Employment Update Italy November 2006

22 November 2006

Caterina Rucci

A legislative decree which proposed changes to the laws relating to employment taxation came into force in August 2006. Further changes to the law relating to stock options' tax law were introduced in October 2006. The new law includes several changes as set out below:

The lower rate of tax levied on incentives paid to older employees upon termination of employment by mutual consent no longer applies. Such payments will now be subject to the same rate of tax as payments made to younger employees.

Significant and complex changes to the rules relating to the taxation of stock options have been introduced. Stock options had previously been exempt from social contributions and were subject to a low rate of tax. The changes introduced cast doubt on the benefit of large employers providing stock options to Italian employees at all. Basically, the social contribution exemption and the low tax rate are not subject to two conditions: that options are not sold for a certain period, and that their value does not exceed certain limits.

The law has also modified provisions for tax deductions for company cars. The change might have a significant impact on employers’ financial planning as the law comes in to force with immediate effect.

A further change is the cancellation of the "no tax area" for non-residents. “No tax area” is an amount of income which is basically excluded from taxes.

Finally, Italian employers will soon lose at least a part of the accrued trattamento did fine rapporto (“TFR”) funds. This is a mandatory seniority indemnity paid to employees in any instance of termination. For this reason TFRs were accrued by companies year by year and used as an investment reserve (avoiding or reducing their need to take loans). Such reserves might soon be diverted to private pension funds, if the employee so chooses, or for the courageous employee, partly into a special fund managed by INPS and used temporarily by the Italian Government for the financing of large building projects and interventions. The present situation is therefore peculiar as whilst affirming the need to encourage the additional private funds, which are fundamental to the provision of adequate pensions, the Government is also allowing all employees to choose to put their money into the government building and intervention projects.

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