Brazilian Court Says Stock Options Subject to Income Taxes

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By Ed Taylor

Companies in Brazil offering stock option plans to their employees have suffered a setback at the hands of a revenue service administrative appeals court.

The court, part of the federal revenue service’s Administrative Council for Fiscal Appeals (Carf), ruled May 23 that Brazil’s largest private bank, Itau Unibanco, must pay income taxes on its stock option plan. The court accepted the revenue service’s argument that stock options constitute disguised salary and therefore are subject to income tax withholding.

The bank was assessed an undisclosed amount for 2009 and appealed to a lower Carf court. Having lost at that level, the bank then appealed to Carf’s superior court, whose members voted 5-4 to uphold the assessment.

In its defense, the bank argued that its stock option plan didn’t constitute salary and merely gave selected employees the option of buying shares which they could exercise or not. For the court’s majority, however, the fact that the stock option was available only to employees meant that it constituted a form of payment for services rendered.

This was the first stock option case dealing with income taxes to reach Carf’s highest court, but in recent years the Carf system has heard several cases involving revenue service claims that stock option plans are subject to a 20 percent social security tax. In 2013, the service adopted the position that the capital gains registered by company employees from stock options should be treated as salary and therefore subject to the social security tax.

Poor Record

Companies appealing this payroll taxation in Carf courts have a poor record. Of 20 cases ruled on by the tax courts between 2013 and 2016, companies lost 16.

This has led many firms to take their cases to the court system, and in June 2016, a federal court ruled in favor of the Brazilian subsidiary of Swedish multinational Skanska, the first appeals court victory by companies on this question. Skanska argued successfully that company shares are sold at market value, are subject to market risks with no guarantee of profits, and employees aren’t required to sign up for the program, which is worldwide at all of the company’s subsidiaries.

Attorneys told Bloomberg BNA that they were not surprised by the May 23 ruling against the Itau Unibanco bank given the poor track record of companies in Carf courts. According to attorney Anete Mair Maciel Medeiros of the law firm Gaia Silva Gaede, the negative results have discouraged many companies from creating stock option programs for their employees.

The superior court, like all Carf courts, is composed of eight councilors, four selected by business associations to represent taxpayers and four selected by the revenue service. In case of a tie, as occurred with the bank’s appeal, the president of the court—always a representative of the revenue service—casts the deciding vote. This tie-breaking system gives an extra vote to the revenue service side, since the president of the court votes twice.

Last December, Brazil’s bar association filed a suit with the Federal Supreme Court challenging the constitutionality of Carf’s tie-breaking procedure.

In a May 23 statement, Itau Unibanco said it will appeal Carf’s ruling either to the court itself or to the judicial system.

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

To contact the editor responsible for this story: Penny Sukhraj at

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