Have Stock Option Plans (‘SOP’s), reached their legal maturity in Brazil? While labour courts appear to have reached a balanced interpretation about them, they seem to now be attracting increasing attention from the Federal Revenue Service and there are signs of change in recent decisions passed by federal tax administrative court (‘CARF’) relating to their taxation.
SOPs are a valuable management tool for companies to align interests and to retain employees and officers. As a result, they are becoming popular in Brazil, especially among small companies and their investors, which are aiming at going public, and subsidiaries of multinational companies.
To the labour courts, an SOP does not constitute employee compensation because of its transactional nature and the risk of loss. Their tax treatment is more complex, though. At least three elements require special attention from those establishing an SOP:
- the moment at which the employee or officer acquires the right to the stock for income tax purposes;
- the discounted price, which must be reasonable not to jeopardise the plan’s integrity;
- in the case of multinational companies that offer in Brazil stock traded abroad, the rules of intercompany reimbursement or offsetting, which might trigger labour and tax risks.
In addition to these factors, there is a new development in the treatment of SOPs in the CARF. It consists of considering the risk of stock value falling below hit price insufficient to make the stock exempt from social security taxation. According to this interpretation, a risk of losing money invested would be necessary. The public policy goal of collecting taxes is understandable, but this shift may not be upheld in the courts.
Lastly, it is worth mentioning that the granting of stock through profit sharing programmes (‘PLR’) is permitted, provided however that the company observes the provisions of Law 10.101/2000 on PLR. These statutory conditions might pose a considerable drawback to the use of these programmes, as they include provisions on collective negotiation and publicity and specific rules relating to granting and mechanisms to determine eligibility and payout. In theory, a company might try to replace negotiation with the union or workers committee by an individual contract (Labour Code 444, paragraph added by Law 13,467/2017). But it is too soon to forecast if federal and labour courts will uphold this. Is it worth the tax risk? Possibly not.
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