Brazil: Tax Department Ignores Court Ruling, Continues to Tax Vacation Bonus

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Feb. 24—Despite a high court ruling against social security taxes on employee vacation bonuses, Brazil's tax department says it will continue to assess the levy on employers.

Mandatory vacation bonuses amount to an additional payment of one-third of an employee's monthly salary. In March 2014, Brazil's superior court of justice, the country's second highest appeals court, ruled that companies do not have to pay social security taxes on payments to employees for these bonuses, an exemption government officials estimated at the time would reduce social security tax collections by $2.4 billion a year.

In response to a taxpayer query, however, the tax department released a statement Jan. 16 saying that it would continue to tax vacation bonuses because the superior court failed to address the provisions of a 2002 law permitting this taxation. The tax department said that it would continue to tax companies for their vacation bonus payments pending a ruling from the supreme court where several cases are now under consideration.

Tax Department Policy ‘Amazing'

Corporate attorneys reacted angrily to the department's position.

“It is amazing how the tax department can insist on charging social security taxes on these payments,” Rodrigo Rigo Pinheiro of law firm BCBO Attorneys said, adding that the supreme court has already ruled that “only payments incorporated into a worker's salary are subject to social security taxation.”

According to Fabio Medeiros of law firm Machado Associates, several companies are already preparing suits to eliminate the vacation bonus taxation and to recover past payments based on the superior court's ruling.

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.