What it is, how it works, and who it is suitable for.
If you are an entrepreneur or a company director, you know full well that the tax burden and cash flow management are the two constant challenges you face on a daily basis. We often focus on how to increase turnover, forgetting that there is a legal, powerful and all too often underutilised tool for optimising cash flow and safeguarding your future: the TFM (End-of-Term Settlement).
In this article, we will look at why, from a financial planning perspective, the TFM is not just a “bonus”, but a cornerstone of corporate asset management.
1. What is TFM and how does it differ from TFR?
Whilst severance pay (TFR) is a statutory obligation for employees, the TFM is a form of deferred remuneration intended for those with governance responsibilities within the company (directors, co.co.co).
The big difference? It’s optional and can be tailored to suit individual needs. There are no fixed scales: the amount is decided by the members and included in the accounts year on year.
2. The 3 Pillars of Financial Advantage
Why do financial advisers almost always recommend setting up a TFM? For three key reasons:
A. Immediate Tax Efficiency (for the Company)
The amounts set aside for the TFM are fully deductible from business income for IRES purposes. This means that the company reduces its taxable profit today by setting aside sums that will only be paid out in the future. It is a means of achieving immediate tax savings that generates internal liquidity.
B. Favourable Tax Treatment (for the Director)
This is the real “treasure” of the TFM. If set up correctly (with a certified date prior to the assignment), when you receive the payment, the sums are not added to your other income (thereby avoiding the top IRPEF tax bracket of 43%). Instead, they are subject to separate taxation, based on your average tax rate from previous years. The net saving can easily exceed 15–20% compared with a standard overtime payment.
C. Heritage Protection
The TFM set aside is, by its very nature, a financial reserve. From an asset protection perspective, diversifying one’s wealth between current income and a deferred “nest egg” is a wise move to safeguard one’s future standard of living against any fluctuations in business.
3. Turning a debt into an opportunity: The TFM Policy
Many companies make the mistake of setting aside the TFM only “on paper” (as an accounting entry), thereby running the risk of not having the necessary cash when the director steps down.
This is where financial strategy comes into play. The most efficient solution is to take out a dedicated insurance policy:
- Zero liquidity risk: The insurance company will pay out the sum exactly when it is needed.
- Returns: The amounts set aside do not remain idle, but can be invested in segregated accounts or funds that protect purchasing power over time.
- Exemption from attachment and seizure: The capital invested in life insurance policies specifically for the TFM benefits from additional legal safeguards, making your future even more secure.
The 2 Golden Rules for getting it right
To avoid a visit from the tax authorities, remember:
- The Certified Date: The TFM must be approved first from the start of the term of office (via certified email or digital signature).
- Reasonableness: The provision must be proportionate to the company’s actual circumstances. A severance payment of 1 million euros for a company with a turnover of 100,000 will not go unnoticed.
Conclusion
The End-of-Term Payment is one of the few mechanisms that reconciles the company’s accounts with the director’s personal finances. Not making use of it effectively means leaving money on the table for the State.
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Salvatore Longo
Mobile: 338 740 7359
website: www.salvatorelongo.it
This document is provided for information purposes only and does not constitute, nor should it be construed as, financial, legal or investment advice.
