Performance bonus: achievement of incremental objectives and timeframe for verifying them (Andrea Di Nino, Sintesi – Ordine dei Consulenti del Lavoro, December 2020)

21 December 2020

The Italian Tax Authority, through its answer to question no. 550/2020 published last 23 November, provided its position, within the more general area of detaxation of the performance bonus, regarding achievement of increasing objectives set by the employer as a condition for distributing a detaxed performance bonus and, specifically the time to verify achievement of the same.

in terms of this specific favourable taxation regime that governs distribution of the performance bonus, the tax authority first stated that this procedure was introduced by Italian Law no. 208 of 28 December 2015 (2016 Budget Law), article 1, paragraphs 182 to 189. It introduced a procedure in the tax regime, starting from the 2016 tax period, for preferential tax treatment consisting of application of a substitute tax for IRPEF (Italian income tax) and relative surcharges of 10% for “performance bonuses of variable amount, with consideration tied to increases in productivity, profitability, quality, efficiency and innovation, measurable and verifiable based on criteria defined with the decree as per paragraph 188”, or with the decree issued by the Ministry of Labour and Social Policies on 25 March 2016.

Among other things this law established that level II collective contracts or trade unions agreements must include measurement and verification methods of increases in productivity, profit, quality, efficiency and innovation, by identifying some measurement criteria for incremental indexes that must be proportionate to the bonuses. In terms of the period included in the contract (so-called “adequate period”), or the maturity of the bonus, it is thus necessary that “an increase of one of the indicated objectives, constituting the requirement for application of the preferential tax treatment”.

Therefore, the Tax Authority underlines that it is not sufficient that the objective set by the company contract be reached, since it is also necessary that the result achieved by the company is “an increase compared to the result before the start of the bonus maturity period”: the increase requirement, measured by the “comparison between the value of the objective reported at the start of the adequate period and that resulting at the end of the same”, thus constituting an essential characteristic of the tax relief.

The facts described in the case in question involved an employer apply ordinary taxation to the performance bonus paid to employees, despite the fact that a regular company contract had been stipulated previously aimed at normalising the tax relief of the bonus and determining the necessary measurement methods for the indicators used. In detail the petition – employee of the company in question – informed the Tax Authority that the supplemental level II contract was stipulated on 1 October 2019, identifying in the sum of gross profit of two companies belonging to the same group as the parameter for measurement of the profit objective to reach in 2019, in order to pay the variable performance bonus and apply the tax benefit envisaged for the following year.

The claimant represented how this bonus, paid with the pay slip of July 2020, was subject to ordinary taxation based on the assumption that on the date the second level supplemental contract was signed (1 October 2019) there were no doubts about reaching the profit objective measurable with the parameter identified in the contract, or that the total gross profit at 31 December 2019 would be higher than that reported in 2018. In this regard, the worker felt that the companies, when the supplemental contract was signed, could only possess knowledge of the figures relative to the first half of 2019, which show a gross profit well below the annual objective set in the company agreement. Therefore, the claimant believed that the two companies, at the time the agreement was signed, could have presumed that the 2019 figure would be higher than the 2018 one was only their point of view. And, based on this, concluding that there is a right to detaxation of the sums paid by the company

In terms of the facts in question, the Tax Authority explained how the law – in addition to the abundant practices resulting over time – had envisaged how the measurement methods must “be determined with a reasonable lead time compared to a possible future productivity not yet realised”. This circumstance is to be considered in an absolute sense and not as necessarily anchored to a specific time reference.

Generally, the Tax Authority considered that the favourable tax regime is applicable only when the company agreement states that achievement of the increased objective is effectively uncertain on the date it is signed, for example because the trend of the adopted parameter at the time of negotiation was subject to variations.

If this does not occur, for example because the company – as in the case in hand – inferred the trend of the economic results thanks to reliable indicators “suitable for assessing the trend of the economic results achieved up to a certain time and to obtain projections for the end of the specific financial year”, then application of the tax relief on the paid performance bonus would not be legitimate, since it was lacking the requirement of uncertainty of achieving the company objective at the time the agreement was stipulated.

The Tax Authority concluded by affirming that such assessments, even if they are marked by a predictive nature and can be influenced by external or internal factors, have however been carefully estimated by the substitute tax, that thus – acting correctly – did not apply the 10% taxation to the amount of the bonus paid.

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