Provisional text

JUDGMENT OF THE GENERAL COURT (Seventh Chamber)

22 June 2022 ([\*](#Footnote*))

( ERDF – Regional policy – Operational programmes coming under the ‘Investment for growth and jobs’ goal in Italy – Decision approving the financial contribution of the ERDF to the major project ‘National Major Ultra Broadband – White Areas’ – Ineligibility of the costs incurred by the beneficiary in respect of VAT – Article 69(3)(c) of Regulation (EU) No 1303/2013 – Concept of ‘VAT being recoverable under national VAT legislation’ )

In Case T‐357/19,

**Italian Republic,** represented by G. Palmieri, acting as Agent, and by P. Gentili, lawyer,

applicant,

supported by

**Czech Republic,** represented by M. Smolek, J. Vláčil and O. Serdula, acting as Agents,

and by

**Kingdom of Spain,** represented by I. Herranz Elizalde, acting as Agent

interveners,

v

**European Commission,** represented by L. Mantl and F. Tomat, acting as Agents,

defendant,

THE GENERAL COURT (Seventh Chamber),

composed of R. da Silva Passos, President, V. Valančius (Rapporteur) and I. Reine, Judges,

Registrar: E. Coulon,

having regard to the written procedure,

having regard to the fact that no application for a hearing was submitted by the parties within the period of three weeks from notification of closure of the written procedure, and having decided, pursuant to Article 106(3) of the Rules of Procedure of the General Court, to give a ruling without an oral procedure,

gives the following

**Judgment**

1        By its action under Article 263 TFEU, the applicant, the Italian Republic, seeks the annulment of Commission Implementing Decision C(2019) 2652 final of 3 April 2019 approving the financial contribution to the major project ‘National Major Ultra Broadband – White Areas’, selected in the context of operational programmes ‘POR Abruzzo FESR 2014-2020’, ‘Basilicata’, ‘POR Calabria FESR FSE’, ‘Campania’, ‘POR Emilia Romagna FESR’, ‘POR Lazio FESR’, ‘POR Liguria FESR’, ‘POR Lombardia FESR’, ‘POR Marche FESR 2014-2020’, ‘POR Piemonte FESR’, ‘POR Puglia FESR-FSE’, ‘POR Sardegna FESR’, ‘Sicilia’, ‘Toscana’, ‘POR Umbria FESR’, ‘POR Veneto FESR 2014-2020’ and ‘Enterprises and competitiveness’ in Italy, in so far as it excludes from EU funding the costs borne by the beneficiary in respect of value added tax (VAT) (‘the contested decision’).

**Background to the dispute**

2        On 3 March 2015, the Presidency of the Council of Ministers of the Italian Republic adopted a document entitled ‘Italian Strategy for Ultra Broadband’.

3        That strategy included, inter alia, the objective of guaranteeing high speed internet connection across Italy of 100 Mbps for 85% of households and all public buildings (including schools and hospitals) and at least 30 Mbps for the remaining population, in particular in market failure areas in which Next Generation Access Networks were non-inexistent and where private operators had no plan to deploy such networks in the next three years (‘white areas’).

4        With a view to deploying Next Generation Access Networks in white areas before 31 December 2022, the Interministerial Committee on Economic Planning of the Italian Republic approved, by decision of 6 August 2015, the principle of direct public intervention in the amount of EUR 4 billion, with EUR 2.2 billion funded by the Italian Development and Cohesion Fund and EUR 1.8 million mainly from the European Regional Development Fund (ERDF) and the European Agricultural Fund for Rural Development (EAFRD).

5        In particular, the intervention model adopted by the Italian authorities provided for the selection, through public tenders, of one or more concessionaires covering, on the one hand, the construction of a passive ultra broadband access network infrastructure – which would remain the property of the Italian State – and, on the other, the maintenance, management and commercial operation of the network, for a renewable period of twenty years.

6        By Commission Implementing Decision C(2016) 3931 final of 30 June 2016, the European Commission considered that the public financing of Next Generation Access Networks in white areas constituted State aid (State aid SA.41647 (2016/N) – Italy – Strategia Banda Ultralarga) and that that State aid was compatible with the internal market, in accordance with Article 107(3)(c) TFEU, in so far as its objective was to facilitate the development of certain activities or certain economic regions and did not affect trading conditions to an extent contrary to the common interest.

7        Following that decision, the Italian Ministry of Economic Development commissioned Infratel Italia SpA (‘Infratel’) to select one or several concessionaires in order to construct the passive ultra broadband access network infrastructure and to guarantee the maintenance and commercial operation of the network.

8        On 20 June and 8 November 2017, then during April 2019, following three tendering procedures, Infratel concluded concession agreements with Open Fiber SpA covering, on the one hand, the construction of the passive ultra broadband access network infrastructure and, on the other, the maintenance, management and commercial operation of the network, for a renewable period of twenty years.

9        On 7 September 2017, the Italian authorities sent a request to the Commission for a financial contribution from the ERDF with a view to implementing the ‘Major National Ultra-broadband Project – White Areas’ (‘the major BUL project’), selected by the managing authority under priority axis 2 of the operational programmes ‘POR Abruzzo FESR 2014-2020’, ‘Basilicata’, ‘POR Calabria FESR FSE’, ‘Campania’, ‘POR Emilia Romagna FESR’, ‘POR Lazio FESR’, ‘POR Liguria FESR’, ‘POR Lombardia FESR’, ‘POR Marche FESR 2014-2020’, ‘POR Piemonte FESR’, ‘POR Puglia FESR-FSE’, ‘POR Sardegna FESR’, ‘Sicilia’, ‘Toscana’, ‘POR Umbria FESR’, ‘POR Veneto FESR 2014-2020’ and ‘Enterprises and competitiveness’.

