Italian peculiarities

The peculiar Italian direct selling scheme involves three main aspects:

1. Legal aspect
2. Tax aspects
3. Social contributions aspects

These aspects affect both the Company and the salesmen.

Legal aspects

Definitions

Article 1 of the Italian Law regulating direct selling provides for that:

• with “direct door-to-door sale activity” (hereinafter direct sale) is meant a special kind of retail sale or offer of goods and services, as identified by Article 19 of Legislative Decree no. 114, dated March 31, 1998, that is carried out through the collection of purchase orders at the final consumer’s domicile or in a place where the final consumer stays, also temporary, for personal reasons (i.e. job, study, entertainment etc.);
• with incaricato alla vendita diretta a domicilio, i.e. “Person in charge of direct door-to-door sale” - hereinafter also “salesman” or “affiliate” - is meant the person who, with or without a subordinate relationship, promotes, either directly or indirectly, the collection of purchase orders at private consumers’ domicile on behalf of the Company as defined below;
• “Company” refers to the company that carries out the door-to-door direct sale as defined under letter a) above.
  
  

Accomplishments of the Company which carries out door-to-door direct sale

Pursuant to Article 19 of Legislative Decree no. 114, dated March 31, 1998:

• the Company that carries out the “door-to-door direct sale” activity, must file a preliminary communication with the Municipality where the company has its registered office;
• the communication under point 1) must indicate: the sector (e.g. food, food supplements, cosmetics, or other) the Company operates in, the specific professional requirements met by the legal representative of the Company, if and to what extent the Company sells food;
• operations can start after thirty days from the receipt of the communication under point 1) by the Municipality (SCIA);
• the Company which intends to carry out the direct sale through salesmen must communicate the list of the salesmen to the Public Security Authorities of the Company’s jurisdiction;
• the Company is liable for the activity of the salesmen for civil purposes;
• the salesmen must provide evidence that specific requirements are met (i.e. they should have not been sentenced for crimes);
• the Company must provide the salesmen with a personal badge. Should the requirements under point 6) no longer exist, the badge should be withdrawn by the Company;
• the badge under point 7) must be numbered and updated each year and should indicate the salesman personal data, i.e. name and address, as well as his/her picture;
• the aforementioned badge must clearly indicate the company’s registered office, its products, the name of the legal representative as well as his/her signature;
• the badge must be displayed during sales operations.
  
  

Relationships between the Company and the salesmen

Sales intermediation can be carried out through:

• subordinate employment contracts, between salesmen and the Company. In this case the Italian standard rules governing employment relationships will apply;
• agency contracts, between salesmen who perform this activity customarily and the Company. In this case the Italian standard rules governing Agents will apply;
• salesmen who promote, directly or indirectly, the collection of purchase orders customarily (above the € 5,000 threshold of the salesmen’s annual income) or occasionally (under the € 5,000 threshold of the salesmen’s annual income). From a tax and social security contribution point of view, salesmen (occasional and habitual) are subject to specific regimes outlined in paragraph below.

We would like to point out that the accomplishment under paragraph 2 must be fulfilled by the Company regardless of the kind of relationship existing between the salesmen and the Company.

Formalities to be respected for engaging a salesman

A written form is mandatory for engaging a salesman. The engagement can be terminated by the salesman at any time without any further obligations. The written engagement must indicate the following rights and obligations:

• no further obligations shall be respected by the salesman when terminating his/her engagement except for a written communication to be sent to the company by registered letter with return receipt;
• when terminating his/her engagement, the salesman is obliged to return any demonstration goods and materials provided by the Company;
• should the salesman return the demonstration products and material within thirty days, the Company shall refund any amounts eventually paid by the salesman. The refund is subordinated to the integrity of the goods and materials returned;
• the Law restriction reported in paragraph 5 below;
• the terms and conditions of sale, established by the Company, the salesman must comply with;
• unless otherwise expressly provided for in writing, the salesman does not have the authority to collect any consideration or to grant any reductions in price or delays of payment to the private consumers;
• the compensation of the salesman consists in the commissions on the transactions that are accepted and regularly executed;
• the commissions fees and the terms of payment.

