the Cassation involved a company that had sought to circumvent legal limits imposed on the volume of imports of electricity from non-renewable sources. To achieve this, the company used a third entity, which, although genuinely existing and not a mere "shell company," was shamelessly interposed to simulate purchases. The objective was clearly to implement a mechanism of fraud or tax evasion, allowing the main company to deduct VAT on transactions that, in their economic and legal substance, would not otherwise have been permitted.

The Regional Tax Commission of Milan had erroneously allowed the deduction, but the Cassation, with ruling 16580/2025, overturned this decision and referred it back. The core of the ruling lies in the assertion that a simulated purchase can never legitimize VAT deduction. This is because, as highlighted by the Court, there is a lack of essential connection with the downstream taxed transactions, i.e., those real economic transactions that justify the recovery of the tax.

In matters of VAT, the right to deduct is conditional upon proof of the actual execution of the transaction of supply of goods or provision of services subject to tax, such that a simulated purchase does not allow for said deduction due to the absence of a link with downstream taxed transactions. (In application of the principle, the S.C. overturned the appealed judgment that erroneously allowed the deduction of tax on purchases of electricity from non-renewable sources made by a company that had circumvented legal limits relating to the volume of such imports through a third company, genuinely existing and not a mere "shell company," but shamelessly interposed to implement the aforementioned fraud mechanism).

This maxim from ruling 16580/2025 is of crucial importance. The Court emphasizes that it is not enough for the transaction to be formally documented; it is essential that it has actually occurred on a substantive level. A simulated purchase, even if channeled through an existing legal entity, is deprived of its ability to generate the right to deduct because it does not represent a genuine economic transaction that integrates into the taxpayer's production or distribution chain. In other words, if the transaction is merely a "fiction" to circumvent regulations, it cannot produce legitimate tax effects.

Implications of Sham Interposition and Tax Fraud

The case addressed by the Cassation highlights the phenomenon of sham interposition, often used for evasive or fraudulent purposes. Although the Civil Code, in Article 2697, establishes that whoever wishes to assert a right in court must prove the facts that constitute its basis, in the tax context, proof of the transaction's effectiveness takes on an even more stringent meaning. EU directives on VAT, such as Council Directive 2006/112/EC (with particular reference to Articles 63, 168, 203, 273), while guaranteeing the principle of VAT neutrality, are also aimed at combating abuse and fraud.

When sham interposition occurs, as in the case of the company circumventing import limits, a distortion of the VAT system is created. Deduction is granted to prevent the tax from burdening the same good or service multiple times along the production chain, but only if the transactions are genuine and aimed at a taxable economic activity. If the transaction is fictitious, there is no real economic transfer that justifies the deduction, and the entire VAT offsetting mechanism fails. The Cassation, also referencing DPR 633/1972 (Art. 19), reinforces the idea that VAT is a harmonized tax at the European level, and as such, must be applied in compliance with Community principles of effectiveness and fraud prevention.

For the correct exercise of the right to deduct VAT, it is essential:

• The actual execution of the commercial transaction of supply of goods or provision of services.
• The absence of evasive or fraudulent purposes, even if it is not a mere "shell company."
• The direct correlation between purchases and the taxpayer's downstream taxable transactions.
• The ability to provide documentary and substantive proof of the effectiveness of the transactions.

Proof of Effectiveness and Risks for Businesses

Ruling 16580/2025 emphasizes the burden of proof on the taxpayer who intends to exercise the right to deduct. It is not sufficient to present an invoice; it is necessary to demonstrate that the transaction to which the invoice refers was actually carried out and was not a mere artifice to obtain an undue tax advantage. This implies for businesses the need to maintain impeccable documentation and, above all, to ensure that all commercial transactions reflect their real economic substance.

The risks for businesses that do not comply with these principles are significant. Denial of the right to deduct not only entails the recovery of unduly deducted VAT but also the application of penalties and interest. Furthermore, in more complex fraud cases, tax crimes may also be constituted. It is therefore imperative that companies operate with the utmost transparency and integrity, avoiding schemes that, while appearing formally correct, hide a simulation or an evasive intent.

Conclusion: The Importance of Tax Transparency

Ruling 16580/2025 of the Court of Cassation serves as a clear warning to all taxpayers: VAT deductibility is a right founded on the economic reality of transactions. Sham interposition, even when involving genuinely existing legal entities, cannot be tolerated if it aims to evade regulations or obtain undue tax advantages. Transparency, genuineness of transactions, and the ability to prove their effectiveness are indispensable pillars for a fair and efficient tax system. To avoid litigation and penalties, it is crucial for businesses to scrupulously comply with these principles, availing themselves, if necessary, of the support of professionals expert in tax law to navigate the complexities of the regulations.