Stock Options in Italy: Beneficial Tax Regime Repealed
June 26, 2008
On June 20, 2008, the Italian Government released a draft law decree contemplating, inter alia, the repeal of the tax and social security benefits for stock options granted to certain beneficiaries with immediate effect upon its publication in the Official Gazette. The law decree was published on June 25, 2008 (Law Decree of June 25, 2008, no. 112, the “Law Decree”); it has force of law upon its publication but lapses unless confirmed by the Italian Parliament within the following 60 days.
Under the repealed rules, the difference between the fair market value (“FMV”) of the shares delivered to certain beneficiaries upon exercise of the options and the strike price (such difference, the “Gain”) was exempt from personal income tax and social security charges upon exercise, insofar as certain conditions, including the following, were met: (i) the strike price would not be lower than the FMV of the shares at the time of the grant, (ii) the plan would provide for a minimum three-year vesting period, (iii) the shares would be listed on a regulated market at the time the options would become exercisable, and (iv) the beneficiary would hold an investment in the shares not lower than the Gain for at least five years from delivery.
For such purposes, FMV means (i) for listed stock, its average trading price in the rolling month preceding the relevant date; and (ii) for non-listed stock, the pro-rata value of the company’s net equity.
If all the above conditions were met, the Gain was taxed at a flat 12.5% rate upon its realization, i.e. when a sale or any other transfer for consideration occurred.
The repeal of such beneficial regime entails that any such built-in gains are now taxed at progressive rates of personal income taxation (currently up to 45.2%) and subject to social security charges upon exercise of the stock options. Employers would have an obligation to withhold taxes and pay social security charges due accordingly.
The Law Decree does not contemplate a grandfathering rule for plans already launched or awards already granted at the time the Law Decree enters into force. However, since Parliament’s confirmation may entail amendments to the Law Decree, it cannot be excluded that a grandfathering rule be introduced during the confirmation procedure (as of yet, however, there is no expectation of any such rule being introduced).
