In ruling n. 92/E of April 2, 2009 Italy’s tax administration ruled that stock received through the exercise of stock options granted by a foreign company is income taxable in Italy, if the options are exercised after the taxpayer has moved to Italy and become a resident of Italy for tax purposes, even though the stock options vested mainly in respect of services performed outside of Italy when the taxpayer was not resident of Italy for tax purposes.
The taxpayer argued that a portion of the stock options which vested in respect of services performed outside of Italy when the taxpayer was not a resident of Italy has no connections with Italy and should be excluded from Italian tax.
The tax administration held that all of the stock is taxable in Italy since received when the taxpayer had become resident of Italy for tax purposes, and a credit would be granted for any foreign taxes charged on stock attributable to services performed in a foreign country.
Under the facts of the ruling, the taxpayer worked as an employee of a UK company from October 1, 2004 to September 30, 2007. On October 1, 2007 he moved to Italy where he started working for the Italian parent company of the group. On February 28, 2005 he was granted stock options that would vest in three years. On March 3, 2008, he exercised the options and received the stock.
The taxpayer argued that the sock represented a compensation for services performed between Feb. 28, 2005 and March 1, 2008, when the options vested, including services performed in the UK from Feb. 28, 2005, to October 1, 2007, when the taxpayer was a resident of the UK for tax purposes.
As a result, according to OECD principles on taxation of stock options, the value of the stock should be divided into two portions:
– one portion, which accrued in respect of services performed in the UK between Feb. 28, 2005 and September 30, 2007;
– another portion, which accrued in respect of services performed in Italy, between October 1, 2007 and March 3, 2008.
According to the taxpayer, the first portion should be treated as income for services performed outside of Italy by a non resident individual and should be excluded from Italian tax. Alternatively, Italian tax code article 51, paragraph 8-bis should apply, according to which income of a taxpayer who performs services outside of Italy on continuing basis and as the exclusive object of his employment is limited to a conventional amount determined by way of ministerial decree. The conventional amount would absorb the value of the stock, which would not be separately taxable.
The tax administration disagreed and held that the entire amount of stock is taxable in Italy, because the taxpayer is taxable on a cash basis, and the stock is income received when the taxpayer was resident in Italy for tax purposes.
The provision of tax code article 51, paragraph 8-bis applies exclusively to taxpayers who work abroad but maintain their tax residency in Italy, which is not the case for the taxpayer in the ruling.
The tax administration agreed that, if the UK charges any tax on stock attributable to services performed in the UK, the taxpayer will receive a credit in Italy which would offset the Italian tax and avoid double taxation.