In addition to the various types of share awards which may be granted to employees in Italy, of particular relevance to the Industrial Engineering sector is the recently-introduced tax credit which is available to companies who hire academics or other highly qualified personnel.
Share Option Plans – Exemption from Social Security Charges
In Italy, equity-based awards to employees are generally taxed in a similar way to salary. However, with careful planning it is still possible to reduce both the employer’s and the employee’s overall tax bill.
As general rule, when an employee exercises an option, to the extent the market value of the underlying shares on the date of exercise exceeds the exercise price paid for such shares, the ‘option gain’ will be taxed as income in the same way, and at the same rate (45%), as salary. It does not matter whether the shares acquired upon such exercise are in the employer or a different company. The income tax must be withheld and accounted for via payroll deductions at the time the shares are acquired pursuant to the exercise of the option.
However, provided that certain conditions are satisfied, any gain made on the exercise of such option is classified as a ‘fringe benefit’. This means that it is not subject to social security charges, which at 30% (11-12% of which is the employee’s contribution and the remainder of which is the employer’s) represents a significant saving. The Italian Social Contribution Authority (“INPS”) has issued guidance stating that in order to benefit from this exemption, a share option must only be exercisable:
- after a vesting period (of any length);
- if certain performance conditions are satisfied; and
- provided the option holder remains in continued employment with the relevant company until the date of exercise.
When the shares acquired pursuant to the exercise of an option are subsequently sold, the individual will be liable for capital gains tax at 20% on any resultant gains.
Share Incentive Plans – Limited Tax Savings Available
The first €2,065.83 worth of shares awarded in aggregate to an employee in any fiscal year will not form part of the taxable base for such employee (for both income tax and social security purposes), provided that:
- the shares are held for at least three years from the date of acquisition; and
- the shares are not re-acquired by the issuing company or by the employer, whether by means of a public takeover bid or otherwise.
If these two conditions are not met, the acquisition of the shares will be taxed in the same way as salary. If the €2,065.83 limit is exceeded, only the excess amount will be subject to tax.
This tax treatment is not available in respect of shares acquired pursuant to the exercise of an option.
There is some debate as to whether the exemption from social security charges is available in respect of shares acquired otherwise than by way of an option. The INPS has issued a verbal statement that the exemption does not apply, but this has yet to be tested in Court.
Tax credit in respect of “highly qualified” personnel
Of potential relevance to the Industrial Engineering sector is the so-called “Growth Decree”, which came into force on 22 June 2012 and which provides for a tax credit for employers who hire personnel who, broadly speaking, are academics or similarly highly qualified.
A company may receive a tax credit of up to 35% of the annual cost to the company of the indefinite engagement of individuals holding the following academic titles, subject to an annual cap of €200,000:
- Doctorate in university research; or
- Master’s Degree in subjects in the technical or scientific fields.
The relevant individuals must be engaged to undertake the following specific research and development activities:
- experimental or theoretical works;
- research plans or critical investigations which aim to acquire new information for use in the development of new products, processes or services, or to improve existing products, processes or services;
- the acquisition, combination, structuring and use of existing know-how and capacities of a scientific, technological and commercial nature, with a view to the production of plans, projects or designs for new, modified or improved products, processes or services.
The tax credit must be used to offset other taxes payable by the company, such as corporation tax or VAT.
Tax incentives for the reversal of the “brain drain” suffered by Italy
From now up to the fiscal period ending on 31 December 2015, income from employment earned by EU citizens who return to Italy after having worked or studied abroad shall be subject to income tax at the reduced rates of 20% for female workers and 30% for male workers, instead of the normal marginal rate of 45%.
This beneficial treatment will only apply to income earned in Italy following the commencement of employment by such individuals.