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17/09/2024HIGHLIGHTS
Superior Court rules that stock options are not wages and are subject to lower income tax
Ruling favors taxpayers and provides legal certainty for the practice
On September 11, the Brazilian Superior Court of Justice (STJ) held that stock options do not constitute part of an employee's wages and are therefore subject to lower income tax (IR) rates.
The stock option plan (SOP) is an instrument widely used abroad, particularly in the United States, allowing companies to offer stock options to select employees. However, in Brazil, this matter lacks specific regulation and is the subject of ongoing debates in both labor and tax law.
The Administrative Council for Tax Appeals (CARF), for instance, has issued decisions unfavorable to companies, ruling that earnings from stock option plans have a salary-like nature and are subject to charges such as contributions to the Severance Indemnity Fund (FGTS), 13th salary, vacation pay, and the one-third vacation bonus. In contrast, the Regional Labor Courts (TRTs) and the Superior Labor Court of Brazil (TST) have consistently held that these earnings do not constitute wages.
The Superior Court has now brought a new resolution to the controversy. Involving Recurring Issue No. 1.226 (Special Appeals 2069644 and 2074564), the decision was delivered by the 1st Section of the STJ. The key issue under consideration was the legal nature of stock options: whether they are linked to employment contracts (as wages) or considered purely trading instruments. This distinction determines both the applicable income tax rate and the point at which the tax is imposed.
The discussion, therefore, focused on determining:
- whether the income tax rates should range from 15% to 22.5% on the sale of shares, and levied only on capital gains; or
- whether it should follow the progressive income tax table, with rates up to 27.5%, applied at the time of the option exercise on the full value attributed at that date.
The opinion of Justice-Rapporteur Sergio Kukina prevailed: stock options are commercial in nature rather than remunerative, and no asset increase occurs to justify imposing income tax at the time the shares are acquired. The beneficiary pays to purchase the shares but does not realize an immediate gain; instead, there is only the expectation of a future profit when the shares are eventually sold, contingent on their potential appreciation in market value.
Therefore, taxation will only occur at the time of sale, if a capital gain is realized.
This decision is significant as it provides legal certainty for companies and individuals, encouraging the implementation and granting of stock option plans. These plans are valuable tools for attracting and retaining top talent by offering the opportunity to purchase shares at a predetermined price.
Support for taxpayers
With a department dedicated to assisting individuals, Domingues e Pinho Contadores stays current with tax developments to offer clients the best possible guidance. You can count on our support by contacting us: dpc@dpc.com.br.
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