Italian 10% Additional Tax on Variable Compensation Paid to Certain Executives Employed in the Financial Services Sector Confirmed

With Law No. 122 of July 30, 2010, the Italian Parliament confirmed Law Decree No. 78 of May 31, 2010, which, as illustrated in our previous e-mail communication of June 3, 2010, introduced, inter alia, an additional 10% tax (the “Additional Tax”) to be levied on bonuses and stock options paid to certain executives employed in the financial services sector. Law Decree No. 78 became effective on May 31, 2010 but would have lapsed if not confirmed by the Italian Parliament within the next 60 days.

The rule introducing the Additional Tax has not been amended during the confirmation procedure. Therefore, as of May 31, 2010, any portion of variable compensation taking the form of bonuses or stock options exceeding three times the remuneration’s fixed component is subject to the Additional Tax. However, such tax is applied exclusively to certain executives (i.e.employees treated as “dirigenti” and certain consultants and directors characterized as quasi-employees (“collaboratori coordinati e continuativi”) for labor law purposes) employed in the financial services sector.

The Additional Tax takes the form of a withholding tax and is effectively borne by the recipient; it does not affect the applicable social security regime.

Since the new legislation does not include a grandfathering rule for plans already launched or awards already vested at the time Law Decree No. 78 became effective, such plans and awards should be subject to the Additional Tax.

Black-letter law raises some doubts as to the actual scope and application of the new rule. For instance, it is not clear whether it applies to options only or also to other equity-settled awards, and how to determine the time frame material to compute the relevant threshold (i.e. three times the fixed component). For the time being, there is no indication as to whether and when the tax administration will issue any guidance with respect to this rule.

Should you have any questions regarding the above, please contact Vania Petrella or Gianluca Russo, or any of your regular contacts at the firm.

This article was published in Practical European Tax Strategies (WorldTrade Executive/Thomson Reuters, July 2010, Volume 12, Number 7).