MBO – Ordinary Tax Regime and Taxability in Case of Conversion to Welfare

In its reply to inquiry no. 77/E of March 20, 2025, the Revenue Agency addressed the potential application of the tax relief regime to variable compensation paid under “MBO” (Management by Objectives) schemes and its exemption from taxes and contributions if converted into welfare benefits.

The Question Submitted

The inquiry raised by the requesting company concerns the possibility of excluding from tax the variable MBO compensation converted by employees into welfare benefits under Article 51, paragraphs 2 and 3, last part, of the TUIR (Presidential Decree No. 917/1986). The request details that MBO recipients eligible for welfare plans are primarily employees in managerial roles, with a small number of clerical workers, identified based on their position’s complexity, responsibilities, and the management evaluation from their respective departments.

The company also specified that the MBOs in question are incentive plans awarded for achieving both collective goals, such as the profitability of the group or company, and individual goals, specific to the role or projects followed by each employee. In this regard, the portion of variable compensation related to individual performance remains subject to ordinary taxation, while the remaining portion, paid based on collective company goals, would benefit from a tax relief regime of 10% (5% until 2027), and could be converted into welfare benefits.

The Clarification by the Revenue Agency

The Revenue Agency, in providing its opinion, first recalled Article 51, paragraph 1, of the TUIR, which states that all sums and values, regardless of their form, received during the tax period, are considered taxable income. Therefore, both cash and non-cash benefits generally contribute to the taxable income (the so-called principle of inclusiveness).

In the case of exemptions from taxable income under paragraphs 2 and 3 of the same article, the Revenue Agency specified that tax-exempt benefits can only be those directly linked to services, goods, or expense reimbursements and cannot be considered if they are designed to incentivize worker performance. Thus, the tax exemption would not apply to MBO compensation, as MBOs are considered forms of performance-based compensation, not eligible for conversion into welfare “tax-exempt” benefits.

The Agency also referred to Circular No. 28/E/2016, emphasizing that conversion to welfare benefits is limited to performance-related bonuses and profits that are subject to a substitute tax at a reduced rate (10% or 5% until 2027).