If you run a business that sells products or services in Italy, you will undoubtedly have come across the value-added tax (VAT) exemption issue. Understanding when a transaction is exempt, how the VAT exemption scheme works, which relief codes to indicate on the invoice, and what bookkeeping duties remain your responsibility is key to operating correctly and managing billing without errors.

This article provides a clear and practical analysis of what VAT exemption is, which transactions qualify for relief pursuant to Italian Presidential Decree No. 633/1972, how it works under the flat-rate scheme, which VAT exemption codes to use and how to apply them on invoices, and how it affects everyday accounting.

What’s in this article?

• What is VAT exemption?
  
• The six main transactions and/or activities exempt from VAT
  
• Difference between exempt, nontaxable, and VAT-excluded transactions
  
• VAT exemption and invoicing
  
• VAT exemption and accounting
  
• How Stripe Tax can help you
  

What is VAT exemption?

VAT exemption is a special condition set out in Italian Presidential Decree No. 633/1972, which governs VAT in Italy. Relief applies when a transaction falls within the scope of Arts. 10 and 72, or further regulatory provisions that establish a zero levy, while keeping the supply inside the fiscal framework. In practical terms, the supply of goods or services continue to be subject to VAT in principle, but the law does not levy it because a particular provision grants an exemption. Accordingly, these are not operations excluded from taxation, but transactions that fall within the scope of VAT that apply a zero charge.

In other words, when you carry out a transaction under the VAT exemption regime, you must still comply with certain documentation requirements, including showing the appropriate relief code, adding the legal citation justifying the exclusion on the invoice, and ensuring bookkeeping records accurately reflect the nature of the exchange. A very common example concerns medical or healthcare work, financial and insurance operations, educational work, certain cultural or sporting activities, and many other categories outlined in legislation.

The exemption issue is especially relevant if work involves non-Italian clients, provide international services, or work with entities that benefit from specific fiscal regimes such as the flat-rate scheme.

Furthermore, if you operate under the flat-rate scheme, it needs to clearly distinguish between the VAT relief linked to the flat-rate scheme (which concerns the management of your business) and VAT-exempt operations pursuant to Italian Presidential Decree No. 633/1972 (which relate to the nature of the transaction). This is why it is important to be aware of the logic behind taxation, the applicability of VAT set out by legislation, and the appropriate selection of the flat-rate VAT exemption code when needed.

The six main transactions and/or activities exempt from VAT

Art. 10 of Italian Presidential Decree No. 633/1972 lists most VAT-exempt transactions. The list is long and covers many activities carried out by enterprises, professionals, institutions, and third sector operators. Below is a structured overview of the main categories, helpful if a supply fits VAT exemption:

Healthcare and medical services

Work offered by doctors, nurses, psychologists, and additional licensed professionals are generally eligible for relief. The invoice must indicate the correct VAT exemption article, as provided for by the applicable regime.

Financial and banking operations

Banks, financial institutions, and intermediaries perform many activities—such as granting loans, managing deposits, and handling financial or insurance transactions—that also qualify for relief. In these situations, specific provisions of Italian Presidential Decree No. 633/1972 exclude the application of VAT.

Educational, training, and academic services

Educational services for children and young people are not subject to VAT, as are didactic activities of any kind, including training, refresher courses, retraining, and professional reconversion. Exemption applies when schools and institutions recognized by the public administration, as well as noncommercial third sector entities, deliver these offerings. This also includes related services such as accommodation, meals, books, and didactic materials provided by colleges or associated facilities. Lessons given personally by teachers also qualify for relief; driving lessons for obtaining B and C1 licenses are excluded.

Cultural and sporting transactions

Cultural associations, amateur sports clubs, and other organizations could benefit from VAT exemption on particular offerings, as long as they comply with organizational and statutory requirements.

Specific real estate transactions

Some real estate leases and transfers, including residential leases, could qualify for VAT relief.

Public administration activities

Work performed by public administrations for institutional purposes falls outside commercial activities and, in most cases, is excluded from the coverage of VAT because the subjective condition is missing: state bodies do not act as VAT taxpayers. However, when state bodies offer services that fall within those listed in Art. 10 of Italian Presidential Decree No. 633/1972, such as healthcare work provided by public hospitals, educational work delivered by state schools, or social welfare services, these transactions are considered VAT-exempt, as are the same work categories carried out by private individuals or third sector entities. In these cases, if an invoice is to be issued, the entity must indicate the correct relief code, along with the legal reference that justifies the exemption from taxation.

