(The Telegraph) The Church currently pays tax on several properties it owns that are commercial enterprises but is exempt if at least some of the activities on the property are "non-commercial" - for example a chapel in a hotel.
"The regulatory framework will be definite by January 1, 2013 - the start of the fiscal year - and will fully respect the (European) Community law," Prime Minister Mario Monti's government said in a statement late Tuesday.
In February, the government had amended Italy's property tax law to end the Church's privileges amid rising calls for the Vatican to share in debt crisis sacrifices and in the face of intense scrutiny from the European Commission.
On Monday the Council of State, Italy's highest ranking court for administrative litigation, rejected the decree. But the government insisted everyone would pay property tax, Church included.
In 2010 the EU opened an investigation into whether tax breaks enjoyed by some Church properties in Italy could be classed as illegal state aid.
The extra revenue from these exempt properties - including hotels, restaurants and sports centres - could be €25.5m a year in Rome alone, La Repubblica daily reported, citing official figures.