Tax treatment of the advance payment of redundancy incentives: clarifications from Italian Tax Authority

Prepared by Francesca Tironi, Alessia Sveva Spadoni and Sara Tanieli

With its reply no. 177 of last March 16th, 2020, Italian Tax Authority provided its opinion on the query submitted by a Company which, as part of a reorganization and restructuring plan aimed at rationalizing costs, in January 2020 initiated a collective dismissal procedure involving all its non-executive staff employed in the operational and organizational structures of the head and branch offices.

The query in question clarifies that, as part of the aforementioned procedure, at the beginning of April 2020 the Company entered into an agreement with the Trade Unions which provided that employees who expressed, within the due date and in the prescribed manner, their adherence and non-opposition to the dismissal, would be entitled to receive a financial support, in addition to their severance indemnity, the most significant portion of which would be paid “in connection with the termination of employment, and therefore as a redundancy incentive“, and another as a general transaction.

However, due to particular technical and organizational needs, including those arising from the epidemiological crisis caused by Covid-19 and the consequent measures adopted by Italian legislator, the terminations of the mentioned employment relationships have been postponed several times, therefore the Company communicated to Italian Tax Authority its intention to pay the redundancy incentive, as an “advance”, during the employment relationship rather than at its termination. Given of the above, the Company asked Italian Tax Authority whether the redundancy incentive paid during the employment relationship could be subject to separate taxation instead of ordinary taxation.

In order to provide its reply to the query submitted, Italian Tax Authority grounded its analysis on the following two provisions of Presidential Decree no. 917/86 (Consolidated Income Tax Act: hereinafter “TUIR”):

  • article 17, paragraph 1, letter a);
  • article 19, paragraph 4.

Article 17, paragraph 1, letter a), of TUIR states, insofar as it is of interest here, that the separate taxation applies to “[…] other indemnities and sums received once and for all in connection with the termination of the above-mentioned relationships, […] as well as the sums and values in any event received, net of legal costs incurred, […] following […] settlements relating to the termination of the employment relationship“, whilst article 19, paragraph 4, of TUIR states that “save for adjustment at the time of final settlement, advances and payments on account relating to severance indemnities and equivalent indemnities, as well as advances relating to other indemnities and sums are subject to the rate determined in accordance with paragraphs 1, 2 and 2-bis, considering the amount set aside, increased by the advances and payments on account paid overall and net of revaluations already subject to substitute tax“.

With regard to the first provision mentioned above (i.e. article 17, paragraph 1, of TUIR), Italian Tax Authority specified, as also noted in the previous document no. 29/E of March 20th, 2001, that the amounts mentioned therein as subject to separate taxation also include redundancy incentives, that are “the payment of sums, in addition to employee severance indemnities, aimed at encourage employees to leave or terminate their employment.

With reference, on the other hand, to the last provision mentioned above (i.e. art. 19, paragraph 4, of TUIR), Italian Tax Authority remarked that “with this provision […] Italian legislator has provided that the employer may pay, during the employment relationship, an advance payment of the redundancy incentive, as a sum directly related to the termination of the employment relationship, or that finds its reason in the agreement aimed at the early termination of the employment relationship“.

On the basis of the analysis of the two aforementioned provisions jointly considered, Italian tax authority ruled that, instead of the ordinary tax, the separate tax must be applied to the redundancy incentive paid to employees, by way of “advance payment”, during the employment relationship.

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