ITALY Law and Practice Contributed by: Silvia Bordi, Emanuele Bosia, Federico Dettori and Rodrigo Boccioletti, Gianni & Origoni
reduced price. Vesting often follows a linear or milestone-based schedule, with typical terms ranging from three to five years. Work-for-equity arrangements, specifically regu - lated for innovative start-ups, permit companies to issue equity in exchange for services, often under favourable tax conditions. This scheme strengthens ties between talent and company growth while reducing immediate cash outflows. Phantom shares, though less common, offer economic benefits similar to equity without transferring ownership. These plans are typically linked to performance milestones or exit events and are paid out in cash. Exercise periods and terms vary but commonly provide a window post-vesting, often until an exit event, within which options can be exercised. Italian civil law requires that these mechanisms, especially within S.r.l. structures, be carefully drafted to comply with notarial requirements for quota transfers and the rules on special rights. 5.3 Taxation of Instruments In Italy, structuring employee incentive schemes is heavily influenced by tax considerations, par - ticularly the timing of taxable events and appli - cable tax rates. Generally, equity-based incen - tives, such as stock options or work-for-equity schemes, are taxed at the moment of exercise or realisation, rather than at the grant date. This means taxation arises when the employee exer - cises the option or sells the resulting shares, aligning tax liability with liquidity events. For standard stock options, the difference between the exercise price and the market val - ue at exercise is treated as employment income and taxed under progressive income tax rates (IRPEF), which can reach up to 43%. Social
security contributions may also apply at the exercise stage, further increasing the cost for employees. However, innovative start-ups benefit from preferential tax treatment under Italy’s specific regulations. If structured correctly, stock options granted by qualifying start-ups may be exempt from income tax and social security contribu - tions at exercise, provided certain conditions are met – such as holding periods and non-transfer - ability of the options until an exit. This exemption shifts taxation to the capital gain realised upon the sale of shares, generally subject to a 26% flat rate, a significant tax advantage compared to ordinary income treatment. These tax rules greatly influence the size, tim - ing and structure of incentive pools. Companies and investors often prioritise schemes eligible for favourable treatment, balancing the need to attract talent with the goal of minimising tax burdens for both the company and the benefi - ciaries. 5.4 Implementation In Italy, the implementation of an investment round and the establishment of an employee incentive programme are closely connected, both from a procedural and dilution stand - point. Typically, incentive plans are negotiated or adjusted during investment rounds, espe - cially when new investors enter the company. Investors often require the incentive pool to be defined and sized upfront to account for poten - tial dilution, ensuring clarity on post-investment ownership structures. From a process perspective, the creation or expansion of an incentive pool often forms part of the capital increase approved during the fund - ing round. The shareholders’ meeting, usually
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