Administrative Tax Court concludes that Brazilian companies must pay social security taxes on stock option income

Brazil held that two well-known Brazilian companies were required to pay social security taxes on stock option income realized by employees. In both cases, the court found that the stock options that the companies granted to their employees in Brazil constituted employment remuneration and accordingly, were subject to social security taxes. At least one of the companies is appealing the decision.
For non-Brazilian companies granting stock options to employees of their local subsidiaries in Brazil, stock option income generally has been thought to be exempt from local social security taxes unless the local subsidiary in Brazil reimbursed the foreign parent company for the equity costs and/or took a tax deduction in Brazil for the equity costs.
These recent decisions, however, call into question the continued validity of this position and raise related questions pertaining to the nature of the granting company (foreign parent company that does not directly employ the stock option recipients vs. Brazilian company that directly employs the stock option recipients), the timing of taxation (date of stock option exercise vs. subsequent sale of acquired shares) and the social security tax treatment of other forms of equity compensation awards (such as restricted stock units).
Whether these decisions will be upheld upon appeal is questionable but we will continue to monitor these issues for our clients.