Modest profit
Pay is almost always preferable: it cuts IRES, is taxed at low IRPEF rates and builds a pension record.
Companies · Planning
Director pay in an SRL: how to set it up
It is the most effective lever for managing the tax burden of an SRL (Italian limited company), and also the one where the most formal errors are made. Without a shareholders' resolution the pay is not deductible, and challenges are frequent.
01 · The formal requirement
Without a resolution, director pay is not deductible
This is the starting point, because it is what generates the most challenges during a tax audit. The pay due to directors must be set by a resolution of the shareholders' meeting, or laid down in the memorandum of association.
The settled view of the Corte di Cassazione (the Italian Supreme Court) is that, without a specific decision by the shareholders, pay given to the director is not deductible from business income. It is not enough for it to be recorded in the accounts, nor for it to have actually been paid.
A further point concerns approval of the financial statements: according to the prevailing case law, approving financial statements that show the cost is not the same as a resolution on the pay, unless the meeting was expressly called for that purpose as well and the resolution appears in the minutes.
- The resolution must state the amount and period the pay refers to.
- It must be adopted by the shareholders' meeting, not by the board or director.
- It must be recorded in minutes entered in the book of shareholders' decisions.
- It is wise to adopt it before or at the start of the financial year it refers to.
- It must be renewed when the amount changes or when the previous resolution was limited to one financial year.
There is no statutory cap on the amount, but pay that is clearly out of proportion to the work done and the size of the company can be challenged as not being properly related to the business. The test is reasonableness, not a ceiling.
02 · For the company
When the cost is deductible
Director pay is deductible on a cash basis, as an exception to the general accruals rule that governs business income: it is deducted in the financial year in which it is actually paid.
There is an important tolerance: pay made by 12 January of the following year is also treated as paid in the tax period, under the extended cash principle that applies to income treated like employment income.
For IRAP (the Italian regional business tax) director pay is not deductible, unless the relationship is set up as employment. This reduces the overall advantage compared with other ways of drawing money.
| Aspect | Director pay | Dividend |
|---|---|---|
| Deductible for the company | Yes, on a cash basis, for IRES (corporate income tax) | No: it is a distribution of profit already taxed |
| Deductible for IRAP | No | Not applicable |
| Tax for the recipient | Progressive IRPEF (Italian personal income tax) by band | Final withholding tax of 26% |
| Social security contributions | INPS Gestione Separata (the separate fund at the Italian social security institute) | None |
| Pension credit | Yes | No |
| Resolution needed | Shareholders' meeting | Meeting approving the financial statements |
| Can be paid in a loss year | Yes | No: a profit or distributable reserves are needed |
03 · For the director
How the person receiving director pay is taxed
The pay is income treated like employment income, except where acting as a director falls within the scope of the person's own profession: an accountant who is a company director, for example, treats it as self-employment income.
As income treated like employment, it is subject to IRPEF at progressive rates by band, plus the regional and municipal surcharges. The company withholds tax on account and pays it over monthly.
On the social security side, contributions go to the INPS Gestione Separata, split two thirds to the company and one third to the director. The director's share is deducted from the pay slip.
The shareholder-director who works in the business
If the director is also a shareholder and works in the business on a habitual and predominant basis, registration with the artisans or traders fund may be triggered, with contributions due even when no pay is received.
- The test looks at the work actually done, not the office held
- The fixed contributions are due regardless of the pay received
- In some set-ups it is added to Gestione Separata contributions on the pay
- It is a position to settle when the company is formed, not after the first assessment
04 · Planning
How to balance what you draw
The choice between pay and dividend is never either-or: the most effective result almost always comes from a combination, calibrated on the expected profit and the shareholder's personal situation.
Pay reduces the company's IRES taxable base but is subject to progressive IRPEF and contributions. A dividend reduces nothing in the company but is taxed at a flat 26% with no contributions.
In the first IRPEF band, pay is almost always more efficient than a dividend, because the marginal rate stays low and it also builds pension credit. Moving up the bands the balance reverses, and above a certain threshold the dividend becomes more advantageous.
High profit
A combination makes sense: pay up to the IRPEF band where it is advantageous, then a dividend at 26% on the rest.
Loss-making year
No dividend can be distributed. Pay can, but it increases the loss: consider postponing it.
Reinvestment
Leaving the profit in the company is taxed only by IRES and IRAP: no further tax until it is distributed.
The shareholder's other income
Anyone who already has high income starts from a high band: pay loses its advantage over a dividend.
Nearing retirement
Pay generates contributions that count. A dividend does not. Here a purely tax-based calculation is not enough.
The calculation must be redone every year: IRPEF bands, contribution rates, profit and the shareholder's personal situation all change. A choice that was right three years ago may not be right today.
05 · Travel and expenses
Expense reimbursements and other payments
Alongside the pay, the director can receive reimbursements for expenses incurred in the company's interest. The rules follow those for employment income, with distinctions that affect the tax treatment.
- Itemised reimbursement: documented expenses for meals, accommodation and travel on business trips outside the Comune (municipality) where the company is based do not count as income for the director.
- Flat-rate reimbursement: travel allowances are exempt within the set daily limits, which differ for Italy and abroad and are reduced when meals or accommodation are also reimbursed.
- Trips within the company's Comune: allowances count in full as income, except for reimbursement of documented transport costs.
- Company car used for both business and private purposes: it generates a fringe benefit taxed on the standard ACI values, with rules that differ by date of registration and assignment.
- Insurance policies and benefits: they follow the general rules for income treated like employment income.
Reimbursements must also be provided for in the resolution or in internal rules: paying them without a resolution behind them exposes the company to the same objections as unresolved pay.
Frequently asked
The questions that keep coming up
Does the director have to be paid?
No. The office can be held free of charge, and this must be stated in the memorandum of association or in a shareholders' resolution.
Be careful with social security, though: if the shareholder-director works in the business on a habitual and predominant basis, the obligation to pay contributions to the artisans or traders fund may exist even without pay.
Can I pass the resolution on director pay in December for the current year?
It is possible, but it is the arrangement most open to challenge: a resolution passed at the end of the financial year, perhaps sized on the result that has just emerged, invites the objection that the pay was set to cut the profit.
The most solid approach is to pass the resolution at the start of the financial year, or in any case before the result is known, stating the amount and period.
Which is better, pay or a dividend?
It depends on the IRPEF band the shareholder falls into once all their income is counted. In low bands pay is almost always more efficient, because it is deducted in the company and taxed lightly on the individual; in high bands the 26% dividend becomes more advantageous.
The right answer is almost always a combination of the two, recalculated every year. With the company's figures and the shareholder's personal position, the simulation takes little time.
Can the pay be made in January and deducted in the previous year?
Yes, by 12 January: the extended cash principle for income treated like employment income applies. Amounts paid by that date are treated as received in the previous tax period.
After 12 January the deduction moves to the following financial year, even though the cost relates to the year before.
Can the company pay the director even in a loss year?
Yes. Director pay is an operating cost, not a distribution of profit: it can be paid even if the company closes the year at a loss, and in fact it increases that loss.
This is a substantial difference from a dividend, which requires a distributable profit or available reserves. In a loss-making company, pay remains the only ordinary way of drawing money.
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Deciding after the year has closed how much to pay the director exposes you to challenges on deductibility. The balance is set at the start of the financial year and checked during it.