Brazil: Court Rejects Taxation of Company Rewards for Employees

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By Ed Taylor

Multinational companies in Brazil have registered an important victory in their efforts to reward exceptional employees.

Attempts to encourage employees to excel by granting bonuses for special contributions have been consistently frustrated by the federal revenue service, which has taken the position that financial rewards based on performance amount to salary and are subject to social security taxation.

But at the end of February, a revenue service administrative appeals court ruled in favor of a company that was taxed for financial rewards it gave to employees for having good ideas. Samarco, a mining company joint venture between Brazil's Vale and Australia's BHP-Billiton, created a good ideas program in 1999 for employees who presented acceptable proposals for environmental and job-related projects.

The revenue service treated the awards as compensation subject to social security taxes. For its part, the company argued that the payments were designed to motivate employees and could not be considered part of their salaries.

Unanimous Ruling

In their decision, the eight members of the appeals court ruled unanimously in favor of Samarco, holding that special payments to employees for ideas to help the company cannot be taxed.

“You can't admit that an amount paid when a worker has an idea, any idea, whether about work or not, has any remunerative nature,” said court member Carlos Henrique de Oliveira. “This is not a payment for services rendered under a work contract.”

Attorney Fabio Pallaretti Calcini of the law firm Brasil Salomao Matthes told Bloomberg BNA on March 13 that revenue service appeals courts had ruled against companies in other cases where employee rewards were based on meeting performance goals.

“These were different from the Samarco case in which the payments were not related to the workers' activities within the company,” Calcini said via email.

Calcini noted that Brazil's new labor reform law, effective last November, contains an article excluding the payment of discretionary rewards to employees from wages subject to social security taxes.

To contact the reporter on this story: Ed Taylor in Rio de Janeiro at correspondents@bna.com

To contact the editor responsible for this story: Rick Vollmar at rvollmar@bna.com

For More Information

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

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