Tax treatment of expense reimbursement for employees in smart working: the answer from Inland Revenue

20 May 2021


With answer to question no. 314 of 30 April 2021 the Italian Inland Revenue Agency provided explanations on the tax treatment for sums paid by the employer for expense reimbursement to its employees who perform their jobs in an agile procedure (so-called “smart working”).

The taxpayer’s question

In formulating its question, the applicant employer notified Inland Revenue of its intention to:

  • sign a second level trade union agreement, in other words to adopt a company regulation for the economic treatment and rule for its employees who do their job in agile working (so-called “smart worker”), as governed by article 18 et seqq. of Law 81/2017;
  • grant each employee a sum for reimbursement of expenses they had to incur to perform their job remotely instead of at the company offices.

Specifically, the taxpayer conducted a detailed analysis to verify its daily savings and the daily cost incurred by the worker for certain expenses, such as: use of electricity to use a computer and light and costs to use a bathroom (water and consumables).

The performed analysis resulted in considering payment of an expense reimbursement for each employee of 0.50 euro per work day of smart working.

In light of the above, the taxpayer asked Inland Revenue if it was possible to exclude this daily sum from taxation, since it does not constitute employment income.

The Inland Revenue’s opinion

In formulating its opinion on the taxpayer’s question, Inland Revenue made an excursus to the regulations and practices on reporting expense reimbursements as income starting from the so-called all-inclusiveness principle of employee income ratified by article 51, paragraph 1, of the income tax consolidation act, approved by Presidential Decree no. 917/ 1986 TUIR (Italian Income Tax Consolidation Act).

Based on this principle employee income is considered to be “all of the sums and valuables in general, for any reason received during the tax period, including in the form of donations, in relation to employment. Even sums and valuables in general are considered received during the tax period, that are paid by the employer by the 12th day of the month of January of the tax period after the one they refer to.

Thus, generally, all of the sums paid by the employer to its employees, including for expense reimbursement, constitute employee income and are thus subject to taxation and social security.

However, Inland Revenue referred to the circular of 23 December 1997, no. 326 according to which certain reimbursements may be excluded from taxation: i.e. reimbursements that regard expenses, other than those incurred to produce income, that are the responsibility of the employer but advanced by the employee. For example, expenses incurred to purchase capital goods of a minor value (such as paper for a photocopy machine or printer, batteries for a calculator, etc.).

The all-inclusiveness employee income principle was further examined in the resolution no. 178/E of 9 September 2003 as well as the later no. 357/E of 7 December 2007.

With the aforesaid resolution, Inland Revenue explained that sums that do not add to the employee’s wealth do not contribute to their taxable income (for example, this is the case of indemnity received to return cash outlaid) and “payments paid for an exclusive interest of the employer are not fiscally relevant for employees.”

Lastly, Inland Revenue then looked at the determination of the amount of the expense reimbursed to the employee on a flat rate basis.

To this end the tax authority, citing the principles expressed in the resolution no. 74/E of 20 June 2017, confirmed that, if the law does not indicate a method for determining the amount excluded from taxation (for example, that included in article 51, paragraph 4, letter a) of TUIR (Italian Income Tax Consolidation Act) regarding company cars granted to employees for mixed use), the costs incurred by the employee in the exclusive interest of the employer, must be identified based on objective elements, verifiable with documents. This is in order to prevent the relative reimbursement from contributing to determine income from employment.

In the hypothetical case, the taxpayer has correctly represented the method for determining the portion of the costs to reimburse to employees in smart working, based on parameters aimed at identifying costs saved by the company.

Based on all of the above, Inland Revenue decided that the sums paid by the employer to its employees to reimburse costs incurred through the represented procedures are not taxable for IRPEF.


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