Share option plans continue to represent an attractive investment for employers and employees alike in Italy.
Despite most options-related tax breaks having been removed from the statute books back in 2008, one key exemption remains in place and thus contributes to the attraction of option plans for employees – tax free status for options exercised in any given year up to the value of €2,065.83, if certain conditions, as per below, are met.
How it works
The typical structure of an Italian share option plan looks like this:
- Employees are given the right to purchase a specified number of stock after a defined period of time, with this vesting period usually set at three years.
- Most commonly, shares are issued through a stock capital increase, but previously existing shares can also be used.
- Prior to the 2008 reforms, it wasn’t unusual for the exercise price to be substantially lower than the fair market value (FMV), but it is now more the norm for the exercise price to be equal to the FMV at the point that the option is granted. Companies aren’t obliged to follow this rule of thumb, but straying from it can have tax consequences.
- It is common – but not compulsory – for performance conditions to also be attached to any options award. In that scenario, as well as meeting whatever time condition has been set down, plan participants would also have to achieve pre-agreed performance-related goals before being able to exercise options.
When individuals – either all employees or those belonging to the same category – sign up to a plan along the lines set out above and eventually exercise their options, they will benefit from the €2,065.83 tax exemption, as long as the stock is then held by the individual for at least three years. That holding rule also excludes the possibility of the shares being repurchased by the issuing company at any point during that period.
If the holding period requirement is not adhered to, income tax will become payable during the tax period in which the sale takes place and will be assessed on the sum that was not taxed when the shares were acquired.
Guidelines governing option plans
The guidelines associated with employee share option plans in Italy are as follows:
- Employers have the leeway to pick and choose which employees are invited into a plan and can offer different terms and conditions to individual participants. However, these choices must be made without discriminating against individuals on grounds such as sex, race, and religion.
- Options can be offered to individuals other than current employees. For example, it is not unusual for options to be granted to board members and it is also possible to offer options to external consultants. As well as that, it is rare but not unheard of to grant options to prospective employees before they formally join the company.
- Unlike the situation in some other European countries, Italian legislation does not currently dictate a permissible maximum value of stock allocated via options in a given calendar year or in general in most business settings – either in terms of options issued by a company or received by an employee.
- Again, as mentioned above, there is no compulsory requirement for the exercise price to be equal to the FMV on the date of the grant, but when employers opt for a different price, this will have tax implications.
Taxation and share options
The key point to make clear here is that no tax liability falls due when options are granted or at the point of vesting. The taxable event is triggered when the options are exercised.
When options are exercised, income tax becomes due, with that bill calculated based on the FMV of those stock at that moment. Income tax is charged at a rate of up to 43%, with additional regional and municipal surcharges also levied where applicable.
The employee must also pay social security contributions on their taxable income unless that income exceeds whatever contribution ceiling might be in place or if they qualify for an exemption on such payments.
When the employee exercises their options and purchases shares, the employer must withhold any income tax and social security contributions that fall due at source. If an employee’s salary isn’t enough to cover the amount due, then that individual is obliged to make up the shortfall in time for the employer to lodge the required amount with the tax authorities by the due date.
When stock is sold, individuals are taxed on whatever capital gain accrues from the disposal. The relevant tax rate is 26%.
From the employer perspective, any costs incurred by the company relating to the overall plan will be tax deductible.
For more information on share option plans in Italy, contact Global Shares now. Our experts are on hand to answer whatever questions you may have and to guide you at every step along the journey.
Article specific disclosures, disclaimers and warnings:
JPMorgan Chase & Co., its affiliates, and employees do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal and accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transaction.
Please Note: This publication contains general information only and Global Shares is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. The Global Shares Academy is not a substitute for professional advice and should not be used as such. Global Shares does not assume any liability for reliance on the information provided herein.