INPS Contributions of the Working Shareholder: the Supreme Court’s Recent Interpretation on the Actual Distribution of Profits
In recent days, the Labour Section of the Italian Supreme Court of Cassation has issued a series of closely spaced rulings with substantially consistent reasoning. By rejecting the appeals filed by INPS, the Court held that profits retained as reserves by an S.r.l. (Italian limited liability company) not subject to the tax transparency regime do not contribute to the formation of the social security contribution base for IVS purposes (Invalidity, Old Age and Survivors insurance) of a working shareholder registered with the Artisans’ or Traders’ Pension Scheme.
This is a recent judicial interpretation that conflicts with the administrative practice followed by INPS for more than twenty years and, at the same time, raises several significant issues, particularly with regard to tax years following the 2018 tax reform.
The subject matter of the dispute
The cases examined by the Supreme Court did not concern the obligation to register with the social security scheme, which was undisputed since the shareholders carried out company activities on a habitual and predominant basis.
The dispute instead concerned the determination of the social security contribution base and, in particular, whether the income generated by the S.r.l. could be allocated proportionally to the working shareholder even when profits remained within the company’s assets through allocation to reserves.
The relevant legal provision is Article 3-bis, paragraph 1, of Decree-Law No. 384/1992, which links contributions to the total amount of business income “declared for IRPEF purposes” (Italian personal income tax).
The key issue lies in the fact that an S.r.l. is an independent IRES taxpayer (Italian corporate income tax): the income generated by the company is ordinarily attributed to the individual shareholder only following the distribution of profits, except where the tax transparency regime provided for under Articles 115 and 116 of the Italian Tax Code (TUIR) applies.
INPS’s position
With Circular No. 102 of 12 June 2003, INPS adopted a different interpretation.
According to the Institute, for working shareholders of an S.r.l., the social security contribution base consists of the shareholder’s proportional share of the company’s business income, based on the percentage of participation in profits, “regardless of the allocation decided by the shareholders’ meeting for such profits”.
Under this approach, company income would therefore be relevant for social security purposes even when it has not actually been distributed.
In the proceedings before the Supreme Court, INPS reiterated this position, arguing that the relevant factor should be the income theoretically available to the shareholder and that the failure to distribute profits—especially in the case of a sole shareholder who is also a director—would depend on the choice of the same person liable for contributions.
According to INPS, allowing such a choice to affect the contribution base would effectively place the determination of social security obligations in the hands of the insured person.
The Institute also referred to the solidarity principle underlying the social security system.
The Supreme Court’s decision
In rejecting INPS’s appeals, the Supreme Court first focused on the wording of Article 3-bis.
The reference to income “declared for IRPEF purposes” introduces a specific and verifiable legal criterion: for social security purposes, what matters is the income that, under tax legislation, is attributed to the shareholder. It is not sufficient that such income has been generated and declared by the company for IRES purposes.
Interpreting the term “declared” as equivalent to “potentially obtainable” would, according to the Court, result in a substantial interpretatio abrogans of the provision and would conflict with the principle of statutory reservation established by Article 23 of the Italian Constitution.
The income generated by an S.r.l. may therefore be attributed to the shareholder and declared by the latter for IRPEF purposes only when a legal event occurs that determines such attribution, such as the receipt of dividends or the application of the tax transparency regime.
In the absence of such circumstances, the income remains attributable exclusively to the company.
Consequently, social security contributions must be calculated on the share of company income actually allocated to the shareholder and declared by that shareholder for IRPEF purposes. The burden of proving that such attribution has occurred lies with INPS.
The Court also rejected the additional arguments put forward by the Institute.
The failure to distribute profits may result from various entrepreneurial and financial considerations and cannot, in itself, be considered an avoidance practice, even where the shareholder is the sole owner of the company.
Likewise, the solidarity principle underlying the social security system cannot justify extending contribution obligations beyond the limits established by law. At the same time, a minimum level of social security protection remains guaranteed through the statutory minimum contribution thresholds.
A principle developed under the tax regime prior to the 2018 reform
A significant element is represented by the tax years examined in the proceedings, all of which pre-date the 2018 tax reform.
In the case for which the full text of the ruling is available, for example, the dispute concerned the years 2015 and 2017.
The Court stated that the declaration of income for IRPEF purposes “presupposes the receipt” of profits.
Under the tax rules applicable at the time, receipt and declaration effectively tended to coincide: an individual shareholder receiving dividends arising from a qualified shareholding was required to report them in the tax return, and part of those dividends contributed to the formation of the overall taxable income.
The principle established by the Court therefore reflects the tax legislation applicable to the years under review and must be interpreted within that framework, as noted by several authoritative commentators.
However, this underlying assumption changed following the 2018 tax reform.
Since that year, dividends received by individuals outside the scope of business activities are generally subject to a 26% withholding tax applied as a final tax (ritenuta a titolo d’imposta).
They no longer contribute to the taxpayer’s overall IRPEF taxable income and, as a general rule, do not need to be reported in the annual tax return.
As a result, receipt and declaration no longer coincide.
A shareholder may receive a dividend without that amount being “declared for IRPEF purposes” in the traditional meaning of the expression.
The exclusion of retained profits is unaffected, because as long as profits remain within the company there is neither receipt nor shareholder-level declaration.
The new issue concerns the treatment of dividends that are actually distributed.
Outstanding issues
The rulings exclude social security contributions in the year in which profits are allocated to reserves, but they do not clarify whether and how the subsequent distribution of those reserves should contribute to the IVS contribution base.
The issue is particularly relevant for profits generated after 2018 and for distributions subject to the 26% withholding tax, which generally do not enter into the shareholder’s overall IRPEF taxable income.
Therefore, the reference to income “declared for IRPEF purposes” does not automatically allow the conclusion that distributed dividends must be subject to social security contributions.
The application of the cash basis principle—with a contribution base corresponding to the amount subject to withholding tax—represents a possible interpretative solution, but it is not an explicit conclusion reached by the Supreme Court rulings..
Should social security contributions be considered applicable to distributed profits, further questions would remain unresolved.
In particular, it would be necessary to determine whether the contribution base should correspond to:
the amount of the dividend actually distributed under civil law rules; or
a portion of the business income originally generated by the company.
It would also be necessary to identify the relevant tax year, since Article 3-bis links contributions to the income of the year to which the contributions relate, whereas distribution of retained reserves may occur several years after the profits were generated.
In any event, an intervention by INPS would be desirable in order to coordinate the new judicial interpretation with its existing administrative guidance and to define the treatment of future profit distributions.
For profits retained in reserves before the 2018 reform, the interpretation adopted by the Supreme Court represents a significant change and may give rise to substantial litigation.
For the current tax regime, however, prompt clarification from INPS would be desirable, including possible confirmation of the current administrative approach.
The key issue remains the relationship between corporate income, shareholder taxation and social security contributions: while retained profits remain within the legal sphere of the company, the subsequent distribution of those profits raises new questions that have yet to be definitively resolved.
