The European Union (EU) Council of Ministers has authorised the Italian government to limit to 40% the right to deduct VAT charged on company spending for cars and vans that are not wholly used for business.

Its decision legally sanctions an Italian clash with EU VAT law, which generally opposes such rebate restrictions.

Indeed this Italian system had been challenged at the European Court of Justice (ECJ), where the European Commission argued Italy had failed to follow proper procedures in framing this national law.

The newly approved derogation has been approved until December 2010, or until fresh EU rules in deducting VAT for road vehicle expenditure come into force, if that happens earlier.

Italian businesses had been claiming Italy has broken the EU’s sixth VAT directive over the issue.