Brazil: Judicial Battle Looms Over Definition of Payroll Tax

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By Ed Taylor

Brazilian companies that thought they had won a dispute over the calculation of their social security tax liabilities are now being advised to prepare for a judicial confrontation with the government.

In March, the country’s federal supreme court ruled against companies in a decision on the calculation of Brazil’s 20 percent social security tax. The court upheld the position of the revenue service that all payments to employees, whether salary or not, should be included. This contradicted a 2015 ruling by Brazil’s superior court of justice, the country’s second highest appeals court, that companies do not have to pay social security taxes on payments to employees for vacation bonuses, which are equal to one-third of an employee’s monthly salary.

The supreme court accepted the position of Justice Luis Roberto Barroso that Brazil’s constitution provides guarantees that all payments to employees in addition to salary should be considered in the calculation of the social security tax. According to Barroso, the determining factor is whether payments to employees are made on a regular basis. If they are, they constitute salary.

On Aug. 22, the revenue service issued an order instructing tax agents to disregard the superior court’s decision and follow the supreme court’s ruling that vacation bonuses are taxable.

Judicial Nightmare

This constitutes a judicial nightmare for labor attorneys, since after the 2015 decision lower courts have adopted the position of the superior court and ruled that vacation bonuses are not taxable.

The central problem is that the supreme court ruled that “habitual payments” to employees should be treated as taxable wages but did not define “habitual.” Tax officials interpreted the ruling to cover not only vacation bonuses but also such payments as maternity pay, indemnified prior notice of dismissal, and 15-day sickness leave payments. The revenue service’s Aug. 22 order dealt only with the vacation bonus and sickness leave payments.

Labor attorneys told Bloomberg BNA that the final text of the supreme court’s March ruling has not yet been released, leaving undefined the concept of “habitual payments.”

“Since the supreme court’s decision has not yet been published, we have huge judicial insecurity,” said attorney Alessandro Mendes Cardoso of the law firm Rolim, Viotti & Leite Campos.

Many companies have received favorable lower court rulings on the vacation bonus and sickness leave questions, eliminating these payments from the payroll tax calculation.

“Companies that have had favorable decisions should continue to base their actions on them, although they must understand that the situation could be reversed because of the supreme court’s ruling,” Cardoso said, adding that there is no longer any guarantee that the superior court’s 2015 decision will be maintained.

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

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

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