Important Brazilian ruling on stock option plan earnings

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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

Published in: Law
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Important Brazilian ruling on stock option plan earnings

  1. 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. 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 About Ius Laboris Ius Laboris is an alliance of law firms offering employers cross-border employment and pensions law advice. It has 1,300 specialist HR lawyers in over 150 cities and 44 countries. Ius Laboris offers access to the best local HR law experts in one global team with 20% more ranked employment lawyers (Chambers & Partners, November 2013) than any other global HR legal services organisation. Further, Ius Laboris has 50% more recommended lawyers than its nearest rival in a recent survey in PLC's employment law guide. Clients include many household names as well as multinational companies in all sectors ranging from energy, retail and technology to pharmaceuticals. For more information on Ius Laboris, please visit iuslaboris.com.

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