With judgment no. 16811 of 13 June 2023, the Italian Court of Cassation affirmed that the taxable base for the payment of the Italian National Social Security Entity (Istituto nazionale della previdenza sociale, ‘INPS’) social security contributions for artisans and traders excludes sums received as dividends by the shareholders of corporations. This judgment affirms the ruling of the Court of Reggio nell’Emilia, confirmed by the Bologna Court of Appeal with judgment no. 57/2017.
In these circumstances and as part of its reasoning, the Court of Appeal had reaffirmed that, in accordance with Article 3-bis of Italian Decree-Law no. 384/1992, converted with amendments into Italian Law no. 438/1992, starting from 1993, the amount of the annual social security contributions due from the parties indicated by Italian Law no. 233/1990, Article 1 (i.e. “persons registered for social security contributions and benefits for artisans and traders’ activities”), related to total business income. The concept of total business income is drawn from Article 55 of the Italian Income Tax Consolidation Act (Testo unico delle imposte sui redditi, ‘TUIR’), and is the total business income reported for personal income tax purposes for the year to which the contributions refer. Consequently, income derived from capital, as defined under Article 44 of the TUIR, deriving purely from shareholdings in capital of companies could not be considered to be included in taxable income.
The INPS appealed to the Italian Court of Cassation against the decision of the Court of Appeal on one ground only, relating to the misapplication of Italian Law no. 438/1992. According to the INPS’ lawyers, the Court of Appeal judges’ decision was based on an erroneous legislative interpretation. This interpretation implies that the law distinguishes between the sums included within the determination of the tax base for contribution and tax purposes, in order to include, in line with the solidarity management of the system, all of the sums received by a party in determining the contribution for pension purposes.
This regulatory interpretation, however, had already been dealt with by the Court of Cassation in previous decisions, thus constituting consolidated precedent which the judges decided to reaffirm (Italian Court of Cassation no. 21540 of 2019; Italian Court of Cassation no. 23790 of 2019; Italian Court of Cassation no. 24096 of 2019; Italian Court of Cassation no. 29779 of 2017; Italian Court of Cassation no. 26958 of 2019; Italian Court of Cassation no. 18822 of 2021).
The current legislation on the subject, namely the above-mentioned Italian Law no. 438/1992, establishes that the amount of the annual contribution due from parties registered for social security contributions and benefits for artisans and traders’ activities “relates to total business income reported for personal income tax purposes for the year to which the contributions themselves refer”. Consequently, to define what is meant by “business income” for contribution purposes, it is necessary to refer to tax regulations – therefore, first and foremost, to the TUIR.
In this regard, the Italian Court of Cassation has held, “since the social security legislation identifies, as the tax base on which to calculate contributions, total business income as defined by the tax regulations and considering that, according to Income Tax Consolidation Act, profits deriving purely from shareholdings in corporations, without the performance of work, are included among capital income, it follows that the latter do not contribute to constituting the tax base for contribution purposes”.
This solution is, according to judges of the Italian Court of Cassation, “completely consistent with the approach of the system as outlined by paragraph 2, Article 38 of the Italian Constitution, which provides that social security protection is due to workers, not to those who merely invest their capital for profit”.
Unlike corporations, the principle of tax transparency applies to partners in partnerships, which provides that – regardless of the source from which they derive and regardless of their corporate purpose – their income is considered business income and is determined on a single basis according to the rules on such income (Article 6, paragraph 3 of the TUIR).
This principle was affirmed by the Court itself in judgment no. 29779 of 2017, according to which, for the purpose of determining the contributions due by artisans and operators of commercial activities, the income received as a limited partner must also be counted, even though it is different from the income deriving from the employment relationship which is subject to social security contributions.
In conclusion, it was observed that the tendency to broaden the contribution base must “be kept within the limits delineated by the legislature, since it is not possible to extend the scope of the relevant provisions by analogy, among other things, as would be the case if the INPS’ argument were accepted, disregarding the intentional parallelism between tax and social security regulations”.
Consequently, in the light of the foregoing, the Italian Court of Cassation rejected the appeal filed by the INPS and declared the validity of the appeal decision, ordering payment of the costs of the proceedings, confirming that, in general, all sums deriving from work activities and constituting business income are subject to social security contributions; on the other hand, if they derive exclusively from financial activities and therefore fall within the definition of capital income, they will not be subject to social security contributions.