Smart Working and notional salary application

Prepared by Carmela Ettorre and Simona Di Grazia

The COVID-19 health emergency, which began in the early months of 2020, has forced several States to adopt restrictive measures to contain the spread of the virus such as the reduction of employee mobility, with consequent impact on workers on assignment abroad, compelled to work from home in the countries of origin instead of at the foreign office.

The limits imposed on the mobility of people have had significant impacts especially on companies and employees with transnational operations who have seen their employees or administrators use as an ordinary way of carrying out their work remotely, that is, work at their home, often located in a State other than that of ordinary business.

It is clearly evident that this case should not only be framed in the regulatory context, both internal and conventional, which governs the determination of the tax residence of individuals, but, especially for Italy, must to be considered all the aspects concerning the determination of the employment income to be subjected to taxation.

In fact, based on art. 51, paragraph 8 bis of the TUIR, “the income from employment, provided abroad on a continuous basis and as the exclusive object of the relationship by employees who within twelve months stay in the foreign country for a period exceeding 183 days, is determined on the basis of the notional salaries defined annually with the decree of the Ministry of Labor … “.

This provision provides for the taxability of an income determined by agreement by the Minister of Labor (in agreement with the Ministers of Finance and Treasury) with specific annual decrees if certain requirements are met.

Under a subjective aspect the element that determines the application of the rule concerns the individuals, who qualify as fiscal residents in Italy, from an objective point of view, the tax relief can be applied in the event that the work is carried out abroad on a:

a) continuous basis;

b) exclusively;

c) for more than 183 days in the 12 months.

As for the requirements under a) and b), it is clear that they excluding from the objective scope of application of the rule all cases in which work abroad is carried out on an occasional basis with respect to the work ordinarily carried out in Italy ( as happens in the case of trips, even long ones, abroad). The rule is applicable to cases of hiring abroad, transfers abroad of the place of work or to cases of secondment.

About the calculation of the 183 days, the Financial Administration has already expressed itself specifying that this threshold must be determined taking into account the duration of the assignment abroad: therefore, holidays must be included, even if spent in a State other than that of work. The calculation of the 183 days takes into account the previous 12 months regardless of the calendar year.

In consideration of the requirements for the application of art. 51, paragraph 8 bis, of the TUIR, the introduction of “smart working”, as an ordinary method, has raised some perplexity about the possibility of applying notional salaries to those employees who, while continuing to perform an employee job in favor of the foreign company, interrupted their stay in the country of assignment due to the pandemic.

On this topic, restrictive clarification arrived from the Tax Authority, which through the reply no. 345 of 14 May 2021 expressed its opinion on the possibility of applying notional salaries to employees who work in the so-called “smart working” mode.

The applicant company represents the case of an employee, tax resident of Italy, hired with a permanent contract and an executive position, seconded from 1 May 2019 to a foreign subsidiary, with workplace at the company’s offices in Paris.

The employee, during 2019 and 2020, qualified as a tax resident in Italy since, despite the assignment in France, he maintained his Anagrafe registration and domicile in the Italian State for most of each tax period considered, having kept central of vital and social interests in Italy, a country where he would have continued to return on weekends and for holidays in a normal situation.

It is also highlighted that the applicant company, as employer, has subjected to taxation the income attributed to the employee on the basis of Article 51, paragraph 8-bis, of TUIR, approved by decree of the President of the Republic 22 December 1986, n. 917 (Tuir).

Due to the pandemic situation, the worker returned from France to Italy in February 2020, continuing to carry out his work in favor of France in remote working, therefore, the place of performance of the employee’s work has become, exceptionally and temporarily , the worker’s home in Italy, where the employee’s family has always lived.

In relation to the worker’s duties, it is highlighted that the activity carried out in Italy by the employee in remote working mode is the same as that carried out – and that in normal conditions it should have continued to be carried out – during the period of effective presence at the abroad. The duties of the employee with respect to his foreign role has remained unchanged, he has never carried out his activity from the headquarters of the seconding Italian company, which is also closed for long periods, but only from his home and exclusively for the benefit of the French employer .

 All the characteristic elements of the contract, such as the salary structure, the duties of the employee and his position within the organization chart of the seconding company have remained unchanged. In addition, the cost (and therefore remuneration, social security contributions, out-of-pocket expenses linked to the posting contract, etc.) of the worker continues to be foreseen for the entire duration of the assignment to the posting company by the posting company.