10      It was apparent from that request and from the information provided by the Italian authorities in support thereof that the Ministry of Economic Development was designated therein as the beneficiary of the ERDF contribution, whereas the implementation of the major BUL project was to be the responsibility of Infratel.

11      In that context, the Italian authorities considered that the VAT linked to the construction costs was eligible to be covered by the ERDF, in so far as it would be paid by the Ministry of Economic Development without the VAT being recoverable under national VAT legislation, because the Ministry is not subject to VAT and cannot deduct it.

12      Lastly, it was stated that Infratel was wholly owned by the Agenzia nazionale per l’attrazione degli investimenti e lo sviluppo d’impresa SpA, in which the ministero dell’Economia e delle Finanze (Ministry of Economy and Finance, Italy) was the sole shareholder.

13      On 30 April 2018, the Commission asked the Italian authorities to provide additional information in order to assess the eligibility of VAT linked to the construction costs resulting from the implementation of the major BUL project.

14      On 2 July 2018, the Italian authorities provided the Commission with additional information.

15      It follows that, in the course of the construction phase of the ultra broadband access network, the invoicing arrangements were as follows:

–        the concessionaire submitted to Infratel the invoices for the costs of works carried out, including VAT;

–        Infratel then submitted invoices for the same amounts to the Ministry of Economic Development, including VAT;

–        the Ministry of Economic Development paid, on the one hand, the invoices issued by Infratel, excluding VAT and, on the other, the VAT directly to the Ministry of Economy and Finance, according to the split payment system in respect of VAT provided for under national law, in accordance with Council Implementing Decision (EU) 2017/784 of 25 April 2017 authorising the Italian Republic to apply a special measure derogating from Articles 206 and 226 of Directive 2006/112/EC on the common system of value added tax and repealing Implementing Decision (EU) 2015/1401 (OJ 2017 L 118, p. 17).

16      In addition, with regard to the operation phase of the ultra broadband access network, it was provided that the concessionaire would pay Infratel the concession fee for the use of the network and would pay the corresponding VAT directly to the Ministry of Economy and Finance, in accordance with the split payment system in respect of VAT. Infratel thus had to send the invoices for the fee directly to the concessionaire.

17      Finally, in the final form of the request for a financial contribution submitted by the Italian authorities, the total cost of the major BUL project was estimated at EUR 3 096 733 706.11, including EUR 364 798 002 by way of VAT due. According to the Italian authorities, the VAT constituted in part a cost eligible for the financial contribution from the ERDF, in the amount of EUR 210 044 165.81.

18      On 26 December 2018, the Commission informed the Italian authorities that the VAT-related expenditure was not eligible for a financial contribution from the ERDF and the EAFRD and requested that the authorities withdraw the amount of VAT from the total eligible costs of the major project.

19      On 6 March 2019, the Italian authorities sent the Commission the final version of the request for a financial contribution from the ERDF to the major BUL project. This final version maintained VAT-related expenditure at EUR 210 044 165.81 as the eligible cost for that operation.

20      By the contested decision, the Commission approved the financial contribution to the major BUL project from the ERDF in the amount of EUR 941 022 670, pursuant to Article 102(2) of Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ 2013 L 347, p. 320).

21      In that decision, the Commission took the view that the VAT incurred by the Ministry of Economic Development for the implementation of the major BUL project did not constitute an economic burden for the beneficiary and could be regarded as being recoverable under national VAT legislation, within the meaning of Article 69(3)(c) of Regulation No 1303/2013.

22      In support of that conclusion, the Commission relied on three separate grounds in the contested decision.

23      First, the Commission considered that the payment of VAT between two ministries – in this case between the Ministry of Economic Development and the Ministry of Economy and Finance – could not be considered to be a cost incurred by the central administration of the Italian State, of which the Ministry of Economic Development is part.

24      Second, the Commission stated, in view of Infratel’s status as an in-house company, that VAT was not payable on internal transactions and, consequently, that VAT should not be included in the invoices issued by Infratel to the Ministry of Economic Development. Moreover, according to the contested decision, Infratel could deduct the VAT on the construction works, in so far as it is regarded as a taxable person.

25      Third, the Commission stated that the major BUL project was a revenue-generating project due to the concession fees paid by the concessionaire to Infratel for the use of the ultra broadband access network. Since those fees were subject to VAT, the Commission took the view that the output VAT was offset by the input VAT payable on the construction of that network and that, therefore, the VAT was theoretically recoverable, irrespective of the institutional structure of the major BUL project and the separation between the beneficiary and Infratel.

26      In that regard, the Commission observed that the words ‘non-recoverable under national VAT legislation’, set out in Article 69(3)(c) of Regulation No 1303/2013, should be understood as excluding the eligibility of VAT in all situations in which the beneficiary can deduct VAT, obtain a refund of the VAT or recover it by any means.

27      The Commission thus considered that VAT-related expenditure on the major BUL project was not eligible for the financial contribution from the ERDF.

**Forms of order sought**

28      By application lodged at the Court Registry on 14 June 2019, the Italian Republic brought the present action. It claims that the Court should:

–        annul the contested decision, in so far as it excludes from the ERDF’s financial contribution the VAT-related expenditure borne by the beneficiary;

–        order the Commission to pay the costs.

29      The Commission contends that the Court should:

–        dismiss the action as unfounded;

–        order the Italian Republic to pay the costs.