Do VAT-exempt transactions still need to be declared or reported?

Yes. VAT-exempt transactions have to be recorded in their respective registers and declared in annual returns, as they fall within the scope of fiscal applicability while applying a zero charge. The only exceptions are taxpayers under the flat-rate scheme, who are excluded from VAT registration but need to show the exemption on their invoices.

Difference between exempt, nontaxable, and VAT-excluded transactions

To understand the distinction between exempt, nontaxable, and VAT-excluded transactions, it is helpful to start from the three key prerequisites for applying it:

• Objective prerequisite: The transaction must qualify as a supply of goods or services.

• Subjective prerequisite: The person performing the transaction must be subject to VAT, meaning they engage in an enterprise, art, or profession.

• Territorial requirement: The transaction must take place within Italy.

If an exchange fails to meet all three conditions simultaneously, it sits outside the coverage of VAT. By contrast, when all three conditions are satisfied, but a rule grants an exemption or imposes no levy, the transaction qualifies as relieved or nontaxable.

This article focuses on VAT exemption, but it is important to recognize how it differs from other situations in which taxation does not apply. Italian law classifies these situations as exempt, nontaxable, and VAT-excluded transactions:

• Exempt transactions
  These are particular activities listed by legislation: healthcare, education, culture, and finance, which, although subject to VAT, are not required to pay tax.

• Nontaxable transactions
  These mainly concern foreign operations, such as exports, intracommunity transfers, or international services. They fall within the scope of VAT, but the law does not impose tax, while invoicing and registration obligations continue.

• Excluded transactions
  These dealings remain entirely outside the scope of VAT because there is no objective, subjective, or territorial requirement: neither invoicing nor registration is required.

VAT exemption and invoicing

Correctly managing VAT relief on invoices is one of the most sensitive aspects for those who sell products or offerings in Italy. Despite the zero charge, specific duties apply, including completing fiscal documents, selecting the appropriate exemption code, and indicating the regulatory citation. A billing document issued incompletely or with an incorrect provision can lead to accounting errors and disputes. This is why it is paramount to know how to structure your invoice when dealing with exempt transactions, whether you operate under the standard or flat-rate scheme.

When carrying out a relieved transaction, the invoice must include the following:

• Correct VAT exemption code
  For instance: N4 for exempt transactions, N2.2 for transactions not subject to VAT due to lack of subjective requirements (used for the exemption code for the flat-rate VAT regime), N1, N2.1, N3.1 in special cases, etc.

• Legislative reference
  For instance: “Transaction exempt pursuant to Art. 10 of Italian Presidential Decree No. 633/1972.”

• Taxable amount excluding VAT (exclusively for transactions exempt under Art. 10)
  For transactions exempt under Art. 10 of Italian Presidential Decree 633/1972, the amount of the service or supply is indicated as chargeable, but VAT is not applied, resulting in a zero charge. The total sum of the invoice, therefore, corresponds to the chargeable value, accompanied by the correct exemption code and the regulatory reference justifying the lack of taxation.

• Supporting documents, if necessary
  These are especially necessary for foreign or complex operations.

• VAT exemption for the flat-rate scheme
  If you operate under a flat-rate scheme, all invoices are VAT-exempt due to your subjective status. You must include the following wording on the billing document: “Transaction not subject to VAT pursuant to Article 1, paragraphs 54-89 of Italian Law No. 190/2014 and subsequent amendments/addenda.” Keep this separate from the exempt transactions provided for by Italian Presidential Decree No. 633/1972.

How is an invoice issued for a VAT-exempt transaction?

To issue an invoice for a VAT-exempt transaction, you must indicate the amount of the service, apply a zero rate, and enter the exemption code required by electronic invoicing rules. It is also necessary to cite the regulatory reference that justifies the exception (e.g., Art. 10 of Italian Presidential Decree No. 633/1972). The invoice follows the same structure as an ordinary one, but the law does not apply tax.

VAT exemption codes

Below is a list of the main VAT exemption codes to be included on invoices:

VAT exemption and accounting

VAT exemption extends beyond billing and has practical implications for accounting management. Although the business does not levy tax on the customer, relieved transactions still require careful handling because they affect sales recording, the right to deduct VAT on purchases, and, more broadly, the organization of internal bookkeeping. Understanding how to manage these operations appropriately is significant to maintaining orderly accounting, avoiding errors, and operating in full compliance.