The applicant company asks the Tax Authority if the conditions set out in article 51, paragraph 8-bis, of the TUIR are no longer valid, with particular reference to the continuity and exclusivity of the employment relationship; more precisely whether these conditions may be compromised by the performance of work in a place different than that contractually provided for and how it is necessary to proceed with the verification of the quantitative requirement of stay abroad, that is the 183 days over a reference period 12 months.

The Tax authority clarifies what are the indications to follow for calculating the days of an employee, forced to work from Italy with the same duties, due to the anti-Covid provisions.

The conditions to be respected are the following:

  • the work activity must be carried out abroad for a determined period of time with the character of permanence or sufficient stability;
  • this activity must be the exclusive object of the employment relationship and, therefore, the execution of the work must be carried out entirely abroad;
  •  the worker, within twelve months, must reside in the foreign State for a period exceeding 183 days.

After summarizing the regulatory framework of reference, and after focusing on the OCSE guidelines, published on 3 April 2020 and updated on 21 January 2021, the Tax authority reviews the previous practice documents and provides clarifications to the questions put by the applicant.

As underlined in the circular of the Ministry of Finance of 16 November 2000, number 207, the physical presence of the worker in the State determines the taxation of employees.

No exception, therefore, in the event that this worker has worked in Italy, although for reasons connected with the coronavirus emergency.

 The details on the calculation of the number of working days are specified in the document of practice which underlines the following: “the Ministry of Finance specified that holidays, weekly rest periods and other non-working days are considered as full days relating to the determination of the remuneration of the State where the work is mainly performed. “

A further clarification concerns the amount of notional salary.

As specified in the circular of 13 May 2011, n. 20 / E of the Tax Authority, the decree of the Ministry of Labor which determines the amount of notional salaries provides for the possibility of split these sums to adapt them to the effective duration of the working period.

The Tax Authority does not agree with the conclusions of the company and essentially reaffirms the ordinary legislation for which if the work is not carried out abroad the main requirement for the use of notional salary is no longer valid.

Regarding the recommendations of the OECD and the Italy-France agreement of July 2020, the Agency reiterates that these are “Interpretations of canons of international law” which have no effect on the interpretation of domestic legislation.

In particular, the international organism suggested to the adhering countries not to give importance to the deviations dictated by the emergency and by the restrictions on mobility imposed by governments. In this sense, an agreement was also stipulated on 23.7.2020 between Italy and France, which aimed to “facilitate the position of the many workers who move between Italy and France and who have found themselves and will find themselves unable or discouraged from doing so because of the health emergency “.

Therefore, on the basis of the case under question, the Tax Authority concludes that the requirement of 183 days is largely satisfied as the employee was in France from 1 May 2019, the day of the posting, until 22 February 2020 (therefore in the has in any case reached the time requirement over the 12 months).

However, starting from February the requirement of staying abroad is no longer valid and consequently, as also clarified by the practice (circular no.20/2011), the notional salary for the month of February 2020 will have to be re-proportioned taking into account that from that date the employee stays in Italy and that one of the conditions required by the law is no longer valid.

Finally, in the opinion of the writer, one last point of reflection remains. The question relates to the recovering of any tax credits in cases of double taxation occur. In fact, if  the interpretation given by the Tax Authority is based on arguments that have probably already been reiterated in previous practice documents, on the other hand the approach is certainly dictated exclusively by internal sources.

Since the existence of transnational income cannot be separated from considering the dictates of the bilateral conventions, as well as the tax regimes of other countries, a question mark still remains on what the position of the Tax Authority would be, where the taxation in Italy of the income produced in home working, there was a double taxation, because applied in the country of the source, (think for example of countries such as the UK that tax according to the principle of the economic employer), those income, as produced in Italy, could they benefit from the recognition of the tax credit, or would it actually be impossible to recover the “foreign tax credit” in the country of residence? After all, the initiative of the intervention of the OECD was going precisely in this direction.

Let’s Talk

For a deeper discussion, please contact:

Carmela Ettorre

PwC TLS Avvocati e Commercialisti


Simona Di Grazia

PwC TLS Avvocati e Commercialisti

Senior Manager