On May 25, 2010, the Italian Government adopted a draft law decree contemplating, inter alia, an additional 10% tax to be levied on the portion of any variable compensation paid (in the form of bonuses and stock options) to certain executives in the financial sector exceeding three times the fixed component of the executives’ remuneration (the ”Additional Tax”). The law decree became effective on May 31, 2010 upon publication on the Official Gazette (Law Decree No. 78 of May 31, 2010, the ”Law Decree”) and it has force of law but lapses unless confirmed by the Italian Parliament within the following 60 days.
Under the current rules, any compensation (in cash or in kind, including fringe benefits, cash bonuses and equity-based awards) paid to employees and quasi-employees in Italy is treated as employment income, generally subject to the Italian personal income tax (levied at progressive rates, currently up to 43%, plus local surcharges up to 2.2%) and to social security charges.
With specific reference to stock options, any difference between the fair market value of the shares delivered upon exercise of the options and the strike price, while generally subject to tax at ordinary rates, is exempt from social security charges. Although the issue is not free from doubt (the Italian social security agency is expected to clarify this issue in the next weeks), this social security exemption regime, subject to certain conditions, should be extended also to other equity-settled incentive plans (such as RSUs and restricted stock).
The Additional Tax would be borne by the recipient and would increase the taxation of any such compensation (taking the form of an additional withholding tax), without modifying its current social security regime. However, it would only apply (i) in connection with remuneration paid to certain executives (i.e., to all employees treated as ”dirigenti”, and to certain consultants and directors characterized as quasi-employees under Italian labor law) in the financial services sector; and (ii) on the portion of such variable compensation exceeding three times the fixed component of the executives’ remuneration.
Although the new provision is not entirely clear (as it broadly refers to “remuneration paid by means of bonuses and stock options”), it could be argued that the Additional Tax should be levied with respect to all variable compensation paid to executives based in Italy, including all equity-based awards (hence, not only on stock options but also on RSUs, restricted stock, stock appreciation rights, etc.).
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 the Parliament’s confirmation may entail amendments to the Law Decree, it cannot be excluded that a grandfathering rule be introduced during the confirmation procedure.