The taxation of stock options has been subject to different changes in law in the last few years. Particularly, the latest Law Decree has established that, starting on 25 June 2008, income derived from the exercise of stock options, that is the difference between the normal value of the shares at exercise date and the exercise price paid by the employee, will be considered as taxable employment income and therefore subject to ordinary progressive income tax rates.
As pointed out by the Revenue Agency, in its answer to a ruling, “Ris. 23/2020”, following this alignment of the stock based compensation to the ordinary employment income also implies that the remuneration must be charged at the time the worker actually receives it, on the basis of the so-called cash principle, which governs the determination of employee earnings.
What is Stock Based Compensation? – Stock Based Compensation, also called Share-Based Compensation or Equity Compensation, is a way of paying employees, executives, and directors of a company with shares of ownership in the business. Shares issued to employees are usually subject to a vesting period before they can be sold. Companies compensate their employees by issuing them stock options or restricted shares. The shares typically vest over a few years, meaning, they cannot be sold by the employee until a specified period of time has passed. If the employee quits the company before the shares are vested (bad leaver clause), they forfeit those shares.
For tax purposes matters the exercising of the option, even pending the bad leaver clause – Said that, the Revenue Agency clarifies that the plans for assigning shares to employees are generally divided into three fundamental moments:
- the granting phase, or the right of option, matching the moment when the beneficiary receives a right to become a shareholder of the employer company or of another company belonging to the same group. At this time, the so-called strikeprice is also fixed, that is the exercise price;
- the vesting period, or the timing from the offer of the option to the initial term for its exercise;
- exercising, that is the date on which the option right is effectively exercised and therefore the share is actually acquired under the conditions set in the granting phase.
For tax purposes, if the option right is not freely transferable to third parties, the moment effectively relevant coincides with the exercise of this right, i.e. the exercise date, regardless of the issue or delivery date of the equities themselves. However, underline the Agency, in relation to the determination of the tax base, it should be noted that the shares must be subject to taxation for an amount equal to the difference between the normal value determined at the time of exercise of the option right, and the amount paid by the employee for the assignment. Therefore, in light of what has been said, for the case under scrutiny the Revenue Agency deems that the moment of taxation coincides with that in which the manager acquires the shares, being for tax purposes irrelevant that the transfer of these equities is limited due to circumstances that do not concern the type of shares themselves but rather the conduct of the manager towards the company, as in the case of a bad leaver.
Stefano Latini