Tax-deductible performance bonuses

Foreword

In an increasingly competitive labour market, employers are showing a need for different instruments for retaining their personnel, especially key workers, and for attracting new resources, at the lowest possible cost.

To meet these needs, the law has introduced and strengthened over time various forms of people retention, which today focus particularly on fringe benefits and corporate welfare, also in connection with the legislation on tax-deductible performance bonuses.

Tax-deductible performance bonuses

Among the main people retention instruments used by companies operating in the Italian market, there are so-called tax-deductible performance bonuses. Tax-deductible performance bonuses are bonuses of a variable amount, which are paid depending on the achievement of increases in productivity, profitability, quality, efficiency and innovation, measurable and verifiable based on the criteria defined by the Ministry; The above, therefore, are essential requirements for such bonuses to be considered tax-deductible.

Beneficiaries

With the aim of guaranteeing subsidised incentive plans also in favour of personnel identified as the ‘driving force of the company’, the tax-deduction of performance bonuses, as identified above, is aimed at those employees who, in the year preceding that in which the bonus is paid, had an annual employment income not exceeding €80,000.

The tax-deduction of performance bonuses consists in the application of a fixed taxation, which is significantly lower than the ordinary taxation currently applied on remunerative emoluments, such as bonuses that do not fall within the category of ‘tax-deductible’ ones. Specifically, ttax-deductible performance bonuses are subject to a 5% substitute tax (the original tax was 10%, later reduced with the following Budget Laws). The advantage, therefore, is a reduction of the tax burden on the employee receiving the bonus, with a subsequent higher gain.

At present, the deduction is applicable only on taxation. In fact, social security contributions remain fully due, except for employees who are actively involved in the corporate activities, where the employer can benefit from a tax deduction by 20% on a bonus amount equal to €800.00 per year, while the employees do not pay any contribution on the same amount.

Today, the maximum bonus amount that can be deducted from taxation is EUR 3,000 per year and the application of the 5% tax deduction is subject to the signing of collective agreements between the companies and the trade unions that are comparatively more representative at national level (so-called “RSAs” and “RSUs”).

A further opportunity: the alternatives to tax-deductible performance bonuses

Given the limited benefits guaranteed by performance bonuses, the Italian law allows the replacement of tax-deductible performance bonuses with fringe benefits, as well as with corporate welfare measures, in order to allow greater flexibility in their use and ensure the widest choice for both employers and employees.

This flexibility consists in the possibility given by the law to convert all or part of the deducted bonus (within the maximum limit of the tax-deduction amount) into corporate welfare or into specific fringe benefits. The decision is entirely left to employees.

In particular, as for corporate welfare, the conversion of performance bonuses can concern all relevant works and services as under art. 51, para. 2, letter f), fbis) and fter) of TUIR (works and services for social purposes, educational works and services, works and services related to the care of elderly and/or dependent family members), as well as goods and donations in kind made pursuant to para. 3 of the abovementioned provision.

With reference, instead, to fringe benefits, the conversion can concern, for example, the following goods/services:

• granting of a corporate care;
• granting of buildings to employees on lease, use or gratuitous loan;
• granting of loans.

For the sake of completeness, it is specified that the law also allows the conversion of performance bonuses with:

• contributions due to supplementary pension funds;
• contributions due to forms of supplementary healthcare for welfare purposes;
• shares.

Conclusions

There is no doubt that employee retention schemes in addition to mere remuneration, such as the adoption of so-called ‘tax-deductible’ performance bonus plans (and others), allow companies to be more competitive and attractive on the labour market. Not just that, the presence of incentive plans that also provide for the possibility of conversion into other forms of goods and services (such as fringe benefits or corporate welfare) allows employees to choose the type of disbursement that best suits their needs (also increasing their corporate engagement).

This also guarantees an improvement or elimination of the tax and contribution impact for the employees (e.g. by converting their bonuses into company welfare), as well as a significant reduction in costs for the company.