30      The Czech Republic and the Kingdom of Spain claim that the Court should:

–        uphold the action brought by the Italian Republic;

–        order the Commission to pay the costs.

**Law**

31      In support of its action, the Italian Republic puts forward, in essence, three pleas in law, alleging, first, infringement of Article 69(3)(c) of Regulation No 1303/2013, second, infringement of Articles 9, 11, 13, 28, 206 and 250 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ 2006 L 347, p. 1; ‘the VAT Directive’), and Article 4(2) TEU and, third, infringement of Article 61(8)(c) of Regulation No 1303/2013.

32      In the present case, the Court considers it appropriate to examine, in the first place, the plea alleging infringement of Article 69(3)(c) of Regulation No 1303/2013.

33      By that plea, the Italian Republic, supported by the Czech Republic and the Kingdom of Spain, claims that, contrary to Article 3 of Council Regulation (EC) No 1084/2006 of 11 July 2006 establishing a Cohesion Fund and repealing Regulation (EC) No 1164/94 (OJ 2006 L 210, p. 79), and contrary to Article 7 of Regulation (EC) No 1080/2006 of the European Parliament and of the Council of 5 July 2006 on the European Regional Development Fund and repealing Regulation (EC) No 1783/1999 (OJ 2006 L 210, p. 1), Article 69(3)(c) of Regulation No 1303/2013 includes an express reference to national VAT legislation which henceforth implies that only deductible VAT-related expenditure within the meaning of specific VAT legislation may be excluded from eligible costs. By contrast, the other forms of recovery, which are not specifically related to tax or based on national VAT legislation, do not exclude VAT from the costs eligible for the financial contribution from the ERDF.

34      The Italian Republic thus points out, in essence, that the Ministry of Economic Development – designated as the beneficiary of the ERDF contribution – is not entitled to deduct the VAT payable on the costs related to the construction of the passive broadband access network infrastructure, with the result that, in so far as that VAT is not recoverable under national VAT legislation, the Commission could not lawfully exclude it from eligible costs.

35      The Commission submits that that plea is unfounded, on the basis of the three grounds set out in the contested decision and restated in paragraphs 22 to 26 above.

36      First of all, it notes that the possibility of recovering VAT, provided for in Article 69(3)(c) of Regulation No 1303/2013, refers to a much broader concept than that of the deductibility of VAT and that, although the Ministry of Economic Development is not actually regarded as a taxable person, within the meaning of Article 13(1) of the VAT Directive, the fact remains that the Ministry could recover the VAT within the meaning of Article 69(3)(c) of Regulation No 1303/2013.

37      Thus, according to the Commission, Article 69(3)(c) of Regulation No 1303/2013 must be interpreted together with Article 65 of that regulation, relating to the eligibility of expenditure, from which it is apparent that only expenditure that constitutes an effective and final burden on the beneficiary is eligible for a financial contribution from the Structural Funds.

38      In that context, there are two cases in which VAT does not constitute an effective and final burden on the beneficiary, namely, first, where the beneficiary can deduct the VAT, in accordance with the provisions of Title X of the VAT Directive, and, second, where, although the beneficiary may not deduct the VAT, the expenditure incurred may nevertheless be recovered by other means, either by a compensation mechanism governed by legislation other than VAT legislation, or where the VAT paid on the construction of the co-financed infrastructure is recovered through the revenue generated by the management of that infrastructure, as in the present case.

39      In particular, the Commission notes that the construction phase and the phase of use of the infrastructure cannot be separated from a technical, organisational and institutional point of view and that, in the present case, the input VAT linked to the infrastructure construction costs is effectively recovered, in so far as it is offset by output VAT in respect of the concession fees for the use of the infrastructure.

40      The Commission considers that any other interpretation would be contrary to the purpose of Article 69(3)(c) of Regulation No 1303/2013, in so far as it would allow the beneficiary to be reimbursed twice for VAT that is not deductible under national VAT legislation, the first time due to a national offsetting mechanism or due to the VAT payable on revenue, and the second time due to the contribution from the Structural Funds.

***The interpretation of** **Article 69****(3)(c) of Regulation** **No 1****303/2013***

41      In accordance with settled case-law, in interpreting a provision of EU law it is necessary to consider not only its wording but also its context and the objectives of the legislation of which it forms part, and in particular the origin of that legislation (see judgment of 11 July 2018, *E LATS*, C‐154/17, EU:C:2018:560, paragraph 18 and the case-law cited).

42      As a preliminary point, it should be borne in mind that, pursuant, in particular, to Articles 174 to 176 TFEU, Regulation No 1303/2013 lays down, with effect from 1 January 2014, common provisions applicable to the ‘European Structural and Investment Funds’ (‘ESI Funds’), which include the ERDF, and general provisions which apply to the ERDF.

43      In particular, it is apparent from Article 100 of Regulation No 1303/2013 that the ERDF may support a major project, defined as an operation comprising a series of works, activities or services intended in itself to accomplish an indivisible task of a precise economic or technical nature which has clearly identified goals and for which the total eligible cost exceeds EUR 50 000 000, provided that the project is part of an operational programme or operational programmes coming under the ‘Investment for growth and jobs’ goal and which have been approved by the Commission.

44      In that context, Article 102 of Regulation No 1303/2013 requires the Commission, in order to determine whether the selection of the major project by the management authority is justified, to evaluate the major project on the basis of certain information listed in Article 101 of that regulation, in particular the total cost and the total eligible cost.

