Increased Labor Cost Deduction for Incremental Hiring: Clarifications on Employment Growth – Italian Revenue Agency Circular No. 1/E (2025)

As provided by Article 4 of Legislative Decree No. 216/2023, business income holders are entitled, for the 2024 tax period, to an increased deduction of labor costs related to newly hired employees under permanent employment contracts. This additional deduction, relevant for the determination of taxable income, amounts to 20% or 30%, depending on specific conditions detailed below.

Increased Deduction: Criteria and Verification of Employment Growth

The Italian Revenue Agency’s Circular No. 1/E (2025) confirms the provisions already established by law and by the Ministry of Economy and Finance (MEF) Decree: the increased deduction applies only when the following conditions are met:

• Permanent employment growth:
  The number of permanent employees at the end of the 2024 tax period must exceed the average number of permanent employees in 2023.
• Overall employment growth:
  The total number of employees (both permanent and fixed-term) at the end of 2024 must be higher than the average total number of employees in 2023.

Regarding overall employment growth, the Circular clarifies that:

[…] this represents a second level of verification that further conditions access to the benefit on the existence of an overall increase in total employees (both permanent and fixed-term) at the end of the incentivized tax period compared to the previous year. This additional requirement, defined by the implementing decree (Article 1, paragraph 1, letter i) as ‘overall employment growth,’ must coexist with the specific requirement of ‘employment growth’ mentioned above. In summary, the increased deduction is granted only if, at the end of the incentivized tax period, the increase in permanent employees is accompanied by an increase in the total workforce, including fixed-term employees.

Italian Revenue Agency – Circular No. 1/E of 20/01/2025

Il calcolo delle condizioni di incremento

Calculation of Growth Conditions

Increased Deduction and Growth Requirements

To verify the two growth conditions, it is essential to use the average employment level of 2023 as the baseline. The MEF Decree specifies that this calculation:

is obtained by summing the ratios between the number of contractually scheduled working days for each employee and 365, or 366 if the tax period includes February 29.

Legislative Decree No. 216 of 30/12/2023

The Revenue Agency further clarified that:

• The average employment (both for permanent and total employees) for the 2023 tax period is calculated by summing the ratios between the contractually scheduled working days for each employee (adjusted for part-time work) and 365 (or 366 if February 29 is included).
• This method differs from the European “Annual Work Unit” (AWU) calculation, which excludes contract terminations not attributable to the employer’s will. Under the new method, the company’s workforce must be considered as a whole, regardless of the reasons for terminations.

Special Cases

The Circular also provides clarification for specific situations:

• Transferred employees under contract transfer (Article 1406 of the Civil Code) or business/branch transfer occurring in 2024 are not included in the calculation. Workers transferred in 2024 whose contracts existed in 2023 are excluded by both the transferor and the transferee. Conversely, if the transfer occurred in 2023, the transferor excludes such workers from the 2023 computation, while the transferee excludes them from both 2023 and 2024 calculations.
• Part-time employees are counted proportionally to their working hours.
• In the case of secondments, seconded permanent employees are not counted by the host company.
• In cases of staff leasing, the user company must include leased employees proportionally to the duration of their assignment. The increased deduction applies to the user company for leased workers, provided they are employed under permanent contracts by the staffing agency.

Increased Deduction in Business Groups

For domestic business groups—that is, sets of Italian companies that are parent, subsidiary, or affiliated under Article 2359 of the Civil Code, or otherwise directly or indirectly controlled by the same entity—the increased deduction is granted only if the employment growth requirement is met.
This also applies to entities other than corporations and to permanent establishments in Italy of foreign companies.

Verification occurs in two stages:

1. At the level of each individual company; and
2. At the group level.

Specifically:

• Data for jointly controlled or affiliated companies are considered in proportion to the control or ownership share held.
• Companies affiliated but controlled by entities outside the group are excluded from the calculation.

Determination of the Applicable Deduction

The labor cost eligible for the increased deduction corresponds to the lower of the following amounts:

• The actual cost of newly hired employees under permanent contracts (as shown under income statement item B.9, pursuant to Article 2425, paragraph 1, letter B, of the Civil Code); and
• The increase in total labor costs—referring to the same income statement items—compared to the costs recorded for the fiscal year ending 31 December 2023.