Recent Italian Tax Developments Will Severely Hit Executives in the Financial Services Sector

With Article 2 of Law Decree No. 138 of August 13, 2011, the Italian government approved a surcharge (the so-called contributo di solidarietà or “solidarity tax”) to be applied on income earned by all Italian residents for the period 2011-2013. This surcharge will amount to (i) 5% on any income exceeding Euro 90,000, up to Euro 150,000, and (ii) 10% over Euro 150,000, and would be deductible from the gross income as of 2012. In addition, if its application results in a marginal tax rate of more than 48% on the last personal income tax bracket (i.e., any income in excess of Euro 75,000), taxpayers could opt to apply such 48% tax rate instead of the solidarity tax.

The Italian government approved the solidarity tax as part of a piece of legislation that is intended to ease the European Central Bank and market concerns about Italy’s economics and, as indicated above, should apply only for the tax periods 2011-2013.

This piece of legislation is effective as of August 13, 2011 but, since it was passed as a law decree, it would lapse (with retroactive effect) unless confirmed by the Italian Parliament within 60 days. Parliament could amend the law decree in the confirmation process (changes to the solidarity tax are already being voiced from various parties).

The rules introducing the solidarity tax overlap with the application of the 10% additional tax on variable compensation paid to certain executives employed in the financial services sector. Since the solidarity tax applies to all taxpayers resident in Italy, based on the rules as currently in force, such executives may be subject to both the solidarity tax and the 10% additional tax.

The Italian tax authorities recently issued official guidance on the amendment to the 10% additional tax rules approved with Law No. 111 of July 15, 2011 (see Para. 15 of Circular No. 41/E of August 4, 2011), confirming that the additional tax would apply to any case in which the variable compensation paid to an executive exceeds the amount of his fixed salary. As illustrated in our previous alert of July 16, following the approval of Law No. 111/2011, the additional tax is now levied on the entire variable compensation paid to an executive in excess of the fixed portion of his compensation and not only - as contemplated before - on the portion exceeding three times its fixed component. The official guidance issued by the Italian tax authorities clarifies the scope of the amendment, confirming that the new rule would not only affect the taxable base of the additional tax but also entails that the 3x test would no longer be a condition for its application. For example, if an executive has a fixed salary of 100 and in a given year is paid variable compensation for 200, following this interpretation the additional tax would apply on 100 (200-100), regardless of the variable compensation not exceeding the 3x threshold.

The Italian tax authorities also confirmed that the revised rule would apply to any variable compensation paid as of July 17, 2011 and that, in order to verify compliance with the new test (i.e., variable compensation in excess of fixed salary), any variable compensation paid before July 17 would also have to be taken into account. Hence, in the example above, where an executive has a fixed salary of 100, if the variable compensation of 200 were paid in two installments, one in February 2011 for 120, and the other in October 2011 for 80, the additional tax would still apply on 80, as the total variable compensation paid in 2011 (120+80) would still exceed the fixed compensation due to the executive for the same year.

As indicated in our previous alert of March 3, 2011, according to the Italian tax authorities (see Para. 13 of Circular No. 4/E of February 15, 2011), the 10% additional tax, which, according to the black letter rule, should apply to executives active in the financial services sector, should apply also to executives of holding companies not operating in the financial sector.

Should you have any questions regarding the above, please contact Vania Petrella (tel.: +39 06 69 522 204; e-mail: vpetrella@cgsh.com) or Gianluca Russo (tel.: +39 06 69 522 680; e-mail: grusso@cgsh.com) in our Rome office, or any of your regular contacts at the firm.