The value-added tax (VAT) split payment mechanism is a tax measure introduced in Italy to combat VAT evasion in transactions with the Public Administration. Under this system, the VAT shown on the invoice is not collected by the supplier but is paid directly to the Italian Revenue Agency by the public entity purchasing the goods or services.

For many Italian businesses that work with public entities or state-controlled companies, understanding what split payment is, which parties are involved, and how to properly handle invoices with split payment is important in order to avoid accounting and tax management errors.

This article explains what split payment is, the legal framework governing this mechanism, how it works in practice, which transactions are included or excluded, and how to pay VAT through split payment. We’ll also examine the accounting treatment of invoices and the obligations of the buyer or customer.

What’s in this article?

• What is split payment?
  
• How split payment works
  
• Transactions included in split payment
  
• Transactions excluded from split payment
  
• How to pay VAT with split payment
  
• Electronic invoicing with split payment
  
• Obligations of the buyer or customer
  
• How Stripe Tax can help
  

What is split payment?

Split payment is a tax payment system applied to transactions conducted with the Public Administration and certain equivalent entities. The concept of split payment is simple: the VAT shown on the invoice is not paid to the supplier but is withheld by the public entity and paid directly to the State.

This mechanism was introduced in Italy by Article 17-ter of Italian Presidential Decree No. 633/1972, as amended by the 2015 Stability Law (Law No. 190/2014). Over the years, the regulations have been updated several times to better define the parties involved and the procedures for implementing this mechanism.

The legal basis for split payment therefore remains Article 17-ter of Italian Presidential Decree No. 633 of 1972, which sets forth how the mechanism operates in transactions with certain public entities.

The split payment mechanism was introduced in Italy following authorization by the Council of the European Union, as it constitutes a special derogation from the ordinary rules on VAT set forth in Directive 2006/112/EC. Italy is currently authorized to apply this system until June 30, 2026 (the authorization was previously valid until June 30, 2023). The extension was granted by Council Implementing Decision (EU) 2023/1552 of July 25, 2023, published in the Official Journal of the European Union No. 188 of July 27, 2023, which approved Italy’s request to extend the application of the split payment mechanism.

How split payment works

To better understand how the split payment mechanism works, it’s helpful to compare it with the standard VAT regime.

In the standard VAT regime:

• The supplier issues an invoice that includes VAT.
  
• The customer pays the total, including VAT.
  
• The supplier remits the tax to the State through periodic VAT settlement.
  

With the split payment mechanism used by the Public Administration, the process changes.

Using the split payment mechanism:

• The supplier issues an invoice subject to split payment, indicating the VAT amount.
  
• The public entity pays the supplier only the taxable amount.
  
• The public entity pays VAT directly to the State.
  

This mechanism also changes the timing for when VAT is due—that is, the point at which the tax becomes payable to the State. When using the split payment mechanism, VAT becomes due either at the time of payment or upon receipt of the invoice, depending on the public entity’s operating procedures.

Comparison between standard VAT regime and split payment

Transactions included in split payment

The Public Administration split payment mechanism applies to transactions conducted with entities and companies that fall into the following categories:

• State administrations
  
• Local public entities (regions, provinces, and municipalities)
  
• Public economic entities
  
• Universities and public institutions
  
• Health authorities
  
• Companies directly or indirectly controlled by the State
  
• Companies controlled by local public entities
  
• Listed companies included in the main indexes of the Italian Stock Exchange
  

Each year, the Ministry of Economy and Finance publishes updated lists of entities and companies subject to the VAT split payment mechanism. It’s therefore important for businesses to verify whether the customer is eligible for the mechanism before issuing the invoice.

Transactions excluded from split payment

Not all transactions with the Public Administration fall under the VAT split payment regime. Even when the customer is a public entity included in the official lists, certain transactions remain excluded because they’re subject to different VAT rules or because tax does not apply. The main transactions excluded from split payment include:

• Transactions subject to reverse charge
  When the reverse charge mechanism applies, the customer is responsible for calculating and paying VAT. Since the supplier does not include tax on the invoice, it’s not possible to apply the split payment mechanism used by the Public Administration. This is the case, for instance, with certain services in the construction sector or in other instances provided for in Article 17 of Italian Presidential Decree No. 633/1972.

• Compensation subject to withholding tax
  Professional services subject to withholding tax are not covered by split payment. In such cases, the supplier issues an invoice including VAT. The public entity withholds income tax (withholding tax), but pays the VAT to the supplier in full. As a result, the split payment mechanism does not apply.

• Transactions exempt from VAT
  Transactions that are exempt from tax under the law—such as certain health care, educational, or financial services provided for in Article 10 of Italian Presidential Decree No. 633/1972—are excluded. Since VAT is not included on the invoice, the split payment mechanism cannot be triggered.

• Transactions outside the scope of VAT
  Transactions outside the scope of VAT are also not subject to split payment. These include, for instance, advance reimbursements of expenses made in the name and on behalf of the customer or transactions that are not relevant from the point of view of VAT. In these situations, since there is no VAT on the invoice, VAT split payment is not applicable.

• Transactions subject to special VAT regimes
  Some tax regimes require special VAT application methods and are therefore excluded from the split payment mechanism. An important example is the flat-rate regime, under which the invoice does not include VAT. The same applies to other special regimes, such as the margin regime or the special agricultural regime.

What’s the difference between reverse charge and split payment?

