The Tax Treatment Of Companies Managers’ Extraordinary Remuneration: Between Opportunities And Risks

The tax treatment of extraordinary remuneration paid (in cash and/or in nature) to the companies managers, in addition to the ordinary remuneration, established for the performance of their duties, frequently presents issues of not immediate solution, mostly related to the, as well varied, legal framework of such payments, which are typically subject to the fulfillment of certain conditions.

In fact, not everyone knows that such “extraordinary” remuneration, on the first hand, can make it easier to demonstrate the deductibility requirements existence for the provider and, on the other hand, are themselves at the centre of various facilitations for the companies (in the form of relief for the director who receives them), which makes it useful to know and adopt them in corporate practice.

From a structural point of view, most of the time the payment of such ‘bonuses’ is subject to the achievement of certain specific goals, in the form of production targets or economic results.

There is no lack, however, of cases in which such payments are more simply awarded to those administrators who hold positions considered more strategic for the corporate purpose’s achievement.

From the tax treatment point of view, it is well known that, with regard to those managers which are linked to the company by a contractual relationship of continuous collaboration (who therefore do not hold the position as self-employed professionals), the amounts, and values in general, received by the company are considered income assimilated to that of employment, pursuant to Article 50, paragraph 1, letter c-bis) of the TUIR (Italian Tax Consolidated Text). This means that the remuneration received for the manager’s duties it is subject to the same rules as the income from employment.

As a result of such assimilation, in principle, from the perspective of the provider, such remuneration is generally always deductible from the business income, in the year in which it is paid, in accordance with Article 95 of the TUIR. This is the case both for ordinary remuneration and for that component of remuneration that is extraordinary in the sense mentioned above.

However, it should not be forgotten that the deductibility of the remunerations in question, whether ordinary or extraordinary, is not indisputable by the tax authorities, since they must, first and foremost, be subjected of a timely resolution process in accordance with the provisions of the articles of association.

In this regard, in fact, according to the strong position adopted by the tax jurisprudence, the respect of the rules of deliberation by the shareholders’ meeting and the board of directors is a necessary requirement for the deductibility of the cost (in this sense Court of Cassation no. 4400/2020), as well as the necessity of an express resolution, also with regard to the quantum (in this sense, the resolution approving the financial statements, that such costs includes, is not itself sufficient, according to the Court of Cassation no. 21933/2008).

From a different point of view, but equally functional to the full deductibility of the remuneration in question from the business income of the provider company, they must also meet the parameters of fairness and proportionality, both with reference to the economic and dimensional possibilities of the Company and, above all, with regard to the activity actually carried out by the recipient (in this sense, according to the recent jurisprudence of the Supreme Court no. 24379/2016, it falls within the powers of the tax authorities “to assess the appropriateness of the costs and revenues shown in the financial statements and declarations, even if there are no irregularities in the keeping of accounting records or flaws in the legal acts of the company”).

In the light of the above considerations, it is clear how it can be profitable for the company to establish an extraordinary remuneration for its manager – although reasonable and correctly deliberated – for example as an incentive for the resumption of the economic activity, since, for the purposes of full deductibility of the same, the achievement of the objective set in the resolution as a condition of disbursement, as well as the attribution to the beneficiary of particular important assignments, will be, from a defensive point of view, elements of greater specific weight, in the event of any disputes regarding the proportionality and appropriateness of the bonus.

Then, with the same (at least) deductibility requirements, compared to ordinary remuneration, extraordinary compensation allows, as mentioned above, significant tax savings (directly in favour of the recipient and, therefore, indirectly, also in favour of the paying company, given the well-known negotiating dynamics that can be found in the managers’ hiring process), whose regulatory purpose is to provide incentives for remuneration oriented towards the company’s increasing productivity and value.

From this point of view, it is relevant the Article 1, paragraph 182 et seq. of Law 208/2015 (as subsequently amended by Law 232/2016), which has definitively introduced an advantageous tax regime for the payment of the so-called “performance bonuses” and for the “participation in the profits of the company”.

The rule, in particular, provides that these bonuses, as well as the amounts paid in the form of profit sharing “unless expressly waived by the employee, are subject to a tax, are subject to a tax, which replaces personal income tax and related local surtaxes, equal to 10%, up to a total amount of €3,000 gross”.

For the purposes of this facility, “performance bonuses” means “variable amounts whose payment is linked to increases in productivity, profitability, quality, efficiency and innovation”.

By “participation in the profits of the company”, on the other hand, the reference is to profits distributed in accordance with Article 2102 of the Italian Civil Code[1].

There are also a number of additional conditions limiting access to the benefit. Thus, in particular:

• for performance bonus only, the amounts subject to the benefit must be disbursed in execution of company or territorial contracts pursuant to art. 51 of Legislative Decree 81/2015;
• the benefit is applied to the private sector, and with reference to holders of employee income of an amount not exceeding, in the year preceding the one of receipt, 80,000.00 euros;
• the limit of 3,000.00 euros it is increased up to an amount not exceeding 4,000.00 euros, for companies that equally involve workers in the organization of work.

If these requirements are all met, the substitute tax is collected by a withholding from the same company.

Even more convenient, from the tax saving point of view, is the so-called “productivity welfare”, consisting in the possibility to convert the performance bonus into goods and services exempt (in whole or in part) from taxation.

In particular, the Legislator (see art. 1, par. 184 of Law 208/2015) has allowed the performance bonuses in question to be fully converted into the goods and services indicated in Article 51, paragraph 2 of the TUIR, which, by express legislative provision “do not contribute in forming income” and are, therefore, completely tax-exempt for the recipient.

In order for the conversion to be applied, it is necessary to comply with the requirements for each “company welfare” measure established by art. 51 in comment.

Thus, for example, in order for the result bonus to be converted into an amount dedicated to “services of social utility” (art. 51, paragraph 2, letter f) of the TUIR), or to “educational services” (art. 51, paragraph 2, letter f-bis) of the TUIR), it is necessary that the benefits are offered to all the employees or to categories of employees and are not, on the contrary, ad personam (in this sense the Tax Revenue Office Circular no.  28/E/2016, as well as the answer to the questioning no. 10/2019).

Those examined above are just a few of the tax relief measures – often not adequately implemented by the business world – that economic operators could take advantage of, without affecting their costs and/or operational structure, except to the strictly necessary extent to meet the requirements provided by law.

[1] As clarified by the Tax Revenue Office Circular no. 28/E/2016, “the reference is not to the allocation of shares in the share capital but to the method of payment of remuneration, provided for in Book V of the Italian Civil Code, according to which the employee may be paid in whole or in part with profit sharing. Pursuant to article 2102 of the Italian Civil Code, the profit sharing due to the employee (article 2554 of the Italian Civil Code) is determined on the basis of the net profits of the company, and, for companies subject to the publication of the financial statements (articles 2423, 2435, 2464, 2491, 2516 of the Italian Civil Code), on the basis of the net profits resulting from the, regularly approved and published, financial statements (article 2433 et seq. of the Italian Civil Code)”.

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Contributing Advisors