Brazil: Court Rejects Taxation of Employee Vacation Bonus

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March 31—Companies battling Brazil's tax department over the taxation of employee vacation bonuses won an important court victory March 24.

The federal tax department has required companies to pay social security taxes on payments to employees for vacation bonuses, claiming that these bonuses constitute employee salary. The required bonuses amount to an additional payment of one-third of an employee's monthly salary. Tax collections on this bonus have been estimated at $2.4 billion a year by government officials.

In March of last year, Brazil's superior court of justice, the country's second highest appeals court, ruled that companies do not have to pay the tax, but this January the tax department released a statement that it would continue to tax vacation bonuses.

In its March 24 ruling, Brazil's highest labor court, the supreme labor court, ruled that the tax cannot be applied to the vacation bonus, which is not salary but a “compensatory” payment established by Brazil's constitution and therefore not subject to social security taxation. This bonus, the court stated, “is not meant to cover services provided by employees” and does not constitute salary.

The court did, however, uphold the tax department's right to tax the normal payment of one month's salary during an employee's vacation period, which in Brazil is 30 days. According to the court, this represents a salary payment while the extra one-third does not.

Still to be heard from on this issue is Brazil's highest court, the supreme federal court, where several cases are under consideration.

To contact the reporter on this story: Ed Taylor in Rio de Janeiro at

To contact the editor responsible for this story: Rick Vollmar at

For more information on Brazilian HR law and regulation, see the Brazil primer.