The Italian Ministry of Economy and Finance has secured a critical step toward extending one of the country's most debated tax mechanisms, with the European Commission adopting a proposal yesterday to prolong the split payment system beyond its looming June 30, 2026 expiration. The final green light now rests with the EU Council, but the trajectory points strongly toward a three-year extension running through June 30, 2029—a move that will continue to shape cash flow realities for thousands of businesses supplying Italy's public sector.
Undersecretary to the Ministry of Economy Sandra Savino confirmed the development during a parliamentary session on June 17, responding to questions from lawmakers representing Forza Italia and Italia Viva. The extension request, filed by Rome on October 1, 2025, followed the procedural timeline set out in Article 395 of EU VAT Directive 2006/112, which allows the Commission eight months to draft a proposal once a member state submits a derogation request. That clock has now run its course, and the proposal is en route to the Council for what is widely expected to be a rubber-stamp approval.
Why This Matters
• Liquidity freeze continues: Companies invoicing public entities will keep receiving only the net amount (without VAT), while the tax itself flows directly to the state treasury—perpetuating structural VAT credits and cash-flow constraints for suppliers, especially small and medium enterprises.
• €19B annual take: In 2025, the split payment regime funneled roughly €19B in VAT directly to state coffers, an 8.1% increase year-on-year, underscoring why the Italian government considers it a fiscal bedrock.
• FTSE MIB exemption stays: As of July 1, 2025, Italy's largest listed companies—those in the FTSE MIB index—are no longer subject to split payment rules, a carve-out that remains unchanged under the proposed extension.
How Split Payment Works in Practice
Under the standard VAT regime, a supplier issues an invoice inclusive of tax, collects the full amount from the customer, and later remits the VAT to the state through periodic filings. Split payment upends that flow. Introduced in Italy in 2015 as an anti-fraud instrument, the mechanism requires suppliers to public administrations and controlled entities to bill with VAT itemized on the invoice, but to receive payment only for the taxable base. The customer—typically a ministry, municipality, health authority, state-owned company, or other qualifying entity—then wires the VAT portion directly to the Italian Treasury.
On electronic invoices, providers must flag the arrangement by inserting code "S" in XML field 2.2.2.8 and adding the statutory note referencing Article 17-ter of Presidential Decree 633/1972. For suppliers, this creates an immediate asymmetry: they collect no VAT on sales but continue to pay it on inputs, generating persistent VAT credit balances that must be carried forward or claimed as refunds—a process that ties up working capital and demands careful bookkeeping.
Who Is Affected
The roster of entities subject to split payment is broad and encompasses the full spectrum of Italy's public sector. It includes all levels of public administration—from national ministries down to municipal councils, regions, provinces, chambers of commerce, public universities, and local health units. Beyond the core civil service, the rule extends to national, regional, and local public economic bodies, special service agencies, foundations where public entities hold at least 70% of the endowment, and companies directly or indirectly controlled by public administrations. Social security institutions and public health enterprises round out the list.
The one significant exclusion, effective since July 1, 2025, applies to the roughly 40 blue-chip corporations that make up the FTSE MIB, Italy's flagship stock index. For transactions with these firms, suppliers revert to the standard VAT collection model. The proposed extension to 2029 does not contemplate further changes to the subjective scope, meaning the current boundaries will hold.
What This Means for Businesses and Public Contractors
For companies in the business of supplying goods or services to the public sector, the impending extension is a mixed signal. On one hand, regulatory certainty through mid-2029 allows for multi-year contract planning without the risk of abrupt rule changes on July 1, 2026. On the other, the liquidity crunch that has long characterized split payment will persist. Firms must continue to finance the VAT gap between what they owe on purchases and what they never receive on sales, a burden that falls disproportionately on smaller contractors with limited credit lines.
Italian law does provide a priority refund track for VAT credits arising from split payment, but the administrative lag and documentation requirements still represent friction. Business groups, including Confcommercio, have voiced concern that while electronic invoicing has dramatically improved traceability and compliance, the original anti-fraud rationale for split payment has weakened—leaving cash-flow management as the primary sticking point.
From the government's perspective, however, the mechanism has proven indispensable. The €19B in direct VAT inflows recorded in 2025 not only bolster budget execution but also insulate tax revenues from the risk of supplier insolvency or fraud. Even though the e-invoicing system now captures transactions in real time, policymakers argue that split payment offers an additional layer of protection against tax evasion and ensures that VAT linked to public spending is never at risk of disappearing into the private sector's liquidity gaps.
The Brussels Dimension
Italy's request for a derogation is not a formality. EU VAT rules generally require uniform treatment across member states, and split payment constitutes a departure from the standard mechanism. That is why Rome must seek explicit authorization from the Commission and Council. The fact that Brussels adopted the proposal within the allotted eight-month window, and that the Directorate-General for Taxation and Customs Union has signaled technical approval, suggests little appetite for blocking the extension.
Still, the final word belongs to the EU Council, where member states will weigh in. Given Italy's track record with the measure—first authorized in 2015 and renewed in 2020 and again in 2023—and the absence of significant opposition from other capitals, approval by the end of June appears likely. Should the Council act swiftly, the transition will be seamless, avoiding any cliff-edge reversion to standard VAT rules on July 1.
Preparing for Continuity
Whether you run a consultancy, supply office furniture to a regional government, or provide IT services to a state hospital, the message is clear: split payment is here to stay through at least the end of the decade. That means your accounting systems, cash-flow forecasts, and VAT credit management protocols need to remain calibrated for a world in which public-sector invoices yield only net proceeds.
If the Council ratifies the extension as expected, the Ministry of Economy will update the official lists of entities subject to split payment, published annually by the Department of Finance. Companies should cross-reference customer details against these rosters to ensure compliance and avoid the penalties that come with misapplying the regime. For those with significant public-sector exposure, maintaining a rolling dialogue with tax advisers and staying current on legislative bulletins will be essential to navigate the nuances of a system that, for all its critics, shows no sign of fading away.