Recording of exempt transactions

If operating under the ordinary VAT regime, operations exempt pursuant to Art. 10 must still appear in the VAT registers, the same way as taxable transactions. This recording is relevant because excluded dealings affect the calculation of the deduction on purchases, i.e., the mechanism that allows you to recover the VAT paid to suppliers. When you carry out both chargeable and exempt activities, the law stipulates that you can only deduct it in proportion to taxable transactions. This proportion is called the pro rata percentage. For this reason, each excluded exchange needs accurate logging, indicating the exemption code and the relevant reference article, to obtain a pro rata calculation that is accurate and consistent with your actual work.

Impact on the pro rata VAT deduction

The pro rata deduction is one of the most sensitive issues for those who engage in various types of operations. In practice, if your business generates both taxable (which are subject to VAT) and exempt transactions (which are not subject to VAT but stay within the scope of taxation), you cannot deduct 100% of it on purchases. The deduction decreases proportionally: the more excluded exchanges you carry out, the less VAT on purchases you can recover. This mechanism prevents an enterprise from deducting it in full on costs related to work that do not generate output VAT. For this reason, accurate classification and recording exempt transactions is not just a bureaucratic burden, but a practical step that directly affects the actual cost of your purchases and your periodic VAT settlement.

Revenue management and breakdown by category

Well-structured bookkeeping also requires the appropriate breakdown of revenues into chargeable, relieved, nontaxable, and outside the coverage of VAT. This distinction is useful beyond fiscal purposes: it improves internal transparency, allows performance analysis of different lines of work accurately, and makes an accountant’s job easier when preparing your annual tax returns. For enterprises operating in multiple sectors, such as companies offering advisory services (taxable activity) and exempt educational offerings, this step is indispensable.

Accounting and flat-rate scheme

If operating under a flat-rate VAT exemption scheme, accounting is simpler because you do not record VAT or deduct it on purchases. Nevertheless, specific obligations remain: numbering and storing invoices, properly displaying the exemption code for the flat-rate scheme, and complying with the regime’s limits. In this case, too, keeping accurate records of income is important in order to monitor the €85,000 threshold and avoid losing the benefit of the preferential tax scheme.

Exempt transactions and foreign relations

Businesses in Italy that work with foreign customers or suppliers and hence issue invoices to them must exercise extra caution. Exempt transactions need separation from nontaxable operations (such as exports and intracommunity transfers) and from exchanges outside the scope of VAT. Correct classification affects both registration and fiscal duties, including annual returns.

How Stripe Tax can help you

Acknowledging when to apply exemption, how to correctly manage VAT type codes, and how to classify transactions as exempt, nontaxable, or excluded is key to ensuring compliance and reducing the risk of tax errors. However, as your business grows, especially if you sell abroad or offer digital products, manually monitoring the correct application of tax can become complex. And it is precisely in these cases that automated tools such as Stripe Tax can make a huge difference.

Stripe Tax reduces the complexity of tax compliance procedures so you can focus on growing your business. Stripe Tax helps you track your obligations and alerts you when you exceed a sales tax registration threshold based on your Stripe transactions. It also automatically calculates and collects sales tax, VAT and GST on physical and digital goods and services in the US and in more than 100 countries.

Start collecting taxes globally by adding a single line of code to your existing integration, clicking a button in the Dashboard or using our powerful API.

With Stripe Tax you can:

• Understand where to register and collect taxes: Find out where you need to collect taxes based on your Stripe transactions. Once you have registered, it only takes a few seconds to activate tax collection in a new state or country. You can start collecting taxes by adding a line of code to your existing Stripe integration or with a simple click in the Stripe Dashboard.
  
• Register for tax payments: let Stripe handle your global tax registrations and benefit from a simplified process that pre-fills your registration request details in advance to save time and ensure compliance with local regulations.
  
• Collecting taxes automatically: Stripe Tax calculates and collects the correct amount of tax owed, no matter what you sell or where you sell it. Moreover, it supports hundreds of products and services and is always up to date with tax rates and legislative changes.
  
• Simplifying tax returns: Stripe Tax integrates seamlessly with partners offering tax return services, ensuring your global tax returns are accurate and on time. Leave the management of your tax returns to our partners, while you focus on developing your business.
  

Learn more about Stripe Tax or get started today.