Failure to comply with the requested formalities implies the application of administrative penalties (see paragraph 6).

Law restriction

The Italian Law provides for that the Company cannot oblige the salesman to:

• purchase materials traded or distributed by the Company except for those demonstration goods and materials necessary to carry on its activity that can be compared to a collection of samples;
• purchase services, directly or indirectly, from the Company, that are not closely inherent and necessary to the business activity carried out, and however, not proportionate to the volume of the activity carried out.

Unless otherwise expressly provided for in writing, a salesman does not have either the authority to collect the consideration of the purchase orders from private consumers, or to grant reductions in price or delays of payment. The compensation of the salesman without subordination consists in the commissions on the transactions accepted and regularly executed.

The commission fees and relevant terms and conditions must be set down in writing. Other restrictions to be taken into account concerning salesmen are provided for by the Law. Article 5 of Law no. 173/2005 that clearly states that both the promotion and the realization of activities and structures of sale are prohibited if the primary economic incentive of the salesman is based on the recruitment of new subjects (salesmen) rather than on their actual ability to sell or to promote goods or services directly or through other members.

The promotion of schemes which link the possibility of gain with the recruitment of other persons and in which the right to recruit could be transferred by the mere payment of a consideration is also prohibited as illegal.

Penalties

Except for the fact that this would constitutes a more serious crime, anyone who promotes or realizes activities or selling structures regarded as pyramidal or encourages the operations under paragraph 3.1.5., is punished either with detention from six months up to a year, or with a penalty from € 100,000 to € 600,000.

Failure to comply with the formalities reported under the paragraph 3.1.4 imply the application of administrative penalty from € 1,500 to 5,000.

Tax and social security contributions aspects

Assumptions

The main element that has to be carefully evaluated, in order to apply the appropriate tax and contributions regime for salesmen, is provided for by Art. 3 of Law no. 173, dated August 17, 2005.

The aforementioned rule clearly states that the activity carried out by a salesman is qualified as occasional if, and to the extent that, the net income obtained from such activity does not exceed € 5,000 per year.

Considering the above, in order to apply the right regimes both from a tax (direct and indirect) and social security contributions point of view, salesmen under the net income threshold of € 5,000 must be distinguished from the others.

In this respect, please note that a salesman reaches the net income threshold of € 5,000 whenever he/she collects an amount of commission equal to € 6,410 (gross).

As a matter of facts, according to Article 25-bis of Presidential Decree no. 600/1972, the salesman’s income is calculated by applying a 22% deduction on the commissions received.

Therefore, a salesman shall be considered:

• occasional: if the income is below the threshold of € 5,000 (equal to an amount of commissions received not exceeding € 6,410);
• habitual: if the income is above the € 5,000 threshold (equal to an amount of commissions received exceeding € 6,410).
  
  

Occasional salesman

Direct Taxes: the commissions received by the salesman are not cumulated with other possible income collected during the FY. Furthermore, the commissions received shall not be declared in the salesman’s income tax return. The commissions the salesman’s receives against the direct selling activity are subject to a substitutive tax withheld at source, applied at 23% on 78% of the commissions (the salesmen) received, according to the provision of Art. 25-Bis of Presidential Decree no. 600, dated September 29, 1973 .

The Company, as a withholding agent, is in charge of the application of the withholding tax to the salesmen and of the payment of the amount withheld to the Italian tax Authorities, on behalf of the salesmen, so that the latter receives a commission fee net of taxes.

Indirect taxes - VAT: occasional salesmen are not considered as VAT taxpayers and they are not obliged to apply for a VAT position. When the door-to-door sale activity is carried out occasionally by the salesman, it can be carried out without any VAT registration. The above means that, below the € 5,000 net income threshold per year, no VAT on commissions is applicable.

