The Italian Revenue Agency: employee income and separate taxation

22 November 2022

The ItalianRevenue Agency, in its response to the request for a resolution No 468 of 22 September 2022, clarified a number of points regarding remuneration paid in the year following its accrual, under supplementary collective agreements and the corresponding taxation regime, in accordance with Article 17(1)(b) of the Italian Income Tax Consolidation Act (Testo unico delle imposte sui redditi,TUIR’). The applicant’s enquiry sought clarification on what type of taxation might be applicable in individual cases of late payment arising from the renewal of a supplementary national collective agreement.

Legislative framework

In order to determine the type of taxation to be applied in such cases, the relevant legislation can be found in Articles 17 and 51 of the TUIR that stipulate which income is subject to separate taxation and the so-called cash method of accounting respectively.

Article 51(1) of the TUIR provides, in particular, 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’ determined, for tax purposes, according to the cash method of accounting.

Given the progressive nature of Italian personal income tax (Imposta sul reddito delle persone fisiche, ‘IRPEF’) rates and in order to mitigate against negative consequences stemming from the strict application of the aforementioned method, Article 17(1)(b) of the TUIR provides that ‘arrears in remuneration for employment services rendered in previous years, received as a result of legislation, collective agreements, legal judgments, administrative decisions, or on other grounds beyond the control of the parties’ are subject to separate taxation.

Application of separate taxation – practice

Over the years, the tax authority has issued statements in order to clarify which legal circumstances may satisfy the requirements of Article 17, for the purposes of correctly applying the separate taxation rules. In resolutions No 55/E/2001 and No 43/E/2004, the Italian Revenue Agency laid out two scenarios which may be relevant in practice for the purposes of separate taxation:

  • circumstances of a ‘legal nature’: this concerns the emergence of legislative provisions, collective agreements, legal judgments, or administrative decisions, in which the assumption of an agreement between the parties as to a ‘deferral’ or, more correctly, a ‘delay’, being entirely instrumental for the purposes of the payment of the sums due, is certainly not applicable;
  • circumstances consisting of ‘objective factual situations’, which hinder the payment of the recognised sums within the time limits ordinarily adopted by the majority of withholding agents, thereby causing the ‘delay’.

The Agency, in its resolution, goes on to explain that the separate taxation regime is not intended to apply when the payment of remuneration in a period subsequent to the accrual period is the result of compliance with the relevant processing requirements, categorising such delays as being of a ‘physiological’ nature. In this respect, variable remuneration, calculated in connection with the attainment of certain objectives on an annual basis and paid in the year following the attainment of the objectives, falls into this category, as clarified by the Italian Revenue Agency in resolution No 379/E/2002. In this case, it is the very nature of the remuneration which entails payment in the following year. Therefore, the application of separate taxation is not permissible because the deferred payment is ‘physiological’, in view of the nature of the payment, rather than arising from a legal basis.

On the other hand, if one of the ‘legal grounds’ provided for in Article 17(1)(b) arises, it is not necessary to make any assessment as to the causes of the delay in order to determine whether said delay may be of a physiological nature. The legislature provides that, irrespective of the nature of the remuneration, it is sufficient that the disbursement take[LT1]  place in a fiscal period subsequent to that in which it accrues as a result of the conclusion of a collective or even a decentralised agreement, in order to fulfil the conditions necessary for the application of the separate taxation rules. However, the ‘delay’ must always be investigated when it has arisen from ‘factual circumstances’.

Types of disbursement and related taxation

The applicant’s position is that the supplementary national collective bargaining agreement (contratto collettivo nazionale di lavoro, ‘CCNL’) for the years 2020 and 2021 was entered into on 25 October 2021, which identified (i) the allocation criteria, (ii) the amounts and allowances for employees and (iii) incentive bonuses. As a result of the entering into the agreement, the company will only be able to pay the compensation related to the salary differences from 2022. The position of the Italian Revenue Agency, in line with the above, is that the disbursement is made in a tax period after the reference period where a collective agreement is in place and that therefore separate taxation may be applied.

The applicant also argues that, as a result of the same supplementary CCNL, sums were provided for as ‘fringe benefits’ consisting of different components, including ordinary and variable incentives.

The payment of this fringe benefit is linked to the achievement oforganisational performance targets for the years 2020 and 2021, for which a quarterly review will be carried out to provide for a 15% pro-rata payment on account in May, August, November and March of the following year. The payment of the balances for ordinary and specific incentives will be commensurate with the performance results identified for the entire reference year and paid subsequently.

The Italian Revenue Agency states that, since the contract was signed in October 2021, the amounts relating to the 2020 fringe benefits will be subject to the separate taxation regime. In contrast, with reference to the 2021 fringe benefits, the signing of the contract in the same reference year does not constitute a supervening legal ground that could justify applying separate taxation and therefore the amounts will be subject to ordinary IRPEF taxation.

The fourth on account payment in March of the year following the reference year is paid even if the supplementary CCNL [LT2] for the reference year has not been signed, since the provisions of the most recently signed agreement are considered ‘ultra-active’ [i.e., they continue to apply after its termination date until a new agreement is reached].[LT3]  Therefore, since this payment on account is contractually provided for and paid even if the new agreement has not been signed, the Italian Revenue Agency does not consider that it falls within the income to which separate taxation can be applied, given that the delay arises from the nature of the emolument.

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