The Italian individual taxation of incentive/remuneration plans

The Italian individual taxation of incentive/remuneration plans

MFB Partners has been asked, by many international groups, what is the Italian individual income taxation in case of assignment of atypical forms of incentive/remuneration plans.

The question can be answered considering what is written in the Article 51 , paragraph 1, of the Tax Code (DPR 917/1986), for the taxation of fringe benefits,  but also the decisions issued by the finance authorities on the subject of stock option plans .

As a priority, in fact, we must remember that the first paragraph of Article 51 of the Tax Code imposes a taxation policy via cash – that is, when the income is physically drawn by the employee – of “all amounts and values ​ drawn in relation to the employment relationship”.

Secondarily, we must notice that, with specific reference to the moment of disposal of the withholding tax, paid by the withholding agent on the total amount of sums and values (and so also for fringe benefits) received by the employee, the Ministerial Circular n. 326 of December, 23 1997 has enlighten that “the moment of disposal corresponds to the moment when the income (in cash and/or in kind) goes from the provider’s availability to the recipient’s property”.

The same principle is further reinforced by the Ministerial Circular n. 98 of May 17, 2000, where the Tax Authority, questioning about stock options, has confirmed that, even for shares, they apply “the general tax principles of the fringe benefit under which the normal value of the shares must be subject to taxation at the time of granting (that is when the asset enters the employee’s availability) net of the amount the employee paid in order to enjoy the assignment itself”.

Within the ministerial decision, the Tax Authority has also clearly discerned option rights between “transferable” and “non-transferable” and stated that “the granting of a transferable option right must always be subject to taxation as employment income -from the date of assignment, because it is different from those considered by the regulation in Article 48 (read 51), point g) and g-bis) of the Tax Code. ” Vice versa, if the right option is not transferable, “its assignment is not taxable, while shares and values acquired by the exercise of the option (except under the existence of those conditions required for the implementation of the tax benefit referred to in Article 51, points g) and g-bis) of the Tax Code) are taxable. However, according to the abovementioned ministerial circular, if the non-transferable option right loses this requirement and becomes subsequently transferable, “the related value will be taxed only during the tax period when it became transferable “.

It seems finally worthy to notice that, with specific reference to a question regarding the tax point of a stock plan with respect to shares which are unavailable for five years, the Tax Authority stated that “the moment of taxation, determining part of the amount of the employment income, corresponds to the moment when the bearer shares are granted “.  This is true when” the bearer shares are deposited in the employment’s account at the ZJ Bank Zurich where they are constrained for five years” and “the employee will obtain any dividend.”

In view of these considerations, MFB Partners has the highlight that, with regard to an atypical incentive plan the received sums:

  • are subject to the taxation policy via cash referred to in Article 51, ​​paragraph 1, of the Tax Code;
  • involve a fee upsurge when the  fee itself goes from the provider’s to the employee’s capital income;
  • generate employee’s taxes when the cash bonus is effectively granted to the employee,  since the employment gets richer only now;
  • require an in-depth practical analysis especially concerning, not only the identification of the taxation period and the related taxpaying capacity, but also the calculation of taxable value;
  • fix the immediate taxation – according to the ordinary rules – of the results deriving from the employee taking part to the plan.