The Internal Revenue Agency issued Ruling No. 81/2025 to clarify the tax regime applicable to bonuses paid to employees under incentive plans, with a special focus on cases of workers involved in international mobility.
The case at hand
A German-registered company with a permanent establishment in Italy requested clarification regarding the taxation of bonuses under a Long Term Cash Bonus Plan. The issue concerns an employee who, during the bonus vesting period (vesting period), worked in the United Kingdom and subsequently moved to Italy during December 2023, acquiring Italian tax residence in 2024.
In 2024, the employee received a bonus accrued entirely while working in the UK. This bonus was subject to withholding taxes both in the UK (being the place of income generation) and in Italy, where the employee was tax resident at the time of receipt. The petitioning company therefore requested clarification of the tax obligations for both its Italian permanent establishment and the employee concerned.
Applicable Tax Principles
The Internal Revenue Agency invoked the following regulatory principles to provide a timely response:
- Principle of tax residence: According to Article 3 of the TUIR, residents of Italy are subject to taxation on all income produced globally, while nonresidents are taxed only on income produced in Italy.
- Determination of employee income: As stated in Article 51 of the TUIR, all compensation received in connection with the employment relationship is part of taxable income.
- Italy-UK Double Taxation Convention: Article 15 provides that income from employment is taxable in the state of residence, except when the employment is carried out in another state, which may also exercise taxing power over income produced in its territory.
- OECD Commentary: It is confirmed that taxation should be attributed to the country where the activity that generated the income was carried out, regardless of when it is actually received by the worker.
Clarification from the Internal Revenue Agency
In the case at hand, the employee worked in the UK until December 2023, employed by the UK company of the group, and then started a new employment relationship in Italy, with a company of the same group, from December 18 of the same year.
Regarding the taxation of bonuses paid by the British company, the Internal Revenue Agency clarifies that the bonus paid in 2024, but accrued entirely before the termination of employment in the United Kingdom, should be subject to taxation exclusively in that state, presenting no connection with Italy. In this case, the employee will have to declare in Italy only the portion of the bonus, if any, referable to the work activity carried out in our country as of December 18, 2023.
As for bonuses that will be paid in 2025 and 2026, accrued in the three-year periods 2022-2024 and 2023-2025, respectively, taxation in Italy will have to take place in proportion to the activity actually performed on Italian territory during the relevant vesting period. Therefore, the portion of the bonus referable to the activity performed from December 18, 2023 until 2025 will be subject to taxation in Italy, while the portion accrued in relation to the activity performed in the United Kingdom, in the absence of connection with the Italian territory, will not have to be declared and taxed in our country.
Finally, bonuses that will be paid starting in 2027, and that fully accrue after December 18, 2023, i.e., during a period when the employee is exclusively working in Italy, will be fully subject to taxation in our country.
Implications for Employers and Employees
- Italian tax withholding agent: Must withhold only on the portion of the bonus attributable to the period of employment in Italy. The withholding agent may make year-end adjustments to correct any excess withholding.
- Employee: If the withholding agent fails to refund the unduly applied withholding taxes, he or she must file for a refund under Article 38 of Presidential Decree No. 602 of September 29, 1973
Conclusions
Ruling No. 81/2025 confirms that the main criterion for taxation of bonuses paid to internationally mobile workers is the place of business during the vesting period. Companies must ensure that withholding taxes are correctly applied, while employees must check whether they qualify for foreign tax credits.