45      So far as concerns Article 69(3)(c) of Regulation No 1303/2013, it is included in Chapter III of Tile VII of the second part of that regulation, which defines the specific conditions on eligibility in accordance with which the expenditure relating to an operation must be assessed in order to be selected for support from the ERDF. Thus, in addition to the conditions on eligibility determined on the basis of national rules, in accordance with Article 65(1) of that regulation, Article 69 thereof includes specific rules on eligibility for grants and repayable assistance. In particular, Article 69(3)(c) excludes VAT from the costs eligible for a contribution from the ESI Funds except where it is non-recoverable under national VAT legislation.

46      In the first place, Article 69(3)(c) of Regulation No 1303/2013 provides that, where a contribution from the ESI Funds takes, as in the present case, the form of a grant, the VAT payable on the subsidised supply of goods or provision of services is excluded from the costs eligible for that contribution, except where it is non-recoverable under national VAT legislation.

47      In that regard, it should be noted that such a rule is consistent with the requirement of sound financial management, enshrined in Article 317 TFEU, underlying the use of the Structural Funds (see, to that effect, judgment of 25 January 2018, *Italy* v *Commission*, T‐91/16, not published, EU:T:2018:30, paragraph 50). The inclusion of VAT in the costs eligible for a contribution from the ESI Funds such as a grant would give rise to unjust enrichment by the beneficiary of the contribution if, after having paid the VAT due on the subsidised supply of goods or provision of services, the beneficiary was able to recover the VAT under national legislation.

48      The fact remains that Article 69(3)(c) of Regulation No 1303/2013 also has the effect of including in the costs eligible for a grant from the ESI Funds VAT-related expenditure in respect of the subsidised operation where that VAT is not recoverable under national VAT legislation.

49      The exclusion of VAT from the costs eligible for a grant from the ESI Funds if VAT were not recoverable would have the effect of increasing the share of the funding allocated to the beneficiary of the ESI Funds and could, therefore, constitute a hindrance to the achievement of operations that the funds are intended to finance.

50      It is apparent from a combined reading of Articles 174 to 176 TFEU that the Structural Funds and the other financial instruments of the European Union which contribute to economic, social and territorial cohesion aim, in particular, to reduce disparities between the levels of development of the various regions and the backwardness of the least favoured regions. Moreover, that objective is reiterated in recital 1 in the preamble to Regulation No 1303/2013 and must be taken into account by the Member States when implementing investments co-financed by those funds and instruments (see, by analogy, judgment of 19 December 2012, *GAMP*, C‐579/11, EU:C:2012:833, paragraph 30 and the case-law cited).

51      Consequently, by providing that VAT does not constitute a cost eligible for a contribution from the ESI Funds which takes, in particular, the form of a grant, except where that VAT is non-recoverable under national VAT legislation, Article 69(3)(c) of Regulation No 1303/2013 guarantees the proper functioning of the economic, social and territorial cohesion mechanisms established by that regulation.

52      In the second place, it is apparent from the wording of Article 69(3)(c) of Regulation No 1303/2013 that the recoverable nature of VAT precluding its inclusion in the total cost eligible for a grant from the ESI Funds must be provided for by the VAT legislation of the Member State in question.

53      In that regard, it must be observed that the wording of that provision differs from that of earlier rules laid down, so far as concerns contributions from the ERDF, by Rule No 7(1) of the Annex to Commission Regulation (EC) No 448/2004 of 10 March 2004 amending Regulation (EC) No 1685/2000 laying down detailed rules for the implementation of Council Regulation (EC) No 1260/1999 as regards the eligibility of expenditure of operations co-financed by the Structural Funds and withdrawing Regulation (EC) No 1145/2003 (OJ 2004 L 72, p. 66), then by Article 7(1)(d) of Regulation No 1080/2006.

54      Those provisions, which had been repealed at the time the contested decision was adopted, provided that VAT does not constitute expenditure eligible for a contribution from the ERDF if that expenditure were, so far as concerns Rule No 7(1) of the Annex to Regulation No 448/2004, ‘recoverable, by whatever means’ and, with regard to Article 7(1)(d) of Regulation No 1080/2006, ‘recoverable’.

55      By contrast, it is clear from the wording of Article 69(3)(c) of Regulation No 1303/2003 that the recoverable nature of VAT can henceforth be assessed only in the light of national VAT legislation.

56      Admittedly, in the proposal for a Regulation on which Regulation No 1303/2013 was based (SEC(2011) 1141 final and SEC(2011) 1142 final), the Commission proposed to limit the eligibility of VAT to the situation where, on the one hand, it was not recoverable under national VAT legislation and, on the other, it was paid by a beneficiary other than a non-taxable person within the meaning of the VAT Directive, provided that the VAT was not incurred in the context of the provision of infrastructure.

57      However, first, in its Opinion on that proposal (OJ 2012 C 225, p. 58), the Committee of the Regions considered that, if VAT that was not recoverable were to be considered as an ineligible expenditure for all projects undertaken by public sector institutions, as proposed by the Commission, then the part to be co-financed by the Member States would increase substantially and the capacity of regional and local authorities to complete projects would be undermined.

58      Second, the wording of Article 69(3)(c) of Regulation No 1303/2013 is taken from Amendment 255 of the European Parliament to the proposal for a Regulation referred to in paragraph 56 above. According to the Parliament’s Committee on Agriculture and Rural Development, the reason for that amendment was the need ‘to refrain from further draining the budgets of public sector bodies which, being unable to include VAT in their accounts, are liable to jeopardise the implementation of the operations and, ultimately, the very effectiveness of the policies they are meant to be supporting’.

