Detaxation of performance bonus: objective recalculations based on the pandemic
With answer to question no. 270/2021 the Italian Internal Revenue Agency ruled on application of the favourable tax regime – consisting of the application of a rate of 10%, replacing the IRPEF and relative regional and municipal surtaxes (article 1, paragraphs from 182 to 189, of Law no. 208/2015) – to the performance bonus paid following a recalculation of company objectives for the COVID-19 pandemic.
The objective facts of the question
The requesting employer, on 29 March 2019, signed a supplementary company agreement with the trade unions to establish an annual performance bonus. The agreement was from 1 January 2019 until 31 December 2019
In detail, the established bonus, on a variable basis and not determined beforehand, was payable following an increase in EBITDA (or gross operating margin) for the year being monitored compared to the previous year.
Due to the COVID-19 healthcare emergency and consequent infection containment policies, resulting in the closure of many businesses, the contract underwent numerous postponements, until reaching the final expiration established by the parties at 31 December 2020.
In addition to the postponement, the company and unions, in order to be able to compare 2020 EBITDA uniformly with that of 2019, thought it reasonable to recalculate the latter, reducing it in proportion to the number of days the business was closed in 2020 due to the “lockdown”.
In consideration of the shorter period of time that the business was open, the parties also agreed to a corresponding reduction of the amount of the performance bonus, whose maximum gross amount was fixed at 2,000.00 euro, instead of the previous amount of 2,800.00 euro.
Application of detaxation to the bonus in the case in question
Given these premises, the requesting company raised a question on the interpretation of the possibility to apply detaxation to the performance bonus despite the recalculation of 2019 EBITDA, useful for making it uniform with that of 2020, taking into consideration the periods of forced closure. Therefore, according to the request, the comparison “is not made with reference to the entire year, but with reference to a shorter period in which the business was performed (i.e. net of the days the points of sale were closed)”.
In its answer the Italian Inland Revenue Agency outlined the laws on the issue citing how the 2016 Budget Law intended to reserve a favourable tax regime for performance bonuses, by applying a substitute tax of 10% (article 1, paragraphs 182 to 189, of Law no. 208/2015).
According to the Agency, the payment of these bonuses, as the government intended, must be “linked to increasing productivity, profitability, quality, efficiency and innovation that is measurable and verifiable” based on certain criteria.
The tax authority stated that, at the end of the bonus vesting period, the result achieved by the company must be “incremental” compared to that of the previous period. Given that “it is […] not sufficient that at the end of the bonus vesting period, the objective set by the second level bargaining is achieved since the result achieved by the company must be incremental compared to the result before the beginning of the bonus vesting period.”
Moreover, the Authority explained that “the favourable tax regime can be applied if the incremental objectives underlying the bonus vesting period, defined in the contract and measured after a reasonable contractual period and not just its disbursement, takes place after the contract signing. Therefore, the measurement criteria must be established reasonably in advance of any future productivity which has not yet been achieved.”
The conclusion of the Italian Inland Revenue Agency related to application of the tax benefit
The tax authority believes that in this case, the “redetermination of the appropriate period due to the epidemiological emergency caused by COVID-19 […] does not preclude the application of the favourable regime, since […] the duration of the bonus vesting period is left to the parties’ agreement.”
Likewise, the Agency did not encounter any criticalities with the recalculation, performed by the employer, of the reference value of the profit indicator constituted by EBITDA of 2019, because “such recalculation, given the business suspension period recorded in 2020, allows a current increase in profitability, as it is not compared to a remote figure.”
Lastly, Inland Revenue pointed out that the company may apply the 10% rate to the bonus “if the company/local contract certifies that the achievement of the incremental objective is […] uncertain at the date of its signing because the trend of the parameter adopted at the time of negotiation is susceptible to variability.”
According to the Agency, by signing the union agreement, the applicant company had not intended to change the criteria for measuring the incremental objective, but rather to extend the 2019 supplementary contract until 31 December 2020, redefining the duration of the appropriate bonus vesting period, based on a mathematical and non-discretionary calculation, i.e. bonus vesting, in order to report an actual increase in profit, through a comparison of two uniform figures. The incentive function of the rules in question was not lost.
As a result of these considerations, Inland Revenue confirmed that “where, as of 31 December 2020, the applicant notes that the EBITDA value for 2020 is incremental compared to the EBITDA value for 2019, recalculated as described, it may apply the tax regime under Article 1, paragraph 182, of the 2016 Stability Law to the performance bonus for 2020.”