Taxation of Brazilian stock option plans by social security taxes on the payroll

Brazil does not have tax legislation setting forth the treatment for long-term incentives based upon stock options. As a consequence, whether social security taxes imposed on the payroll will be imposed depends on a case-by-case analysis, to claim that they are not remunerative benefits and thus not subject to this tax.

Recent tax audits resulted in tax assessments to claim social security taxes from the companies that granted stock options to employees and non-employees. Tax authorities´ arguments were based on the remunerative nature of this kind of long-term incentive plan: since the beneficiaries had an employment/working relationship with the issuer of the stock options, tax authorities claimed that the amounts perceived had the purpose of compensating services rendered. Companies involved in such tax assessments presented the respective defences to the Administrative Tax Court.

On the other side, jurisprudence issued by labour courts established parameters to differentiate a remunerative long-term incentive based on stock options from those plans that do not present this remunerative nature:

• Voluntariness: the beneficiary voluntarily adheres to the long-term incentive plan;
• If the beneficiary needs to invest his/her own financial resources to exercise the options; and
• If the investment is exposed to the inherent risks of the stock market.

Companies´ defence against the tax authorities´ assessments mentioned before were based on the parameters construed by labour courts´ jurisprudence.

The Administrative Tax Court (competent to decide the tax cases) analysed closely the first two cases that came before it to see if the three conditions stated by labour jurisprudence were met by the plans adopted. The Administrative Tax Court decided that the risk conditions were not present so the social security tax on the payroll should be imposed.

Though the decisions were unfavourable to the companies assessed, the Administrative Tax Court clearly demonstrated that the parameters construed by the Labour Court´s jurisprudence shall be observed, to decide if the long-term incentive has a remunerative nature, granting more certainty to taxpayers: there is no space for a tax court´s decision stating that taxes shall be imposed, and at the same time for Labour Court decisions stating the contrary.

Companies that grant long term incentives based on stock options should review to see if the three conditions stated by Labour Courts´ jurisprudence mentioned before are met, to assess the tax risk involved in this kind of incentive, as tax assessments are becoming frequent.

Maria Isabel Tostes da Costa Bueno (isabel@mattosfilho.com.br) is a partner of Mattos Filho in Brazil.

Share this article