59      It is true that the Committee on Agriculture and Rural Development stated that the amendment was in order to maintain continuity with the previous programming periods. However, contrary to what the Commission argued, such continuity was intended to respond to the Commission’s proposal to wholly exclude any payment of VAT by public bodies, as is apparent from the Opinion of the Committee on Agriculture and Rural Development, an extract of which is set out in paragraph 58 above. It was not therefore a question of maintaining the previous system under which VAT recoverable by any means had to be excluded from any contribution from the ESI Funds.

60      Consequently, the wording and origin of Article 69(3)(c) of Regulation No 1303/2013 reflects the intention of the EU legislature to limit the scope of the clause relating to the ineligibility of VAT as previously provided for in Article 7(1)(d) of Regulation No 1080/2006.

61      Accordingly, Article 69(3)(c) of Regulation No 1303/2013 now limits the ineligibility of VAT for contributions from the ERDF which take the form, in particular, of a grant, solely to cases in which VAT is recoverable under national VAT legislation and not, as the Commission argues, by any means whatsoever.

62      In the third place, it must be held that there is a difference in terminology between the expression ‘recoverable VAT’, referred to in Article 69(3)(c) of Regulation No 1303/2013, and the expression ‘deductible VAT’ which appears, inter alia, in Articles 167, 168a, 188, 226, 295 and 310 of the VAT Directive.

63      Thus, contrary to the Italian Republic’s submissions, the possibility for the beneficiary of a contribution from the ESI Funds to recover VAT is not strictly in accordance with a taxable person’s right to deduct under the VAT Directive (see, by analogy, judgments of 20 September 2012, *Hungary* v *Commission*, T‐89/10, not published, EU:T:2012:451, paragraph 47, and of 20 September 2012, *Hungary* v *Commission*, T‐407/10, not published, EU:T:2012:453, paragraph 46).

64      Thus, it follows from Article 69(3)(c) of Regulation No 1303/2013 that the right to deduct VAT constitutes a method of recovery that precludes VAT from being included in the costs eligible for the contribution from the ESI Funds which, moreover, none of the parties contest.

65      It is settled case-law that the right to deduct, which is an integral part of the VAT scheme, is exercisable immediately in respect of all the taxes charged on input transactions and is intended to relieve the trader entirely of the burden of VAT payable or paid in the course of all his economic activities. The common system of VAT ensures neutrality of taxation of all economic activities, whatever their purpose or results, provided that those activities are themselves subject in principle to VAT. In so far as the taxable person, acting as such at the time when he acquires goods or receives services, uses those goods or services for the purposes of his taxed transactions, he is entitled to deduct the VAT paid or payable in respect of those goods or services (see, to that effect, judgment of 14 September 2017, *Iberdrola Inmobiliaria Real Estate Investments*, C‐132/16, EU:C:2017:683 paragraphs 25 to 27 and the case-law cited).

66      In the context of Regulation No 1303/2013, the right to deduct VAT guaranteed by the VAT Directive thus allows the beneficiary of a grant from the ESI Funds, where that beneficiary is a taxable person within the meaning of the directive, to recover the VAT previously paid on the subsidised supply of goods or provision of services.

67      Consequently, although the expression ‘VAT recoverable under national VAT legislation’ necessarily includes deductible VAT, it cannot be limited to that situation alone, in so far as other possibilities for recovery provided for by national VAT legislation could also preclude VAT from being taken into account in the context of a contribution from the ESI Funds.

68      In the fourth and last place, it is true that, like Article 7(1)(d) of Regulation No 1080/2006 and Article 3(e) of Regulation No 1084/2006, on which it was modelled, Article 69(3)(c) of Regulation No 1303/2013 does not identify the entity or person from the point of view of which the recoverability of VAT must be assessed.

69      However, it is apparent from Article 65(2) of Regulation No 1303/2013 that expenditure is eligible for a contribution from the ESI Funds if it has been incurred by a beneficiary of such a contribution and paid during the relevant period. Therefore, only expenditure that has been incurred and paid by that beneficiary can be regarded as eligible costs of the project in question. The concept of ‘beneficiary’ is defined in Article 2(10) of that regulation as a public or private body responsible for initiating or both initiating and implementing operations.

70      Accordingly, in line with what the Court has already held with regard to Council Regulation (EC) No 1083/2006 of 11 July 2006 laying down general provisions on the European Regional Development Fund, the European Social Fund and the Cohesion Fund and repealing Regulation (EC) No 1260/1999 (OJ 2006 L 210, p. 25), and Regulation No 1084/2006 (judgment of 20 September 2012, *Hungary* v *Commission*, T‐89/10, not published, EU:T:2012:451, paragraph 51), it must be held that, in the context of Regulation No 1303/2013, reference is made, in terms of the eligibility of VAT, to the beneficiary of the contribution from the ESI Funds.

71      In addition, it must also be observed that, in the context of the preparatory work leading to the adoption of Regulation No 1080/2006, the Council adopted, on 12 June 2006, a common position on the Commission’s proposal for a Regulation concerning the ERDF, according to which non-recoverable VAT ‘genuinely and definitively borne by the beneficiary’ should be regarded as eligible expenditure for the purposes of calculating the contribution from the Funds. In a communication sent to the European Parliament on 13 June 2006, the Commission indicated its support for that common position.

72      It is against that background that the EU legislature adopted Article 7(1)(d) of Regulation No 1080/2006, which provided that recoverable VAT does not constitute a cost eligible for a contribution from the ERDF.

73      However, it is in no way apparent from the preparatory work leading to the adoption of Regulation No 1303/2013 that the designation of an entity or person from the point of view of which the recoverability of the VAT must be assessed, namely the beneficiary of a contribution from an ESI Fund, had been amended in the light of the designation selected by the legislature when it adopted, in particular, Article 7(1)(d) of Regulation No 1080/2006.

