Corporate welfare and performance bonuses: interconnection between the two regimes

Corporate welfare consists of “all benefits, projects and services provided to employees in kind or in the form of expense reimbursements, aimed at purposes that can be broadly defined as socially relevant, and excluded from employment income” (see Circolare 28/2016 Agenzia delle Entrate). In other words, it includes a broad and heterogeneous range of initiatives set up by the employer, mainly related to work–life balance, employee care, and the provision of goods and services.

Corporate welfare is, to date, an essential tool for companies in order to achieve competitive advantages and respond to the needs of a continuously evolving labor market.

The main impact areas are:

• attractiveness and retention of talent;

• improvement of the workplace climate and employee well-being;

• enhancement of employee motivation and productivity.

  
  

In the absence of specific legislation on corporate welfare, the architecture of welfare plans is entirely left to the discretion of the employer. However, following a series of legislative measures introduced since 2016 to encourage the use of this instrument, significant tax and social security advantages have been established—where the legal requirements are met—for both employees and employers, that can be summarized as the exclusion from employment income (Article 51, paragraph 2 of the TUIR) and full deductibility for the company (Article 95, paragraph 1 of the TUIR, as an exception to Article 100 of the TUIR), except in specific cases.

First of all, it is necessary to consider that these benefits are granted only if the welfare provisions:

• are offered to the generality of employees or to a homogeneous category, whether defined in a “civil law” sense (e.g. executives, middle managers, etc.) or based on any characteristic related to job performance (see ruling 57/2024 of the Agenzia delle Entrate);

• arise from a binding obligation for the employer, whether deriving from a corporate welfare plan or from collective bargaining agreements (see ruling 954-1417/2016 of the Agenzia delle Entrate); otherwise, Article 100 of the TUIR applies, which allows deductibility within the limit of 5 per thousand of the total expenses for employee labor;

• do not constitute a way to circumvent the general rules for calculating employment income.

  
  

To this end, it is first necessary that the corporate welfare policy is drafted in compliance with the applicable regulations, identifying the category of employees to whom the individual benefits are addressed, the access criteria, the methods of provision, the duration, and the rights and obligations of the parties, so that a binding obligation on the employer to provide such benefits can be clearly established.

The most relevant cases are those set out in Article 51, paragraph 2 of the TUIR, which can be summarized as follows:

Benefits may also be provided through entitlement documents, in either paper or electronic form, commonly known as vouchers. As established by Article 6 of the DM 25/03/2016, such vouchers must indicate the nominal value of the benefit and are strictly personal, meaning they cannot be transferred or assigned to third parties, nor converted into cash. Vouchers may be issued in cumulative form; however, their total value must not exceed €258.23. Any unused amounts cannot be monetized but may be treated as a credit to be reused exclusively within the same plan and in compliance with the applicable time limits.

Performance bonuses and their conversion in corporate welfare

In general, performance bonuses can be an effective tool, alongside a welfare plan, to stimulate company productivity. In particular, performance bonuses are variable amounts whose payment must be provided for by company-level collective agreements, concluded directly by RSA or RSU, or by applicable territorial collective agreements. These agreements must also set out objective criteria for measuring increases in productivity, profitability, quality, efficiency, and innovation, which characterize the performance bonus. From a tax perspective, performance bonuses are subject to a substitute tax in place of IRPEF and related surtaxes at a rate of 10%, up to a maximum of €3,000 gross per year. However, for the 2026–2027 tax periods, the substitute tax is reduced to 1%, and the maximum limit is increased to €5,000 gross per year. From a social security standpoint, a reduction of 20 percentage points applies to the IVS contribution rate borne by the employer, up to a maximum benefit of €800 per year, while employee contributions are exempt. This regime applies to private-sector employees with an employment contract whose employment income received in the previous year does not exceed €80,000. The possibility of converting performance bonuses—linked to results and productivity—into goods or services included in corporate welfare plans, as established by Article 1, paragraph 184 of Law No. 208/2015, represents one of the main innovations introduced in the management of employee remuneration.

However, the conversion is subject to compliance with the following requirements:

1. the amounts must qualify as performance bonuses potentially subject to the substitute tax;

2. the conversion must be provided for by a second-level collective agreement. The collective agreement must clearly specify the methods of conversion and ensure that the employee can exercise the option voluntarily;

3. the amounts converted into welfare, which do not contribute to the employee’s taxable income, must comply both with the maximum limit of amounts subject to the aforementioned substitute tax and with the exemption limits set by the Italian Income Tax Code (TUIR); any excess amount is considered employment income and is therefore subject to taxation and social security contributions.

   
   

From the perspective of tax benefits, the conversion currently generates only a minimal incremental advantage, considering that, from the employee’s standpoint, the substitute IRPEF tax has been reduced to 1%, while, from the employer’s standpoint, no differences arise, as full deductibility of costs is provided, just as with welfare plans.

Moreover, attention should be drawn to the fact that, in the absence of a specific legal provision, the conversion of a performance bonus into corporate welfare is considered valid, whereas the reverse is not permitted. This implies that once the employee opts for the conversion, the bonus ceases to be a monetary component of remuneration and is definitively transformed into corporate welfare. Therefore, in the event of a cash payout of any residual welfare credit deriving from the conversion of a performance bonus, the amount paid to the employee can no longer benefit from the reduced 1% tax rate, but will instead be subject to social security contributions and included in employment income subject to ordinary IRPEF taxation.

Comparison between corporate welfare and fringe benefits

The favorable conditions outlined above highlight the substantial differences between welfare plans and fringe benefits, which more generally represent all forms of non-cash remuneration provided by the employer to the employee. Although the use of fringe benefits entails a lower advantage for the employee, it is easier to implement, as it does not require compliance with the strict conditions applicable to welfare plans and may also be granted on an individual basis, without the need to extend them to the generality of employees. From a tax perspective, pursuant to paragraphs 1–3 of Article 51 of the Italian Income Tax Code (TUIR), fringe benefits do not contribute to employment income provided that their total annual value does not exceed €1.000 (increased to €2.000 for employees with dependent children). It should be noted that this threshold functions as a limit and not as an allowance: therefore, if fringe benefits are granted for a total annual value exceeding €1,000/€2,000, taxation applies to the entire amount granted, not just to the excess. From the employer’s perspective, since these benefits fall within employment income, Article 95 of the TUIR applies, under which they are fully deductible.

Tax & Legal Research Hub – Studio Locatelli & Associati

Centro Studi e Pianificazione Fiscale

Responsabile

Dott. Valerio Locatelli

Coordinatore

Dott. Giancarlo Marengo