For years, businesses have been at odds with the Italian Revenue Agency (“Agenzia delle Entrate”) over research and development tax credits, which the Agency has challenged on the grounds that the projects behind them were not innovative enough. The yardstick used to judge them, the OECD Frascati Manual, was not incorporated into the tax system until 2020, well after many of those investments had been made. It is like fining a driver for exceeding a speed limit that did not yet exist when they were driving. This point, widely debated before the Tax Courts (“Corti di Giustizia Tributarie”), has now been addressed by the Italian Council of State (“Consiglio di Stato”), the country’s highest administrative court. In judgment no. 5627 of 14 July 2026, its Sixth Section upheld the ruling of the TAR Lazio (the Regional Administrative Court for Lazio) and settled the matter, making clear that those criteria cannot apply to activities carried out before they were formally incorporated into the tax system in 2020. The decision undermines the basis of most tax assessments and bears on all pending litigation, allowing businesses to rely on this principle in ongoing assessments and in appeals already lodged. One paradox, however, remains to be resolved: the instructions for the professionals who now certify past research have not yet been updated, leaving the door open to new challenges.
Innovating for yourself or for everyone?
At the heart of the matter lies a seemingly simple question: must a company’s research be “new” compared with what? Until 2019 it was enough for a product or process to be innovative for the company developing it, even if similar solutions already existed elsewhere. This was a flexible test, designed not to discourage smaller companies, which often innovate “for themselves” rather than for the market as a whole. The approach then hardened. Once the OECD standards of the Frascati Manual were written into Italian law as guiding criteria, the activity was required to advance the state of the art of the entire sector, not just of the company carrying it out. Two opposing philosophies, yet the tax authorities also applied the stricter one retroactively to taxpayers who could not have known what criteria the Agenzia delle Entrate would use to assess them.
When an incentive becomes an accusation
The consequences were severe: credits classified as non-existent (“inesistenti”), full recovery of the amounts, heavier penalties than those applicable to credits that are merely “not due” (“non spettanti”) and, in several cases, criminal complaints, since the statutory thresholds were easily exceeded by companies that had acted in good faith. This climate of deep uncertainty led the State to open a voluntary repayment procedure for credits already used (a kind of amnesty), implicitly acknowledging how confused the rules in this area were.
Every investment has its time
The principle reaffirmed by the Consiglio di Stato is straightforward: a company must be judged by the rules in force at the time of the investment. This position is shared by much of the tax case law and by the Ministry of Economy and Finance itself, which has clarified that, in the absence of fraud, any undue use of the credit should simply be classified as a credit “not due” rather than “non-existent”. The distinction is decisive, since it drastically reduces exposure to penalties and criminal liability.
Guidelines in need of rewriting
The Consiglio di Stato’s decision does not close the matter entirely. Businesses can now request technical certification of past activities to qualify them as research and development, technological innovation, and design and aesthetic innovation activities eligible for the tax relief, thereby protecting themselves against possible future assessments. The tax authorities are in fact bound by this certification as regards the technical nature and classification of the research and development projects carried out, and can challenge it only if the activities actually performed turn out to differ from those certified. In theory, the certifier should assess projects up to 2019 under the more lenient criteria of the time and apply the OECD standard only from 2020 onwards. However, the ministerial guidelines for certifiers have not yet been brought into line and continue to require the stricter test for earlier years too. The result is a paradox: a tool created to provide certainty risks generating new disputes. Bringing the administrative instructions into line with the Consiglio di Stato’s ruling is now the key step towards ending a period of uncertainty. Restoring consistency to these criteria is essential if businesses are to invest in research on the basis of stable rules. The practical implications of these developments are not the same for all taxpayers: everything depends on the individual situation, and only a careful case-by-case analysis can point the way forward.