74      Consequently, if the VAT due by reason of implementing an operation subsidised by an ESI Fund is genuinely and definitively borne by the beneficiary of that grant and if that VAT is recoverable by the beneficiary under national VAT legislation, that VAT cannot be included in the costs eligible for that grant.

75      It is in the light of all those considerations that the three grounds on which the contested decision is based must be examined, all of which the Italian Republic claims are based on an infringement of Article 69(3)(c) of Regulation No 1303/2013.

***The first ground, based on the fact that the Ministry of Economic Development is a part of the central administration of the Italian State***

76      It must be observed at the outset that, according to recital 25 of the contested decision, the Ministry of Economic Development is the beneficiary of the contribution from the ERDF within the meaning of the definition set out in Article 2(10) of Regulation No 1303/2013.

77      Moreover, in Article 2(9) of that regulation, the term ‘operation’ is defined as ‘a project, contract, action or group of projects selected by the managing authorities of the programmes concerned, or under their responsibility, that contributes to the objectives of a priority or priorities’.

78      Furthermore, it is not disputed by the parties that the construction by Open Fiber, against remuneration, of an infrastructure such as an ultra broadband access network constituted a supply of goods for consideration within a Member State and made by a taxable person acting as such, who is subject to VAT under Article 2(1)(a) of the VAT Directive, and that the VAT payable on the construction costs linked to that network must be discharged by the beneficiary of the contribution from the ERDF, namely the Ministry of Economic Development.

79      As regards the ground set out in recital 30 of the contested decision, according to which the VAT paid by the Ministry of Economic Development to the Ministry of Economy and Finance cannot be regarded as expenditure incurred by the central administration of the Italian State, the Commission explains that it took account of the fact that the Ministry of Economic Development is financed by the State budget, which draws, in particular, on resources accruing from VAT.

80      However, on the one hand, it does not appear in any way from the documents in the file that the VAT-related expenditure incurred by the Ministry of Economic Development for the implementation of the major BUL project would give rise to budgetary compensation by the Ministry of Economy and Finance, with the result that such a procedure for the recovery of VAT by the beneficiary of the contribution from the ERDF is not established.

81      On the other, even supposing that such budgetary compensation exists, the Commission does not establish that it takes the form of recovery under national VAT legislation.

82      As is apparent from the wording of Article 69(3)(c) of Regulation No 1303/2013, and as indicated in paragraphs 52 to 61 above, the ineligibility of VAT for a contribution from the ERDF is limited to the sole situation in which the beneficiary who is liable to pay that tax can recover it under national VAT legislation and not, contrary to what the Commission maintains, where the VAT is recoverable by any means.

83      Furthermore, the ground set out in recital 30 of the contested decision cannot be upheld, since it would result in the automatic exclusion of VAT from the costs eligible for a contribution from the ERDF where the beneficiary is a part of the central administration of a Member State, such as a ministry department, as in the present case.

84      Apart from the fact that such an interpretation is in no way apparent from the wording of Article 69(3)(c) of Regulation No 1303/2013, it would lead to unequal treatment between the public bodies likely to benefit from the ESI Funds, in disregard of Article 2(10) of that regulation, which includes public bodies in the definition of the concept of beneficiary, irrespective of whether they belong to the central administration of a Member State or have separate legal personality with an autonomous status from the State within whose responsibility they fall.

85      Consequently, on the basis of the ground set out in recital 30 of the contested decision, according to which the payment of VAT by the Ministry of Economic Development to the Ministry of Economy and Finance cannot be considered to be a cost incurred by the central administration of the Italian State, the Commission infringed Article 69(3)(c) of Regulation No 1303/2013.

***The second ground, based, in essence, on the fact that the VAT burden was not borne by the Ministry of Economic Development***

86      In recital 31 of the contested decision, the Commission considered, in essence, that the VAT-related expenditure linked to the construction of the ultra broadband access network was chargeable to Infratel, acting as an in-house company of the Ministry of Economic Development, and not to the latter. Pursuant to the VAT Directive, no VAT is due in the context of an ‘internal transaction’, with the result that VAT should not have been included in the invoices issued by Infratel to that Ministry. Moreover, since Infratel is a taxable person for VAT purposes, it could have deducted the VAT in question.

87      As a preliminary point, it must be observed that, in their request for a financial contribution from the ERDF, the Italian authorities stated that the financing for the entire major BUL project in question, that is to say not only capital expenditure that includes costs related to the acquisition of assets such as infrastructure, but also operating expenses, would be managed through Infratel, without stating that Infratel would not pay VAT.

88      However, it was stated in the same request that the Ministry of Economic Development would cover operating expenses, which usually include taxes, in accordance with the programme agreement concluded on 20 October 2015 between the Ministry of Economic Development, Agenzia nazionale per l’attrazione degli investimenti e lo sviluppo d’impresa and Infratel.

89      Furthermore, the Italian authorities had expressly stated that they had included VAT in the eligible costs, since that tax would be paid by the beneficiary, namely the Ministry of Economic Development.

90      As is apparent from paragraph 15 above and from the replies of the Italian Republic to the measures of organisation of procedure, as work on the construction of the ultra broadband access network progressed, the concessionaire, Open Fiber, had to send the invoices corresponding to the cost of the works and including VAT to Infratel, which only had to pay the invoice value excluding VAT.

91      For its part, the Ministry of Economic Development had to pay the portion of those invoices corresponding to VAT directly to the Ministry of Economy and Finance, according to the split payment system in respect of VAT referred to in paragraph 15 above, pursuant to which the VAT due on the supply of goods and the provision of services intended for the public authorities had to be paid directly by those authorities into a separate blocked bank account of the tax authorities.

