Italian 10% Additional Tax on Variable Compensation: Tax Base Increase

With Law No. 111 of July 15, 2011 (confirming the Italian budget law approved with Law Decree No. 98 of July 6, 2011), the Italian Parliament amended the rule implementing the 10% additional tax applicable to variable compensation paid to certain executives employed in the financial services sector, increasing its tax base.

As illustrated in our previous alerts, the additional tax was implemented with Article 33 of Law Decree No. 78 of May 31, 2010 (effective as of that date) and provided for the application of a 10% additional levy on the portion of any variable compensation paid to certain executives employed in the financial services sector exceeding three times the fixed component of the executives’ remuneration. The Italian tax authorities issued official guidance on the application of the additional tax with Para. 13 of Circular No. 4/E of February 15, 2011, inter alia, expressing the intention to extend the application of the additional tax also to variable compensation paid to executives of holding companies not operating in the financial sector.

The revised rule seems now to contemplate that, if the variable compensation exceeds three times the fixed portion, the additional tax should apply on the entire variable compensation exceeding the fixed portion and not only - as contemplated so far- on the portion exceeding three times its fixed component.

For example, given an executive with a salary of 100 who in a year is paid variable compensation of 400, according to the rule in force so far, the 10% additional tax would be levied only on 100 (400-300); following the approval of this amendment, the additional tax should instead be levied on 300 (400-100).

Law No. 111 of 2011 expressly states that the revised rule applies to any variable compensation paid as of July 17, 2011.

The revised rule, however, does not address many contentious aspects, which remain unclear.