Under the former Italian tax regime, there was favourable tax treatment for share options granted to employees at market value (defined by law).  Income from options exercised by an employee under a share option plan was exempt from income tax and social security contributions, provided that the exercise price was equal to market value at the date of offer. For listed shares, under the former regime, market value had to be assessed on the basis of the arithmetical average of the shares to be placed under option over the one month period prior to the date of the offer.

Law Decree No. 223, published on 4 July 2006 in the Official Gazette No. 153, repeals this favourable tax treatment by removing the income tax and social security exemption on the exercise of share options granted at market value.  This repeal is effective for all options exercised on or after 4 July 2006. However, the Law Decree does not affect the annual exemption of EUR 2,065.83 which is available for options or shares granted at a discount or for free under all-employee plans.

This provision of the Law Decree forms part of the first Act of the new Italian Government which introduces sweeping reforms in other areas (unrelated to employee share plans) aimed at preventing tax avoidance and improving tax revenues.  The proposed Act has already proved controversial and prompted announcements in the last few days of protest strikes.

Even though the Law Decree is already effective, its effectiveness will only last for a period of 60 days from its publication in the Official Gazette (4 July 2006).  In order to become definitive, the provisions of the Law Decree must be implemented by the Italian Parliament through an ordinary law.  However, the Parliament might amend or delete the Law Decree's provisions, in response to lobbying activities. 

Allen and Overy LLP intends to see what lobbying can be undertaken to influence the course of the Law Decree by working with the relevant share schemes organisations. As a minimum, this would be aimed at persuading the Italian authorities to remove the retrospective effect of the Law Decree, so that it would apply to options granted, rather than exercised, on or after  4 July 2006.

If  lobbying is unsuccessful, the Law Decree will have a permanent impact for companies and employees. Companies would need to notify their employees of the new tax treatment  and comply with withholding obligations in respect of tax and social security contributions that are due.