92      In those circumstances, it must be found that, according to the institutional structure adopted by the Italian authorities for the implementation of the major BUL project, which the Commission does not dispute, the VAT linked to the construction costs of the ultra broadband access network was borne by the beneficiary of the contribution from the ERDF, namely the Ministry of Economic Development, and not by Infratel.

93      However, in recital 31 of the contested decision, the Commission considered that VAT was not due on ‘internal transactions’, with the result that Infratel could have paid the VAT relating to the construction costs of the ultra broadband access network instead of the Ministry of Economic Development, and that that company could have deducted it afterwards.

94      Thus, according to the Commission, the VAT-related expenditure in respect of the construction costs of the ultra broadband access network does not constitute some form of financial burden for the beneficiary of the contribution from the ERDF. It follows that VAT does not constitute an eligible cost for the beneficiary.

95      However, first, it should be noted that the concepts of ‘internal transaction’ and ‘in-house company’ are not provided for by the VAT Directive. Moreover, the Commission has not relied on provisions of Italian VAT legislation which define or use such concepts.

96      More generally, the Commission has failed to establish that Infratel should not, as a company legally distinct from the Ministry of Economic Development, pass on the VAT to the Ministry.

97      Second, in so far as the Commission intended to refer to Article 11 of the VAT Directive, it is true that that provision provides, in the first paragraph thereof, that each Member State may regard as a single taxable person any persons established in the territory of that Member State who, while legally independent, are closely bound to one another by financial, economic and organisational links.

98      However, such a provision is conditional inasmuch as it involves the application of national provisions determining the actual scope of close financial, economic and organisational links between the persons concerned (see, by analogy, judgment of 16 July 2015, *Larentia + Minerva and Marenave Schiffahrt*, C‐108/14 and C‐109/14, EU:C:2015:496, paragraph 50). Furthermore, as the Italian Republic argues without being contradicted in that regard by the Commission, the possibility offered by that provision has not been transposed into Italian legislation with regard to entities such as the Ministry of Economic Development and Infratel, which constitute two separate legal entities.

99      Thus, and in any event, the Commission cannot consider that the transactions between Infratel and the Ministry of Economic Development were carried out between two entities which formed a single taxable person within the meaning of Article 11 of the VAT Directive, which would have enabled the Ministry to pass on to Infratel the VAT due on the construction of the ultra broadband access network.

100    Third, it is true that, as the Commission points out, the decision to allocate revenue and expenditure between several public bodies of a single Member State and between several organisations responsible for a project, cannot alter the assessment of the eligibility of costs, in particular the VAT paid for implementing the project (see, to that effect, judgment of 20 September 2012, *Hungary* v *Commission*, T‐407/10, not published, EU:T:2012:453, paragraph 32).

101    However, it is sufficient to note that, in the present case, the decision of the Italian authorities not to use Infratel’s services has no bearing on the payment by the Ministry of Economic Development of VAT, which would then have been invoiced directly by Open Fiber in respect of the construction of the ultra broadband access network.

102    Furthermore, the Commission does not establish, or even allege, that the institutional structure adopted by the Italian authorities for the implementation of the major BUL project, in so far as it places the final burden of VAT on the Ministry of Economic Development, was unlawful under the rules laid down by the VAT Directive.

103    Consequently, the second ground on which the contested decision is based, alleging that the burden of VAT relating to the construction works in respect of the ultra broadband access network should be borne only by Infratel, as an in-house company of the Ministry of Economic Development, also infringes Article 69(3)(c) of Regulation No 1303/2013.

***The third ground, based on the neutralisation of** **the** **VAT due on the construction** **works in respect** **of the ultra broadband access network through** **the** **VAT levied on the concession fees for that network***

104    In recital 32 of the contested decision, the Commission considered, in essence, that the concession fees for the ultra broadband access network paid by the concessionaire to Infratel, in its capacity as contracting authority, are subject to VAT, which is paid by the concessionaire directly to the Italian tax authority according to the split payment system. The input VAT payable on the construction of the network is thus neutralised through output VAT levied on concession fees and is therefore recoverable.

105    In the present case, it must be held that that ground, relating to the neutralisation of the VAT due on the construction works by means of the VAT collected by Infratel on the concession fees, does not relate to the Ministry of Economic Development, which is the beneficiary of the contribution from the ERDF for the implementation of the major BUL project. It cannot therefore be established on the basis of that ground that the Ministry may recover, under national VAT legislation, the VAT charged to it on the invoices corresponding to the construction phase of the ultra broadband access network.

106    It is apparent from the file that, as work on the construction of the network progressed, Infratel only had to pay the value excluding VAT of the invoices issued by Open Fiber, whereas the Ministry for Economic Development had to pay the portion of those invoices corresponding to VAT directly to the tax authority.

107    In addition, as the Italian Republic points out, without being contradicted by the Commission in that regard, the Ministry of Economic Development is not regarded as a taxable person in respect of the activities or transactions in which it engages in the exercise of its institutional functions, such as the implementation of the major BUL project, since it carries out those activities or those transactions in its capacity as a public body, in accordance with Article 13 of the VAT Directive, which has been transposed into Italian law by Article 4 of the decreto del Presidente delle Repubblica n. 633 – Istituzione e disciplina dell’imposta sul valore aggiunto (Decree No 633 of the President of the Republic establishing and regulating value added tax) of 26 October 1972 (Ordinary Supplement to GURI No 292 of 1 November 1972).

