In resolution no. 59/E/2024, the Italian Revenue Agency (Agenzia delle Entrate) clarified the application of tax relief for performance bonuses under Article 1, paragraph 182 of Italian Law no. 208 of 2015, with specific reference to the requirement of improved performance against company targets.
Article 1, paragraphs 182 to 189 of Italian Law no. 208 of 2015 (the “2016 Budget Law”) provides for the application of a tax substituting personal income tax (imposta sul reddito delle persone fisiche – IRPEF) and related regional and municipal surcharges on “variable performance bonuses, the payment of which is linked to increases in productivity, profitability, quality, efficiency and innovation, which are measurable and verifiable on the basis of the criteria defined by the decree referred to in paragraph 188”. This substitute tax is 10%, up to a maximum of EUR 3,000 gross.
Italian Law no. 197 of 29 December 2022 (the “2023 Budget Law”) subsequently amended this provision with Article 1, Paragraph 63, which stipulates that for bonuses and amounts paid during 2023, the substitute tax rate is reduced to 5%. Similarly, Italian Law no. 213 of 30 December 2023 (the “2024 Budget Law”) extended the application of the provision for bonuses and amounts paid during 2024; therefore, the 5% rate applies to these amounts for the current year as well.
With regard to the performance criteria to which the company objectives for the payment of performance bonuses must be anchored, the decree of the Ministry of Labour and Social Policies of 16 March 2016 refers to the definition in the company or area collective bargaining agreement, which must contain “criteria for measuring and verifying increases in productivity, profitability, quality, efficiency and innovation, which may consist in an increase in production or savings in production costs or in the improvement of the quality of products and processes, including through the re-organisation of non-overtime working hours or the use of remote work as a flexible way of carrying out the employment relationship, with respect to a reasonable period defined by the agreement, the achievement of which can be objectively verified through specifically identified numerical or other indicators”.
Therefore, the improved performance must be “measurable and verifiable”, and consequently it is necessary to identify criteria for measuring the achievement of improved performance through objectively verifiable numerical (or other) indicators identified for this purpose.
In view of the above, for the purposes of applying the substitute tax, it is necessary that, over a period of time defined in the agreement, improved performance in at least one of the objectives of productivity, profitability, quality, efficiency and innovation mentioned above is found and, in addition, that this improvement can be verified and measured.
In this regard, Circular no. 5/E of 2018 clarified that to qualify for the tax relief, it is sufficient that the company achieve an improvement in only one of the productivity, profitability, quality, efficiency and innovation objectives identified in the contract, within an appropriate period predefined by the parties.
The Circular also clarified that “appropriate period” means the accrual period of the performance bonus, or the time period identified by the agreement at the end of which the improved performance against the objectives must be verified. The duration of the appropriate period is left to the second-level bargaining agreement and may be annual, mid-year or multi-year.
The resolution of 19 October 2018, no. 78/E, later clarified that – for the purposes of applying the tax benefits – it does not appear to be sufficient that the objective set by the second-level bargaining agreement is achieved, it is also necessary that the company’s performance has improved compared to its performance prior to the beginning of the bonus accrual period.
In the question considered by the Italian Revenue Agency’s resolution of 5 March 2024, clarification was sought on the tax regime applicable to the amounts paid as a performance bonus in view of the reduction in the number of holidays days untaken as of 31 December compared to the previous year (resulting in a reduction in the related business cost). In this circumstance, however, the “holiday parameter” criterion, while objectively achieved, was not explicitly stated in the company’s supplementary agreement as a condition for bonus payment.
In fact, the supplementary agreement made payment of the performance bonus conditional not on the achievement of improved performance, but on the attainment of stipulated figures, consisting partly of “collective company objectives” and partly of “functional/individual objectives”, without therefore providing for any verification of the attainment of improved performance.
In conclusion, the Italian Revenue Agency – with the answer under discussion – ruled that in this case the performance bonus is not eligible for the tax relief, as:
“The rule under consideration requires (…) that the following conditions concurrently exist:
These conditions are not fully met by all the objectives outlined above.”