Brazil: Tax Courts Rule for Companies in Dispute over Taxation of Stock Option Plans

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By Ed Taylor

April 20—After suffering defeats for two years, Brazilian companies have scored three straight victories in challenges to the taxation of stock option programs.

Since 2013, the Brazilian tax department has adopted the policy that capital gains registered by company employees from stock option plans should be treated as salary and therefore subject to a 20 percent social security tax. The department's administrative courts, known collectively as the Administrative Council for Fiscal Appeals, have ruled in favor of this taxation but in three successive cases in March companies emerged victorious.

The ruling in the first case, published in the Official Gazette on March 17, involved the Brazilian food giant BRF, the world's largest poultry producer. In this as in previous cases, the tax department argued that stock options are benefits that amount to remuneration because employees are allowed to buy the shares at below market values which they can later sell without risk at higher values.

The company countered that its stock option program was not remuneration but an incentive for employees who used their own funds to buy the shares. BRF also said that the price it set for the shares offered employees was the average over three stock market sessions preceding the purchase and cited a 2010 ruling by Brazil's supreme labor court that stock options could not be treated as salary bonuses.

‘An Investment Opportunity'

The court's majority found that BRF did not provide funds for the purchase of the shares sold to employees and that its only role was to identify the employees who were offered the option.

“The stock option plan is merely an investment opportunity provided to the company employee at his own risk,” said court councilor Gustavo Vettorato in speaking for the majority. “In this case, the value paid was not set in advance but was the market value.”

Based on this argument, the court majority held that the company's stock options cannot be considered salary “because they are merely a sale and purchase operation of stock rights that is regulated by civil law.”

The second case in favor of taxpayers involved Brazil's largest private bank, Itau Unibanco. The bank did not provide funds to its employees for the purchase of bank shares, shares were sold at their average market value over the previous 90 days and half of the shares purchased could not be sold for two years.

Based on these facts, the court held that there was nothing in the bank's stock option plan that differed from the normal mercantile nature of stock sales and purchases.

The third case involved Brazil's stock market, Bovespa, and the tax assessment was dismissed for procedural questions without delving into the merits.

‘An Extremely Important Precedent'

Attorneys told Bloomberg BNA that the rulings in favor of BRT and Itau Unibanco were of enormous importance because they were the first victories for companies in the tax department's appeals courts.

The BRT case “is an extremely important precedent for taxpayers,” said attorney Pedro Moreira of the law firm Celso Cordeiro, Marco Aurelio de Carvalho Attorneys.

According to Moreira, the key elements in the court's decision were that the company did not give its employees funds for the stock purchases and that the price of the stocks was set by the market. This allowed the court to determine that the stock option program amounted to a normal commercial operation.

“When these characteristics are present, there can be no taxation because there is no remuneration,” Moreira added.

For attorney Thais de Barros Meira of the firm Barbosa, Mussnich & Aragao Attorneys, the two rulings in favor of taxpayers raise issues the administrative courts will have to examine in future cases—whether companies paid for the stock purchases and whether the stock prices were set at market values.

Tax department attorney Raquel Godoy acknowledged that in the BRF and Itau Unibanco cases the administrative courts understood that the shares were sold at market value and that there was an element of risk in their purchase, elements that were not present in previous cases which went against the companies. According to Godoy, the tax department will continue to examine stock option plans on a case-by-case basis.

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


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