Exceeding the threshold obliges the salesman to register for VAT purposes. Once the salesman registers for VAT, he will remain a VAT taxpayer for all following years, hence his/her commissions will always be subject to VAT (at the ordinary 22% VAT rate).

Social security contributions: Social security contributions are not due by salesmen whose annual income does not exceed the threshold of € 5,000. In particular, Art. 44 of Law Decree no. 269, dated September 30, 2003, clarifies that door-to-door direct salesmen have to pay social security contributions only in case the annual income deriving from said activity exceeds € 5,000. Differently to VAT, the threshold above applies on a yearly recurring basis. This means that every year the first € 5,000 of net commissions are free of social security contributions.

Habitual salesman

Direct Taxes: also in case of habitual salesmen, the commissions received are not cumulated with other income.

In this case too, commissions received by the salesman shall not be declared in the annual income tax return. As per occasional salesmen, according to the provision of Art. 25-Bis of Presidential Decree no. 600, dated September 29, 1973, commissions received from habitual salesmen for the activity of direct selling are subject to a substitutive source-withholding tax, applied at a 23% rate on 78% of the commissions received (by the salesmen).

Even in this case, the Company as a withholding agent is in charge of the application of the withholding tax to the salesmen and of the payment of the amount withheld to the Italian tax Authorities.

Indirect taxes - VAT: the salesman’s activity, when it exceeds the € 5,000 net income threshold (i.e. when the commissions received exceed € 6,410), becomes relevant for VAT purposes. The salesman becomes a VAT taxpayer from the first operation that implies that the € 5,000 net income threshold is overcome. At this time, the salesman must register for VAT according to Art. 35 of the Presidential Decree no. 633, dated October 26, 1972 (Italian VAT Law), and has to comply with the obligations set forth by the Italian VAT Law.

Social security contributions: once the income threshold of € 5,000 is exceeded, also social security contributions are due by the salesman.

According to Art. 44, Law Decree no. 269/2003, salesmen whose annual income exceeds the threshold of € 5,000, must register to INPS Separate Management, starting from the first operation implying that the € 5,000 net income threshold is overcome.

Differently to VAT, the threshold above applies on a yearly recurring basis. This means that every year the first € 5,000 of net commissions are free of social security contributions.

Starting from 1st January 2018, social security contributions are due at a 33.72% rate for person which is not registered for any other social contribution duty, 24% for person subject to other social contribution dues (e.g. employees, retired, etc).

Social contributions, calculated by applying 33,72% on the salesman’s income exceeding the threshold of € 5,000 net, are borne as follows:

• for 1/3rd by the salesman;
• for 2/3rds by the Company.

No contribution is calculated on yearly income higher than € 103,055 (i.e. Social Security Contributions Cap). The Company is in charge of withholding 1/3rd of the total contribution due from the salesman and of paying the total amount of the contribution due (i.e. 1/3rd + 2/3rds) to INPS in its quality of withholding agent.

The salesman is in charge of his/her own registration with INPS.

Conclusions

Considering the Italian strict provisions regarding salesmen and the relevant direct selling activity, should the Company decide to carry out this business in Italy, we would recommend incorporating a subsidiary in Italy.

As explained above, a Company that carries out a direct selling activity in Italy through salesmen has to:

• file the relevant communication with the Municipality in which it has its legal office;
• file a communication with the Social Security Institution in the town/area where it has its legal office, for each salesman engaged;
• supply salesmen with their personal badge;
• engage salesmen in a written form;
• act as a withholding agent for taxes and contributions purposes, applying all relevant formalities briefly described in this document.

Furthermore, it should:

• ensure its compensation plan and policies and Procedures are compatible with local requirements and interpretations (to prevent significant issues like application of non-compliance penalties or disqualification sanctions by the Antitrust Authority);
• comply with EU regulations (e.g. on the use of Health Claims, GDPR – General Data Protection Regulation, HACCP – Hazard Analysis Critical Control Point, etc.).