Tax exemption for productivity bonuses: how and when does the 5% reduced tax rate apply?

The 2023 Budget Law (L. 197/2022), in Article 1, paragraph 63, provides for a reduction in the substitute tax rate for productivity bonuses paid to private sector employees in the current year. This amendment is part of a package of measures aimed at reducing the tax burden on employees’ paychecks, specifically targeting the reduction of the tax wedge.

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Tax exemption for productivity bonuses

 

Definition of production bonuses

Production bonuses are additional compensation that is added to employees’ base salary, and the amount and criteria for their payment vary from company to company. They were introduced in the late 1970s to encourage employees to increase company productivity, making these bonuses purely incentive-based. Nowadays, they are established through company or territorial bargaining as defined in Article 51 of Legislative Decree 81/2015, and the indications in these negotiations play a crucial role in the application of benefits. Bonuses can be paid to all employees or only to some of them, they can be tied to the achievement of predetermined performance and objectives, or they can be independent of any specific target.

2023 Updates

The regulatory framework originates from Articles 182-190 of the Stability Law 2016 (Law No. 208/2015), which announced specific tax benefits related to bonus remuneration, including the application of a substitute tax rate of 10% for personal income tax (Irpef) and its regional and local surcharges. It also allowed employees to request part of the bonus amount in the form of welfare goods and services according to their preferences.

Significant changes have been introduced in the 2023 Budget Law (Law No. 197/2022). Specifically, paragraph 63 establishes a reduction from 10% to 5% in the substitute tax and regional and local surcharges on sums paid as productivity bonuses as defined in Article 1, paragraph 182, of Law No. 208/2015. This measure is applicable only for the year 2023 and aims to reduce the tax wedge in favor of employees when the bonus amount is paid following company and territorial agreements that include increases in productivity, profitability, quality, and innovation in business processes. The maximum limit of €3,000 annually for tax benefits remains unchanged, but employees still have the option to convert part or the entire amount of the bonus into company welfare goods and services.

The 5% tax benefit for 2023 is only available to private sector employees with income from dependent work not exceeding €80,000 per year. This total income limit is calculated based on the previous year’s dependent work income, including any pensions, while excluding separately taxed income. Public administrations are excluded from this tax benefit.

The tax benefit applies to productivity/result bonuses linked to increases in productivity, profitability, quality, efficiency, and innovation. It is crucial to establish, within company and/or territorial agreements, whether at least one of these objectives has been effectively achieved and can be measured through numerical/statistical indicators.

Conclusion

it appears that the legislator intends to incentivize companies to opt for economic incentives tied to challenging goals for performance improvement. These incentives are considered part of the bonus remuneration that motivates and increases productivity. It is hoped that this incentive is just the beginning and that it signals the recognition of employees as a fundamental part of a company’s success, with the added benefit of tax reduction for their efforts in improving performance, both at a personal and corporate level.

 

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