108    Consequently, the Ministry of Economic Development did not have the option of deducting VAT-related expenditure linked to the construction of the ultra broadband access network according to the methods provided for in the second paragraph of Article 1(2) of the VAT Directive and Article 19(1) of Decree No 633 of the President of the Republic of 26 October 1972.

109    Furthermore, it does not appear from the documents in the file that the Ministry of Economic Development could recover indirectly, even in part, the VAT due by Open Fiber on the concession fees during the operation phase of the ultra broadband access network, such that it could be considered that the Ministry does not bear the genuine and final burden in respect of that expenditure.

110    In that regard, the mere fact that Infratel is a publicly owned company indirectly owned by the Italian State and placed under its control is not sufficient to establish the existence of a mechanism for the indirect recovery of VAT for the benefit of the Ministry of Economic Development.

111    In any event, even assuming that such a mechanism exists or could be put into place between the Ministry of Economic Development and Infratel, VAT-related expenditure incurred by the Ministry during the construction phase of the ultra broadband access network could be excluded from the total costs eligible for a contribution from the ERDF only on the condition that the indirect recovery of VAT, through Infratel, is provided for under Italian VAT legislation, which is not even claimed by the Commission.

112    In that regard, the Commission is not justified in relying on the solution adopted by the Court in the judgments of 20 September 2012, *Hungary* v *Commission* (T‐89/10, not published, EU:T:2012:451), and of 20 September 2012, *Hungary* v *Commission* (T‐407/10, not published, EU:T:2012:453).

113    Admittedly, in those two cases, the Court dismissed the actions for annulment bought against two decisions of the Commission excluding VAT from the costs eligible for contributions from the ERDF and the Cohesion Funds.

114    However, on the one hand, those two Commission decisions were governed, in particular, by Regulation No 1084/2006, Article 3(e) of which, like Article 7(1)(d) of Regulation No 1080/2006, excluded recoverable VAT from the costs eligible for aid from the Cohesion Fund without there being any need to determine whether the methods of recovery resulted from the application of national VAT legislation.

115    On the other, in the two cases giving rise to the judgments cited in paragraph 112 above, the beneficiary had taken account of the integrated financial management of the construction and operation phases of the projects at issue in those cases and had carried out a cost/benefit analysis that is specific to revenue-generating projects.

116    In the present case, as recalled in paragraph 6 above, the support provided by the ERDF to the major BUL project constitutes State aid compatible with the internal market, as shown by the individual assessment of financing needs carried out by the Commission in accordance with applicable State aid rules.

117    As the Italian Republic rightly points out, it is apparent from Article 61(8) of Regulation No 1303/2013, in the version applicable on the date of adoption of the contested decision, that the rules on operations which generate net revenue after their completion were not applicable to operations for which support under the programme constitutes State aid.

118    Lastly, the Commission does not establish that Italian VAT legislation provides for mechanisms for the recovery of VAT other than the right to deduct established by the VAT Directive which allows public law bodies such as the Ministry of Economic Development to recover the VAT they incur as end consumers.

119    Consequently, the mere fact that the concession fees for the ultra broadband access network paid by the concessionaire to Infratel, in its capacity as contracting authority, are subject to VAT has no bearing on the genuine and definitive liability of the Ministry of Economic Development for the VAT-related expenditure linked to the implementation of the major BUL project. In so far as the Commission has not established that it is possible for the Ministry to recover the VAT-related expenditure under national VAT legislation, the third ground set out in recital 32 of the contested decision also infringes Article 69(3)(c) of Regulation No 1303/2013.

120    It follows from all the foregoing that the three grounds on which the contested decision is based infringe Article 69(3)(c) of Regulation No 1303/2013. The contested decision must therefore be annulled, without there being any need to examine the other grounds put forward in support of the action.

**Costs**

121    Under Article 134(1) of the Rules of Procedure of the General Court, the unsuccessful party is to be ordered to pay the costs if they have been applied for in the successful party’s pleadings. Since the Commission has been unsuccessful, it must be ordered to pay the costs, in accordance with the form of order sought by the Italian Republic.

122    Under Article 138(1) of the Rules of Procedure, the Member States which have intervened in the proceedings are to bear their own costs.

On those grounds,

THE GENERAL COURT (Seventh Chamber)

hereby:

1.      **Annuls Commission Implementing Decision C(2019) 2652 final of 3 April 2019 approving the financial contribution to the major project ‘National Major Ultra Broadband – White Areas’, selected in the context of operational programmes ‘POR Abruzzo FESR 2014-2020’, ‘Basilicata’, ‘POR Calabria FESR FSE’, ‘Campania’, ‘POR Emilia Romagna FESR’, ‘POR Lazio FESR’, ‘POR Liguria FESR’, ‘POR Lombardia FESR’, ‘POR Marche FESR 2014-2020’, ‘POR Piemonte FESR’, ‘POR Puglia FESR-FSE’, ‘POR Sardegna FESR’, ‘Sicilia’, ‘Toscana’, ‘POR Umbria FESR’, ‘POR Veneto FESR 2014-2020’ and ‘Enterprises and competitiveness’ in Italy, in so far as it excludes from EU funding the costs borne by the beneficiary in respect of value added tax;**

2.      **Orders the European Commission to bear its own costs, and pay those incurred by the Italian Republic;**

3.      **Orders the Czech Republic and the Kingdom of Spain to bear their own costs.**

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| da Silva Passos | Valančius | Reine |

Delivered in open court in Luxembourg on 22 June 2022.

[Signatures]

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[\*](#Footref*)      Language of the case: Italian.