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Brazil: Remuneration of executives and the labour reform

Brazil executives black and white

The remuneration of executives is always an object of attention for the Federal Internal Revenue Service. Whenever there is a new remuneration policy introduced in the market, the Internal Revenue checks whether the adjustment is remuneratory in character, and whether such expense will be deductible by the company when ascertaining its actual profit.

Negotiated elements do not always necessarily have a remuneratory character, being not the object of taxation, notably due to the contributions to the Social Security and Welfare.

Situations as the payment of contract bonus, retention bonus, consideration for non-competition clauses and profit sharing  are just a few of the matters which have been discussed by the Internal Revenue and companies in judicial and administrative courts.  

We have noticed an intense debate about the share purchase option plans and arrangements for payments based on shares. On one side, taxpayers argue that such contracts do not have a remuneratory character, but rather a merchant one; on the other side, the Internal Revenue alleges that the elements of these contracts denounce the remuneratory intention, justifying the taxation.

We also note an intense debate as to the fruition of social contribution exemption and the possibility of deducting expenses with payments of profit sharing or results granted to those which occupy management positions. This is because, under the perspective of the Federal Internal Revenue, business administrators would not be included in the exemption rule, only employees – and only employees who do not occupy administration positions, at that.  

There have already been significant decisions within the administrative sphere concerning this debate. Recent decisions of the Administrative Council of Fiscal Appeals, the highest court of analyses of notices of assessment issued by the Internal Revenue, stated that payment plans based on shares, including share purchase option plans, would have a remuneratory character.  

Likewise, as to profit sharing, it has been consolidated within the administrative sphere that only payments of profit sharing or results carried out under the terms of Law no. 10.101/00 would tax exempt. Specifically on this matter, there is also a debate as to the comprehensiveness of administrators under the mentioned law, which shows that the discussion should be further extended.

Within the judicial sphere, the discussions are still in their infancy. We also notice just a few decisions in the Federal Regional Courts, and in the Superior Courts, about these policies of remuneration to executives; mainly payments based on shares and profit sharing. 

With respect to profit sharing, recent one-off decisions by the judicial courts indicate that there would be restriction of the use of tax exemptions on payments made to administrators. On the other hand, with respect to payments based on shares, in recent decisions the courts have recognised the merchant nature of these contracts, stirring the debates between the Internal Revenue Service and the taxpayers.

It was within this context that Law no. 13.467/2017, known as “labour reform”, and more recently, Provisional Measure no. 808, of November 14, 2017, known as “reform of the reform” were published.

Such norms brought significant changes to the labour relations governed by the Consolidation of Labor Laws (“CLT”) – Decree-Law no. 5.452/1943, “in order to regulate the legislation to the new labour relations” (part of the preamble of the law). The mentioned changes have not reached only elements of the “labour law”, but they have also directly impacted the source of financing of social security.

Remuneration of executives

To the reality of what we are discussing herein  – remuneration of executives – two points of the reform were more significant.

The first of these concerns the “prevalence of the negotiated over the legislated”. For employees who have a university degree and receive monthly remuneration above twice the maximum limit of benefits of the General Regime of Social Security (currently BRL 11,062.62; $3,376.64), the reform authorised individual agreements to “freely” rule about certain matters, even if the legislation or collective negotiations (agreements or collective conventions) provide differently, among them: position and salary plans, remuneration by productivity, incentive premiums and profit sharing.   

Thus, executives who have employment link, who were previously linked exclusively to the provisions under the legislation or in collective negotiations, can have greater autonomy when negotiating certain elements of their contracting with companies.  

The second aspect refers to the payment of premiums.  

Law no. 13.467/2017, besides changing exclusive rulings of the employment relation, excluded the “premiums” from the basis for calculation of the social contributions destined to social security.

This innovation is diametrically in opposition to what was part of the legislation before, which provided for the taxation by the social contributions of the variable parts of the remuneration, both of employees and of other workers, including the executives.  

While in the reform of the CLT, the changes pursued to set a few minimum criteria to define what would this premium be. For the other workers, there was not any imposition of an objective criterion defined under the law. Thus, a possible interpretation would be that any premium paid as remuneration would be excluded from the taxation by the contributions to social security.   

In view of all this, many companies have re-analysed their remuneration policies, studying moves to migrate from certain models to others, or assessing the risks of assuming certain postures in relation to fiscal treatment.

However, we understand that this moment calls for caution. Besides the action we can already expect from the Internal Revenue Service – of questioning the payment of premium, as as it has been doing with profit sharing and with payments based on shares – many other departments and class entities have manifested criticism against the innovations introduced by the reform.

For these reasons, we believe that the debates between the Internal Revenue Service and the taxpayers will only intensify.

This article was prepared by Isabel Bueno and Luiz Fernando Goedert Leite of Mattos Filho, International Tax Review's tax disputes correspondents in Brazil.

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