The difference between reverse charge and split payment lies in how VAT is managed and paid:

• Reverse charge: The supplier issues an invoice without VAT, and the customer adds the tax to the invoice, recording it as both output VAT and VAT credit. This way, the customer manages the tax in their own VAT settlement.
  
• Split payment: The supplier issues an invoice that includes VAT, but the supplier does not actually collect that VAT. Instead, VAT is withheld by the customer (typically a Public Administration entity) and paid directly to the State.
  

In short:

• Under the reverse charge mechanism, the customer handles VAT by adding it to the invoice.
  
• Under the split payment mechanism, VAT is stated on the invoice but is paid to the State by the public entity customer.
  

How to pay VAT with split payment

For businesses that bill the Public Administration, it is important to understand how VAT is paid under the split payment system and what the implications are for tax management.
Under the standard VAT regime, the supplier collects the tax from the customer and pays it to the State through periodic VAT settlements. With split payment, however, the tax is not paid by the supplier but by the public entity customer. This is how it works:

• The VAT shown on the invoice is withheld by the public entity customer.
  
• The public entity pays the tax directly to the Revenue Agency.
  

In practice, when a business issues an invoice subject to VAT split payment, the public entity pays the supplier only the taxable amount (excluding VAT). The VAT shown on the invoice is paid directly to the Revenue Agency by the buyer or customer, in accordance with the procedures set forth in tax regulations.

This has certain operational implications for the supplier. Although the tax is indicated on the invoice, it should not be included in their periodic VAT settlement because it’s not actually collected. Nevertheless, the obligation remains to record the invoice in the VAT sales ledger, clearly indicating the uncollected VAT. This ensures that the transaction is properly recorded for tax purposes, even if the tax payment is made directly by the public entity customer.

Electronic invoicing with split payment

Since 2019, electronic invoicing has been mandatory for almost all transactions between businesses and the Public Administration. In the case of split payment, here is how to fill out an electronic invoice:

• Enter “S,” which indicates split payment, in the field labeled (); this is data block code 2.2.2.7.
  
• Include a note such as: “Transaction subject to split payment—the seller does not collect VAT pursuant to former Article 17-ter of Italian Presidential Decree No. 633/1972; the buyer is required to pay the VAT to the Revenue Agency.”
  
• Digitally sign the invoice.
  
• Submit it to the Exchange System.
  

How do you record an invoice with split payments in the sales VAT register?

When issuing an invoice with split payments, the transaction must be recorded in the sales VAT register, just like any other invoice. However, the treatment of VAT differs from that under the standard regime.

Under the split payment mechanism, the VAT stated on the invoice is not collected by the supplier but is paid directly to the Revenue Agency by the public entity customer.

From an accounting perspective, the process of recording an invoice generally involves:

• Recognizing the receivable from the customer for the taxable amount
  
• Recording the revenue from the sale of goods or the provision of services
  
• Reporting the VAT shown on the invoice but not collected, which is not included in the supplier’s VAT settlement
  

Since the tax is not collected, the supplier is not required to include it in their periodic VAT settlement. However, VAT must still be recorded in the accounting entry and on the invoice, as the transaction remains subject to VAT.

Obligations of the buyer or customer

Under the VAT split payment system, public entity customers also have specific tax obligations. The buyer or customer, that is, the entity purchasing the goods or services, must:

• Withhold the VAT stated on the invoice.
  
• Pay the VAT directly to the State.
  
• Properly record the transaction for accounting purposes.
  

Public entities can pay the tax:

• Using the F24 form.
  
• With internal accounting procedures provided for by law.
  

This way, the system ensures that VAT is paid directly to the State without going through the supplier. The split payment mechanism for the Public Administration was introduced specifically to reduce the risk of VAT evasion in transactions with public entities.

How Stripe Tax can help

Managing VAT and tax compliance can be complex for many businesses, especially when selling goods or services online or operating in multiple countries. Although VAT split payment applies specifically to transactions with the Public Administration, businesses must still properly manage tax collection, invoicing, and compliance with tax regulations across various markets. Digital tools designed for tax management can help simplify these processes and reduce the risk of errors.

Stripe Tax reduces the complexity of tax compliance so you can focus on growing your business. 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.

Stripe Tax helps you monitor your obligations and alerts you when you exceed a tax registration threshold based on your Stripe transactions. It can also register to collect tax on your behalf in the US and manage filings through trusted partners. Stripe Tax automatically calculates and collects sales tax, VAT, and GST on:

• Digital goods and services in all US states and over 100 countries.
  
• Physical goods in all US states and 42 countries.
  

Stripe Tax can help you:

• Understand where to register and collect taxes: See where you need to collect taxes based on your Stripe transactions. After you register, switch on tax collection in a new state or country in seconds. You can start collecting taxes by adding one line of code to your existing Stripe integration, or add tax collection with the click of a button in the Stripe Dashboard.

• Register to pay tax: If you need to register for a sales tax in the US, let Stripe manage your tax registrations. You’ll benefit from a simplified process that prefills application details—saving you time and simplifying compliance with local regulations. If you need help registering outside of the US, Stripe partners with Taxually to help you register with local tax authorities.

• Automatically collect tax: Stripe Tax calculates and collects the right amount of tax owed, no matter what or where you sell. It supports hundreds of products and services and is up-to-date on tax rules and rate changes.

• Simplify filing: Stripe Tax seamlessly integrates with filing partners, so your global filings are accurate and timely. Let our partners manage your filings so you can focus on growing your business.

Learn more about Stripe Tax, or get started today.