The financial administration has clarified the criteria for determining employment income in the case of incentive plans that provide for payment in shares

17 February 2023

The Italian Revenue Agency, with ruling No 168 of 26 January 2023, provided some clarification on the determination of employment income in the case of incentive plans that provide for payment in shares.

Application for clarification

The application for clarification was submitted by a company resident in Italy, which belongs to an international group headed by a German company. Shares in the German parent company have been listed on the Stock Exchange since 2021 following an initial public offering (IPO).

Two of the Italian resident company’s employees participate in incentive plans, which are substantially the same, operated at an international level by a group company for subsidiaries, in particular:

  • the Virtual Share Incentive Plan (VSIP), and
  • the Bonus Pool Agreement (BPA).

On the occurrence of certain conditions set out in the plan, employees are entitled to receive a cash payment by exercising an option (so-called exercise notes) within certain deadlines. Alternatively, the company may decide, at its discretion, that instead of paying cash, employees will be assigned shares (so-called Share Settlement) (to be delivered within six weeks of the option exercise date).

The IPO of the German company’s shares took place on 4 February 2021 and the two employees exercised the option on 22 November 2021, accruing the right to receive the Payout in relation to the assigned Virtual Shares. The German company opted for the payment in shares and these were transferred to the two employees on 15 December 2021.

The Italian resident company – the employer – as a prudential measure determined the employee income relating to the above-mentioned transaction and applied the withholding taxes, identifying the normal value of the shares on the date of exercise of the option.

In this context the applicant company asked whether, in the present case, considering that when the option was exercised (22 November 2021) the employees were entitled to the payment of a sum of money and that only following the German company’s decision did they receive payment in shares, the normal value of the assigned shares had to be determined on the basis of the average price of the listed shares on the date of their transfer (15 December 2021).

The Italian Revenue Agency’s ruling

In providing the answer to the application for clarification, the Italian Revenue Agency first of all referred to the reference regulatory framework, starting from Article 49 (Employment income) of Italian Presidential Decree of 22 December 1986, No 917 (Italian Income Tax Consolidation Act, Testo unico delle imposte sui redditi, ‘TUIR’), according to which employment income is that which ‘derives from relationships which have as their subject matter the performance of work, in whatever capacity, in the employment and under the direction of others’.

Furthermore, for the purposes of determining employment income, the Agency reiterated that the subsequent Article 51 of TUIR, established that employment income consists of compensation of any nature, monetary or otherwise, received for any purpose during the fiscal period, including in the form of donations, in connection with the employment relationship’.

On the basis of the latter provision, the Agency emphasised that compensation in kind also constitutes employment income, including the assignment of shares in listed companies (as in the present case), the normal value of which is determined under Article 9, paragraph 4, letter a), of TUIR.

Therefore, as already clarified in the past by the practice notes provided by the financial administration – Resolutions No 29/E/2001 and No 366/E/2007, Circular No 54/E/2008 – in the context of employee stock optionincentive plans, to determine the moment at which the shares are received as a result of the exercise of the option right, the shares must be considered to be at the disposal of the employee and, consequently, to be treated as taxable employee’s income.

In particular, Circular No 54/2008 clarified that the option right follows the signing of a contract with which one party is given the right to establish a definitive contractual relationship through a new declaration of intent. Therefore, unlike the bound party (the employer) who is not required to issue other declarations of consent, for the exercise of the right attributed to him or her, the option holder (the employee) must expressly express the will to establish a definitive contract.

Therefore, the shares reserved for the employee become at his or her legal disposal, i.e. they are assigned to him or her, when he or she exercises his option right, regardless of whether the actual issue or delivery of the security (or any accounting entries) take place at a later time.

As regards the determination of the taxable base, in the Ministry of Finance Circular of 17 May 2000, no 98, it was specified that the shares must be subject to taxation for an amount equal to the difference between the normal value determined under Article 9 of TUIR, at the time of exercise of the option right, and the amount paid by the employee for the assignment itself.

With reference to the case in question, according to the Italian Revenue Agency as set out in ruling No 168/2023, the determination of the moment at which the shares are received as a result of the exercise of the option right, within the context of the employee incentive plans, is when the shares must be considered to be at the disposal of the employee.

Therefore, the assignment of Virtual Shares to employees does not give rise to the right to the assignment of shares in the German company, not even following the German company’s (unilateral) decision to make the payment through assignment of its own shares, but only grants the employees a right to receive a cash payment (Payout Entitlement) on the occurrence of certain events contemplated by the incentive plans, including the IPO transaction, which took place on 4 February 2021.

Consequently, on the date of exercise of the option by the two employees (22 November 2021), they would not have acquired shareholders’ rights nor the ownership of the shares that the German company would subsequently assign on 15 December 2021, deciding to make the above-mentioned payment in shares.

Therefore, taking into account that, for the purposes of taxation of the employees’ income, the transfer of ownership of the shares is relevant which, in the present case, appears to have occurred at the time of the material delivery of the shares, the Italian Revenue Agency considers that the normal value of the shares assigned, under Article 9 of TUIR, must be determined on 15 December 2021, the date on which the German company decided to make the payment.

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