Trattamento di Fine Mandato (TFM), or Director End-of-Mandate Compensation, is one of the most important instruments in corporate governance, particularly for small and medium-sized enterprises (SMEs). While it was initially applied mainly by large corporations, TFM is increasingly being adopted as a strategic tool by SMEs aiming to optimize both corporate management and tax planning. This type of end-of-service benefit for directors provides significant corporate and fiscal advantages, including potential tax deductions, improved executive retention, and structured succession planning.
However, TFM also carries risks if not properly structured and formalized. In this article, we will examine TFM in depth, covering its legal framework under Italian law, fiscal treatment, procedural requirements, and the potential pitfalls companies and directors should be aware of.
1. What Is Director End-of-Mandate Compensation?
TFM is a sum of money that a company agrees to pay a director upon the conclusion of their mandate. Although it may appear similar to TFR (Employee Severance Pay), there are notable differences. While TFR is strictly regulated by law and accumulates annually according to a fixed formula, TFM is more flexible and can be customized based on the agreement between the company and the director.
These agreements can either be included directly in the company’s bylaws or approved through shareholder resolutions. The flexibility of TFM allows companies to tailor compensation in line with their financial situation, corporate strategy, and executive roles.
The Italian Civil Code (Articles 2364 and 2389) provides the legal foundation for TFM. Although it does not specify exact rules for calculation, it acknowledges the company’s right to grant additional compensation to directors. This may include end-of-mandate payments and other discretionary bonuses. It is crucial that both the director and the company clearly agree on the amount, conditions, and timing of the payment, ensuring legal enforceability and tax deductibility.
2. Key Features of TFM
TFM is generally paid at the end of the director’s mandate, unless exceptional circumstances occur, such as resignation or early termination without cause. From a corporate perspective, TFM represents a tax-deductible expense, reducing the taxable base for corporate income tax (IRES).
Unlike TFR, which accrues automatically and is subject to statutory rules, TFM can vary significantly based on factors such as:
- The company’s size and financial health
- The director’s role and responsibilities
- The length of the mandate
- The strategic objectives of the company
TFM serves multiple purposes:
- Offering a structured “exit package” to directors
- Aligning executive incentives with corporate performance
- Supporting fiscal planning for both the company and the director
It can be accrued annually, and its calculation can take into account various considerations, including company profitability, market benchmarks, and individual director performance.
3. Determining TFM: Legal Framework and Procedures
The determination of TFM, in both amount and disbursement, is not rigidly fixed by law. Companies have the flexibility to define it either through shareholders’ resolutions or by incorporating it into the company’s bylaws.
However, it is critical that TFM agreements are formalized in a document with a certain date and executed before the director’s appointment begins. This is essential to ensure:
- Tax deductibility for the company
- Separate taxation benefits for the director
Companies can either include TFM provisions in their bylaws as part of corporate structure or adopt them later through a shareholders’ meeting resolution. If the resolution is improperly executed—for instance, if it lacks a certain date or formal registration—the tax deductibility of TFM may be jeopardized.
Proper documentation should explicitly state:
- The right to receive TFM
- The method for calculating the payment
- The timeline and procedure for disbursement
By formalizing TFM in this manner, companies protect both their tax position and their legal obligations toward directors.
4. Tax Treatment of TFM: Accrual and Deductibility
One of the most attractive features of TFM is its fiscal management potential, offering tax optimization opportunities for both the company and the director.
For the company:
- TFM is considered a deductible business expense, meaning that the accrued amount each year can reduce the company’s taxable income, lowering corporate income tax liability (IRES).
- Deductibility is only granted if the TFM is properly formalized according to Italian tax law.
For the director:
- TFM is taxed separately upon disbursement, under Article 17, paragraph 1, letter c) of the Italian Income Tax Code (TUIR).
- Separate taxation allows directors to benefit from a more favorable tax regime compared to ordinary income, as TFM is not included in the annual income for the year it is received.
If the TFM agreement is not formalized before the mandate begins, the director will be subject to ordinary taxation, resulting in a higher tax burden. Therefore, precise documentation with a certain date is essential for both tax efficiency and legal compliance.
5. Managing Special Situations
Certain situations require careful handling to maintain the benefits of TFM:
1. Waiver of TFM:
A director may voluntarily waive their TFM for strategic reasons, company crises, or personal choice. Italian jurisprudence treats waived TFM as an increase in the director’s equity stake, which has implications for corporate accounting and taxation.
2. Directors with special mandates:
Directors holding temporary or specialized roles, such as vice presidents or project-specific directors, may have TFM calculated separately. In these cases, TFM determination can be delegated to a specific corporate body, such as the board of directors, which calculates the amount annually while maintaining the separate taxation treatment.
By managing these scenarios properly, companies ensure both compliance with tax law and fair treatment of directors.
6. Risks and Pitfalls: Avoiding Tax and Legal Issues
Despite its benefits, TFM carries risks if mismanaged:
- Lack of formalization: If the TFM agreement is not documented with a certain date, the company may lose deductibility, and the director may lose separate taxation benefits.
- Unauthorized modifications: Changes to TFM during the mandate without proper resolution may invalidate the agreement and trigger tax issues.
- Excessive amounts: TFM must be proportionate to the director’s position and company size. Overly high TFM may attract scrutiny from tax authorities, increasing the risk of audits or penalties.
Proper planning, realistic calculations, and precise documentation are critical to maximizing benefits while avoiding risks.
7. Conclusion
Director End-of-Mandate Compensation (TFM) is a versatile and strategic tool for Italian companies. When correctly implemented, it:
- Supports tax planning and optimization
- Rewards directors at the end of their mandate
- Facilitates smooth succession planning and corporate governance
However, TFM must be carefully structured in accordance with Italian corporate and tax law to prevent fiscal or legal issues. Only through meticulous planning, clear agreements, and proper documentation can companies and directors fully benefit from this instrument without exposure to unnecessary risk.
By leveraging TFM effectively, SMEs and larger corporations alike can align executive incentives with corporate goals while taking advantage of favorable tax treatment, making TFM a key element of modern Italian corporate governance strategy.
