EU Court Backs Italy's 21% Tax Withholding on Short-Term Rentals

On 22 December 2022, the Court of Justice of the European Union ruled that Italy could make short-term rental platforms collect its tax. In a case brought by Airbnb, the court held that EU law did not stop a member state from requiring a platform to report rental contracts to the tax authority and to withhold 21% of the rents it handled.

Airbnb won one point. The court held that EU law precluded the part of the Italian law that made a platform with no permanent establishment in Italy appoint a tax representative there, and called that duty a disproportionate restriction on the freedom to provide services. The case then went back to Italy's Council of State, which had asked the question, for the final decision.

What the Italian law required

Article 4 of Decree-Law No 50 of 24 April 2017 set a tax regime for short-term rentals: lets of residential property by private individuals, outside a business, for a maximum of 30 days, whether agreed directly or through an intermediary or an online platform. The court's press release summarised three duties for intermediaries:

• Send the tax authority the data of the rental contracts they brokered. The judgment recorded the deadline as before 30 June of the following year.
• Where they received the rent or took part in collecting it, withhold 21% and pay it to the Italian Treasury.
• If they were not resident and had no permanent establishment in Italy, appoint a tax representative.

From 1 June 2017, the 21% applied as a withholding tax where the owner had opted for that preferential rate. Where the owner had not, the judgment noted, the sum withheld counted as a payment on account.

The duty to withhold turned on who handled the money. The court noted that Airbnb collected the guest's payment before the stay began and passed it to the owner if the guest had not raised a challenge.

How the case reached Luxembourg

Airbnb Ireland UC and Airbnb Payments UK Ltd went to the Regional Administrative Court of Lazio to annul the tax authority's implementing decision of 12 July 2017. That court dismissed the action on 18 February 2019, and the companies appealed to the Council of State. Reuters reported the argument: that the tax and the other duties breached the EU's freedom to provide services across its 27 member countries.

The Council of State sent questions to the Court of Justice on 11 July 2019. On 30 June 2020 the court declared that request manifestly inadmissible and left the Italian court free to send a new one. It did, by a decision of 26 January 2021 that became Case C-83/21. The Second Chamber held a hearing on 28 April 2022 and heard the Opinion of Advocate General M. Szpunar on 7 July 2022. The Ministry of Economy and Finance, the hotel federation Federalberghi and the consumer body Codacons were among the intervening parties.

What the court decided and why

The court first set aside the EU directives Airbnb had relied on. All three duties, it said, fell within the field of taxation, so the only test was Article 56 TFEU, the treaty's ban on restrictions on the freedom to provide services.

The reporting duty passed. It applied to every intermediary, resident in Italy or not, online or not, and on that point the court followed its own judgment of 27 April 2022 in an earlier Airbnb Ireland case, C-674/20. The withholding duty passed for a similar reason. It fell on intermediaries established in Italy and on those established in another member state alike, so the court ruled out treating it as something that impeded the service or made it less attractive. In the words of the court's press release, “EU law does not preclude the requirement to collect information or to withhold tax under a national tax regime”.

The tax representative did not pass. That duty fell only on certain platforms without a permanent establishment in Italy. It made them take steps and bear the cost of paying a representative, which the court said was a hindrance of a kind to deter them from offering the service in Italy. The court accepted that ensuring the effective collection of tax was a legitimate objective. It found the rule went beyond what was necessary: it made no distinction by, for example, the volume of tax a platform collected, and the tax authority was already receiving information on the taxpayers.

The judgment was a preliminary ruling. It did not settle the dispute between Airbnb and the tax authority. That was left to the national court, in line with the ruling, which also bound other national courts facing a similar issue.

How Airbnb and the hotels read it

Federalberghi, Italy's hoteliers' association, welcomed the ruling. “Tax evasion and unfair competition damage both traditional tourist businesses and those who correctly manage the new forms of hospitality,” it said in a statement reported by Reuters. The association alleged that, by its own estimate, Airbnb had failed to withhold and hand over 1.5 billion euros ($1.6 billion) over six years. The figure was Federalberghi's own. The court ruled on the law and named no sum.

Airbnb pointed to the part it won. “Airbnb does not have a tax representative to enforce the withholding of income tax in Italy, and the CJEU's ruling makes clear that any requirement to appoint one is contrary to EU law,” a spokesperson told Reuters. The spokesperson said Airbnb was already helping hosts pay the right income tax by putting the common tax reporting framework agreed by the EU into practice, and that it was waiting for the Italian court's final decision.

The Italian news agency ANSA put it in a headline: the EU court had ruled for Italy and against Airbnb.

Short Term Rentalz noted the timing. A little more than a month earlier, the European Commission had adopted a proposal for a regulation under which booking platforms would have to hand over data identifying hosts and recording their activity. The trade paper listed Airbnb, Booking.com, Expedia Group and TripAdvisor among those platforms.

What it meant for hosts

For an owner letting a home in Italy for 30 days or less through a platform that collected the rent, the ruling confirmed the rules as written in 2017. The platform could be required to keep back 21% of each rent and pay it to the Treasury. If the owner had opted for the flat rate, that was the tax on the income. If not, it was a payment on account. Either way, the contract data was due at the tax authority before 30 June of the following year.

At the end of December 2022 the case was back with the Council of State, and Airbnb said it had no tax representative in Italy to enforce the withholding. Until the Italian court ruled, the safe course for an Italian host was to keep declaring the rent and paying the tax on it themselves.

The judgment's account of Italian law held a second duty for hosts. A 2019 decree set up a database of short-term rental properties, each with an identification code that owners, intermediaries and online portals had to publish when they advertised a property, with a fine of EUR 500 to EUR 5000 for leaving it out.

Outside Italy, the message reached anyone renting through a platform in the EU, because the court's rulings bound national courts facing a similar issue. What a platform knew about a host's bookings, a tax office could ask to know too.

Sources

1. Court of Justice of the European Union, Press release No 212/22: Short-term property rentals: EU law does not preclude the requirement to collect information or to withhold tax under a national tax regime (22 December 2022).
2. Court of Justice of the European Union, Judgment of the Court (Second Chamber), 22 December 2022, Case C-83/21, Airbnb Ireland UC plc and Airbnb Payments UK Ltd v Agenzia delle Entrate (22 December 2022).
3. Reuters via Euronews, EU court rules Airbnb must provide rental info to tax authorities (23 December 2022).
4. ANSA, EU Court rules for Italy, against Airbnb in tax case (22 December 2022).
5. Short Term Rentalz, Airbnb to provide tax information to Italian authorities under CJEU ruling (23 December 2022).