The Brazilian Administrative Council of Tax Appeals (Conselho Administrivo de Recursos Fiscais – “the CARF”) has decided that social contributions are owed on amounts earned by employees under stock option plans. Read our article to learn more about the implications of this important ruling. With thanks to our Brazilian member firm Veirano Advogados. Originally posted on the Ius Laboris Knowledge Base: www.globalhrlaw.com

1. Important Brazilian ruling on stock
option plan earnings
Publication Date: 28 May 2014 | Author(s): Luiz Guilherme Migliora &
Ian Muniz Member Firm(s): Veirano Advogados Country: Brazil
The Brazilian Administrative Council of Tax Appeals (Conselho
Administrivo de Recursos Fiscais – “the CARF”) has decided that social
contributions are owed on amounts earned by employees under stock
option plans.
The CARF was considering two cases in which the Brazilian tax authorities
sought the payment of social security contributions on gains resulting from
stock options. The key issue was whether the amounts earned by the
individuals should be regarded as employee compensation, thereby
triggering the application of employment-related benefits and taxes totaling
approximately 60%.
The basis of the CARF’s decision was that earnings and gains derived
from stock option plans may be subject to payroll taxes if the plan is not
“economically sound”. For example, the CARF considered a strike price
that was much lower than the stock price, on grant date, would be a strong
indication that the plan was artificial - hiding what was in reality payment of
compensation to the employees. The main takeaway from these decisions
is that stock options will be analyzed on a case-by-case basis.
Although there have not so far been many cases of this nature decided in
Brazil, the clear tendency of trial courts, courts of appeal and even the
superior labor court has been to declare that stock option earnings do not
trigger payroll taxes or affect benefits.
The rationale behind the previous decisions was clear. Stock options
involve the possibility of two employees in the same position having
different gains: the inherent uncertainty makes it impossible to consider
such benefits as having the nature of salary. Salary is something
employees can count on and does not depend on their choice as to when
to exercise an option, or on market behavior.
The latest CARF decisions effectively create a new, additional requirement
- economic soundness - for a stock option plan to be free from payroll
taxes and labor benefits.

2. 2
An alternative approach that has been adopted, albeit on a small scale, is
the implementation of stock option plans through profit sharing plans that
comply with the provisions of Federal Law 10,101/2000. The amounts paid
under properly structured profit sharing plans are unequivocally not
considered in the calculation of payroll taxes and benefits, so this is
definitely an avenue worth pursuing. It allows employers to implement
long-term compensation schemes through stock options, without creating
uncertainty as to whether additional costs may subsequently be imposed.
Originally posted on the Ius Laboris Knowledge Base:
www.globalhrlaw.com
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