How to make directors’ severance pay (TFM) deductible in newly incorporated companies

When incorporating a limited liability company (LLC), the issue of directors’ severance pay (known in Italy as TFM – Trattamento di Fine Mandato) is often overlooked. However, improper setup during incorporation can make provisions non-deductible and cause directors to lose favorable tax treatment.

Italian Tax Authority Ruling 901-4/2018 definitively clarified how TFM should be managed in newly incorporated companies, distinguishing between statutory provisions (mandatory) and subsequent resolutions determining the amount.

⚖️ Essential regulatory framework

• Article 105 TUIR → allows accrual-based deduction of TFM provisions, but only if the director’s right is established by a written document with a certified date prior to the mandate’s start.
• Article 17 TUIR → provides for separate taxation of TFM for directors, under the same formal conditions.
• Ruling 901-4/2018 → for newly incorporated companies, deduction is allowed from the first fiscal year if TFM quantification occurs through a document with a certified date concurrent with appointment or, at latest, by December 31st of the same year.

🧩 The two-step solution: bylaws + resolution

🔹 1. Statutory provision (required)

The bylaws must provide for the possibility of granting directors a TFM, as this is the only way the right finds its foundation in the company’s constitutive act.

However:

• No need to specify the amount or calculation formula in the bylaws;
• Sufficient to include a clause authorizing shareholders to establish it later through resolution.

📘 Correct statutory clause example:

“The shareholders’ meeting may resolve to grant directors a severance payment pursuant to Article 105 TUIR, determining criteria and amount through specific resolution.”

🔹 2. Appointment resolution (operative)

During incorporation, concurrent with directors’ appointment, shareholders must resolve the actual TFM attribution, specifying objective calculation criteria, even if compensation is partially variable.

📘 Operative resolution example:

“The meeting resolves to grant the director a severance payment equal to six monthly installments of the gross annual compensation due at termination, accrued pro-rata for each fiscal year and provisioned in the balance sheet pursuant to Article 105 TUIR.”

🔢 Linking TFM to variable compensation

TFM can be linked to directors’ annual compensation, even if it includes variable components (bonuses, targets, results).

Key requirements:

• Compensation criteria must be established by shareholders’ resolution;
• Must be objective and verifiable (e.g., profit percentages, performance indicators, revenue thresholds);
• TFM calculation formula must reference these parameters.

⚠️ Common mistakes to avoid

The main errors that compromise TFM deductibility and their consequences are clearly outlined in the comparison table.

✅ Best practice summary

To make TFM deductible from the first fiscal year in a newly incorporated LLC:

1. Include in bylaws the possibility of granting TFM to directors, without fixing the amount.
2. Approve concurrent with appointment a certified resolution defining amount or calculation criteria.
3. For variable compensation, specify objective parameters in the resolution.

👉 This way, the company can deduct TFM on an accrual basis, directors benefit from separate taxation, and bylaws remain flexible and updatable over time.