Smart working and employees

published on 27 July 2021 | reading time approx. 4 minutes

The Italian Revenue Agency has responded to the queries concerning the reimbursement of expenses incurred by employees while working from home and the applicability of conventional salaries to employees who were declared tax residents of Italy but had been posted abroad and have now returned to Italy due to the healthcare emergency.

Employees involved in “smart working” – reimbursement of expenses incurred at their homes – Three issues

The Italian Revenue Agency, in its response to query no. 314 dated 30 April 2021, has clarified that payments made to employees engaged in “smart working” for reimbursement of expenses incurred at their homes for work-related activities (e.g. the use of electricity for a computer and a lighting fixture, water and consumables) must be excluded from taxes, as such amounts do not constitute income from employment.

As a general rule, according to Article 51, Paragraph 1, of the Consolidated Income Tax Act, all sums paid by the employer to the employee, including reimbursement of expenses, constitute employee income, but:

reimbursements of expenses paid by the employer in advance to the employee may be excluded from taxation (Ministerial Decree No. 326 of 23 December 1997);
sums which do not constitute an enrichment for the employee, and which are paid out exclusively in the interest of the employer, based on objective and documentable reasons, are not included in the taxable base (ref. Revenue Agency Circulars no. 178 dated 9 September 2003, no. 357 dated 7 December 2007 and no. 74 dated 20 June 2017).

In the reviewed case, the criterion used by the requesting company to determine the reimbursement is based on the costs saved by the company (and incurred by the employee). The reimbursement must therefore be considered attributable to expenditure incurred in the exclusive interest of the employer.

Therefore, to avoid the reimbursement of expenses being included in the calculation of employee income, it is necessary to adopt an analytical criterion that makes it possible to determine, for each type of expense (e.g. electricity, internet connection, etc.), the portion of costs saved by the employer and instead incurred by the employee.

With the answers to queries no. 328 dated 11 May 2021, and no. 371 dated 24 May 2021, the Italian Revenue Agency has provided further clarification in other cases of reimbursement of expenses to employees engaged in “smart working”.

In its first statement, the Agency clarified that the sums paid out to employees involved in “smart working” as a lump-sum reimbursement of expenses incurred for work-related purposes at home (in this specific case, 30 per cent of the actual consumption charged to the employee in relation to the costs of the internet connection and the use of electricity, air conditioning or heating), are considered to constitute taxable employment income.

In effect, this is a reimbursement based on a flat-rate criterion not supported by objective facts and standards, which, in the absence of a specific legal provision in this regard, cannot be excluded from the calculation of the employee's income, given the principle of “all-inclusiveness” of the same under Article 51, Paragraph 1 of the Consolidated Income Tax Act.

A similar approach was adopted by the Italian Revenue Agency in its latest response to query no. 371 dated 24 May 2021, concerning the reimbursement of all expenses incurred by employees involved in “smart working” for the installation and subscription fees for the internet data connection service (via a mobile device or a fixed installation at home). This reimbursement was also deemed taxable as income from employment because it does not relate only to the costs attributable to the exclusive interest of the employer and is supported by objective and detailed facts and standards.

Employees working abroad – “Smart working” in Italy – Non-applicability of conventional salaries

With the answer to query no. 345 dated 17 May 2021, the Italian Revenue Agency provided clarifications in relation to the applicability of conventional salaries as per Article 51, Paragraph 8-bis of the Consolidated Income Tax Act in the context of employees who are tax residents in Italy and had been posted abroad, but had to return to Italy due to the COVID-19 emergency. The employee performs his/her work according to a “smart working” model at his/her home in Italy, but only for the benefit of the overseas company and without the employment relationship undergoing any interruptions or modifications.

Article 51, Paragraph 8-bis of the Consolidated Income Tax Act provides that, by way of derogation from the provisions of the paragraphs above, the income from employment which is continuously performed abroad and is the sole purpose of the employment relationship due to which the employee, during a 12-month period, resides in the foreign country for a time exceeding 183 days, is to be determined based on conventional salaries, which are defined annually by a specific ministerial decree.

As pointed out by the Italian Revenue Agency, this tax regime is applicable if:

the work activity is carried out abroad for a determined period with a character of permanence or sufficient stability;
the work carried out abroad constitutes the exclusive purpose of the employment relationship and, therefore, the work is carried out entirely abroad;
the employee stays in the foreign country for a period of more than 183 days during 12 months.

Since the criterion adopted by the legislature for the applicability of conventional salaries is that of the employee to be physically present in the foreign country (refer to Ministerial Circular 207/2000 and Revenue Agency Circular 17/2017), it is therefore not possible to apply the conventional salaries regime to an employee who is formally posted abroad but performs his/her work in Italy under a “smart working” mode.