INPS: Performance bonus and substitution with corporate welfare measures

21 June 2023

In its Circular No 49/2023, and on the basis of the regulatory changes that have taken place in recent years, the INPS implemented the extension of provisions to favour the provision of company welfare measures to employees. In the Circular the INPS analysed the regulatory framework and its impact on performance bonuses transformed into welfare measures for the purposes of social security contributions.

Reference legislation

The Legislator, with Italian Law No 208/2015 and Italian Law No 232/2016 (2016 Budget Law and 2017 Budget Law, respectively), essentially introduced the concept of ‘performance bonuses’ (hereinafter, also ‘PB’) – i.e. sums of a variable amount paid to employees linked to increases in productivity, profitability, quality, efficiency and innovation, as well as sums paid in the form of participation in the company’s profits.

The remuneration in question is subject to a 10% substitute tax as against Italian personal income tax (Imposta sul reddito delle persone fisiche, ‘IRPEF’) and the relevant regional and municipal surcharges, for a total gross amount of EUR 3,000.00. Workers in the private sector who hold an employment contract, whether fixed-term or permanent, and who, in the year preceding the year in which the bonus is received, have received employment income of no more than EUR 80,000.00 are eligible for the favourable tax treatment.

In addition to the direct cash payment of the performance bonus due to the employee, Italian Law No 208/2015 provided for the possibility, at the worker’s request, of converting the amount due under the PB and receiving it in the form of company welfare, if any. The aforementioned subsidised sums may therefore be replaced by one or more services exempt from social security contributions for both employer and employee.

In addition to the conditions to be met by the worker, to apply the favourable regime the legislation provides that the performance bonus must be:

  • of variable amount;
  • paid in the presence of increases in the level of production, income, efficiency and innovation, as well as quality;
  • paid under the terms of local or company collective bargaining agreements that have been entered into by the most representative trade union associations or company collective bargaining agreements that have been entered into by the company trade union representatives of those associations or by the single trade union representation.

Article 1, paragraph 63 of Italian Law No 197/2022 (2023 Budget Law) provided that, for the 2023 tax year only, the amounts paid as performance bonuses to workers will be subject to 5% substitute tax.

On the other hand, there is no single legislative framework for corporate welfare. Corporate welfare is considered to be the goods and services that an employer provides – on the basis of an agreement concluded with trade union representatives, or under a unilateral regulation – to its employees to satisfy certain needs of a non-work nature.

The area of corporate welfare developed through the combination of certain tax regulations laid down by Italian Presidential Decree No 917/1986, the Italian Income Tax Consolidation Act (Testo Unico delle Imposte sui Redditi, ‘TUIR’). These are mainly contained in Article 51, where a number of goods and services are excluded from taxable remuneration, and in Article 100, which provides for the deductibility of ‘expenses relating to work or services that can be used by all employees or categories of employees voluntarily incurred for specific purposes of education, training, recreation, social and health care or worship’.

Under Article 51, paragraph 1 of the TUIR, ‘all sums and amounts in general, for whatever reason, received during the tax period, including in the form of charitable donations, in connection with the employment relationship’ fall within income from employment and are therefore subject to ordinary taxation and social security contributions. Exceptions to this principle of remuneration which is taxable in full are the explicit exceptions provided for in Article 51, paragraph 2 of the TUIR.

Conversion of performance bonuses into corporate welfare

The 2017 Budget Law, making some amendments to the 2016 Budget Law, provided that the following types of income are not included in employee income, nor are they subject to substitute tax if, in lieu of performance bonuses, they are received or enjoyed by the worker, at his or her choice:

  1. contributions to complementary pension schemes, even if paid in excess of the deductibility limits from employee income;
  2. health care contributions – intended for bodies or funds with an exclusively welfare purpose in accordance with contractual provisions or company agreements or regulations, even if paid in excess of the relevant exemption limits indicated by the TUIR;
  3. the value of shares offered to all employees even if for more than a total amount exceeding EUR 2,065.83 of the employee’s income.

In relation to subparagraph a) above, therefore, the exemption is extended so that sums paid as performance bonuses and profit-sharing are not included in employee income, nor are they subject to substitute tax, even if they are contributed to complementary pension schemes. The legislation also provides that bonuses may be deducted from personal income even if they exceed the limits. The Italian Revenue Agency, in its Circular No 5/E/2018, clarified that ‘the tax-free substitution of the performance bonus with contributions to the complementary pension scheme […] was already possible under the ordinary rules for determining employee income, since such contributions withheld by the employer fall within Article 51, paragraph 2, letter h)’.

With regard to the applicable social security regime, on the instructions of the Ministry of Labour and Social Policy, under Article 12 of Italian Law No 153/1969, the contributions paid at the employee’s request to complementary pension schemes, in lieu of all or as part of the PB, is subject to a 10% solidarity contribution (contributo di solidarietà) (an additional pension contribution) payable by the employer.

The same considerations apply to subparagraph b) since, also in this case, the amounts of the PB that are converted into contributions to be paid to welfare funds are excluded from employment income. Moreover, for contribution purposes, paragraph 4 of the aforementioned Article 12 of Italian Law No 153/1969, provides that contributions to ‘professional funds, funds, schemes provided for by collective agreements or company agreements or regulations, for the purpose of providing supplementary social security or welfare benefits for employees and their family members during or after termination of the employment relationship’ are subject to the 10% solidarity contribution payable by the employer.

Finally, with reference to the case of the replacement of performance bonuses with shares offered to all employees referred to in subparagraph c), it is noted that the legislator has introduced an exception to Article 51, paragraph 2, subparagraph g) of the TUIR. The exception applies both to the value limit of the shares that are not included in employee income, and to the conditions that require the shares to be granted to all employees and the non-transferability of the shares by the employee before the three-year period, as well as – including after that period – to the employer or the issuing company.

Scopri le soluzioni HR
pensate per te