August 18, 2010
New Italian 10% Additional Tax on Bonus and Stock Options in Finance Sector
– Vania Petrella and Gianluca Russo, Cleary Gottlieb Steen & Hamilton
On May 25th, the Italian Government adopted a draft law decree contemplating, inter alia, an additional 10% tax to be levied on the portion of any variable compensation paid (in the form of bonuses and stock options) to certain executives in the financial sector exceeding three times the fixed component of the executives’ remuneration (the “Additional Tax”). The law decree became effective on May 31, 2010 upon publication on the Official Gazette (Law Decree No. 78) and it was confirmed by the Italian Parliament on July 31st (Law No. 122).
The rule introducing the Additional Tax has not been amended during the confirmation procedure. Therefore, as of May 31, 2010, any portion of variable compensation taking the form of bonuses or stock options exceeding three times the remuneration’s fixed component is subject to the Additional Tax. However, such tax is applied exclusively to certain executives (i.e.employees treated as “dirigenti” and certain consultants and directors characterized as quasi-employees (“collaboratori coordinati e continuativi”) for labor law purposes) employed in the financial services sector. The Additional Tax takes the form of a withholding tax and is effectively borne by the recipient; it does not affect the applicable social security regime.
Since the new legislation does not include a grandfathering rule for plans already launched or awards already vested at the time Law Decree No. 78 became effective, such plans and awards should be subject to the Additional Tax.
Black-letter law raises some doubts as to the actual scope and application of the new rule. For instance, it is not clear whether it applies to options only or also to other equity-settled awards, and how to determine the time frame material to compute the relevant threshold (i.e. three times the fixed component). For the time being, there is no indication as to whether and when the tax administration will issue any guidance with respect to this rule. Read more in our memo.