Brazil tax court decision on withholding of individual income tax on employee stock options: key takeaways for companies

Global Tax News


A recent decision by the Brazilian Federal Administrative Tax Court (CARF) partially settles the debate between Brazilian tax authorities and companies regarding the treatment of employee stock options for purposes of withholding individual income tax (WHT). The court reaffirmed tax authorities’ argument when it held that a major financial institution was required to deduct WHT on income from stock option plans to employees because the plan was in essence variable compensation to employees.

Still, the decision is subject to a motion to clarify and could be appealed.

Common questions and key takeaways for multinational companies doing business in Brazil and taxpayers include:

1.    What are the clear rules that emerge from the court’s decision?

In essence, if an employee is granted a stock option plan that is treated as a form of variable compensation, it is subject to WHT. Brazilian tax law mandates employers to withhold income tax from employee’s compensation, and employers’ failure to collect may accordingly result in liability.

2.    How did the court determine that issuing employee stock option plans qualifies as “variable compensation”?

It is not clear what would be necessary for employee stock option plans not be considered variable compensation. In this particular case, tax authorities based the tax assessment on specific information about the stock option plan reported in official documents, which made clear reference of the “variable compensation” nature of such a plan. The presence of such language was a determinative factor in the court’s ruling coupled with the finding that the employee had no risk.

3.    Does the court clarify which event triggers WHT (vesting or exercising)?

The moment when the taxable event occurs is still a matter of controversy in Brazil. In this particular case, the court’s ruling is not clear. Since the decision is subject to a motion to clarify and/or appealed, such controversy may be further clarified in this case or another.

4.    Are there any important steps to take in the future?

In the meantime, to mitigate tax, labor and securities law related risks, taxpayers should review language associated with any stock options plan to avoid conflicting positions regarding its status as variable compensation, or lack thereof. 

*Alex Jorge and Humberto Marini are partners in the Tax practice of Campos Mello Advogados, an independent law firm in Brazil.