As an HR manager, you are no stranger to the complexities of managing a multinational workforce. There is a lot to keep track of, from visa and residency requirements to navigating different benefits packages. And when employment comes to an end, either due to resignation or severance, things can get even more complicated.

If you have employees in Italy, you will need to be familiar with the TFR (Trattamento di Fine Rapporto). This blog post provides a brief overview.

What is TFR?

The TFR is a mandatory plan that all employers in Italy must contribute to on behalf of their employees. It is a distinctively Italian approach, a hybrid of deferred/severance pay (although separate payments may also be payable in the event of dismissal) and long-term savings. Contributions are salary based and made on a monthly basis.

At the end of the employment relationship, employees are entitled to receive the full amount of their TFR balance, plus any interest that has accrued. However, employees can leave their TFR balance invested with their employer, on which interest will continue to accrue. Please note that employees can select at the outset for the TFR monies to be sent to a private pension fund of their choice. In addition, they can withdraw funds earlier for specified purposes, such as purchasing a main home.

How is TFR calculated?

TFR is calculated as follows:

  • An employee’s gross annual salary (from 1 January to 31 December) divided by 13.5.
  • Less an INPS (Italy’s social security/pension agency deduction of 0.5% gross annual salary), essentially a form of insurance against the insolvency of the employer.
  • Plus an annual cost of living adjustment based on an ISTAT (Italian national savings institute) index.

Applicable taxes for TFR

The TFR may be taxed differently depending on how and when it is paid out. For instance, TFR paid via payroll is taxed according to the ordinary income tax scale rates, potentially higher than when TFR is paid out at the termination of employment.

How does the Italian TFR differ from other (sort of) severance pay schemes?

There are some ways in which the TFR differs from other schemes around the world with a similar purpose; The TFR is mandatory for all employers in Italy, regardless of company size. Comparable schemes elsewhere are sometimes only mandatory for larger companies. The TFR is based on a percentage of an employee’s salary rather than a flat rate. This means that high-earning employees stand to receive more generous payments.

Learn more about Italian TFR

Find out more about TFR on the INPS website here or find out more about our services.

If you need more support, you are welcome to contact Internago: info@internago.com