Equity-based compensationTypical forms
What are the prevalent forms of equity compensation awards in your jurisdiction? What is a typical vesting period? Must the arrangements be offered to a broad group of employees, or can the employer select the participants?
In Brazil, the prevalent forms of equity compensation are stock options, restricted stocks and stock grants. The typical vesting period varies between three and five years.
The employer can select the employees who are entitled to equity-based compensation, but it is important to avoid criteria that may be considered discriminatory.
Must equity-based compensation be granted by the company’s board of directors (or its committee) or can the authority be delegated to officers or employees of the company? Are there limitations or requirements that apply to delegation?
Usually the equity-based compensation is granted by the company’s board of directors but depends on the company’s by-laws. The authority can be delegated also according to the company’s by-laws. However, in any case, stock options must be submitted to the shareholders for prior approval and the company must comply with certain rules and procedures provided by the Brazilian Securities Commission.Tax treatment
Are there forms of equity compensation that are tax-advantageous or disadvantageous to employees or employers?
Yes. According to the Brazilian tax authorities’ current understanding on the matter, all equity compensation structured as share-based payment directed to the employer’s statutory directors will be tax-advantageous to the employer owing to the possibility of deducting the corresponding expenses for corporate income tax purposes, provided they are treated as compensation for tax purposes. As a rule, expenses related to variable compensations paid to statutory directors, such as bonuses, are non-deductible for corporate income tax calculation purposes. However, because of a specific rule, share-based payments paid to statutory directors and employees can be deducted.
Specifically, with regard to stock options, it may be possible to sustain that certain structures should not be taxed as compensation, resulting solely in a capital gains tax charge at the employee’s level upon sale of the corresponding stock or share. However, the tax authorities tend to disagree with such a position, arguing that all forms of equity compensation should be taxed as compensation. There is currently a relevant discussion in Brazil’s administrative and judiciary courts on the matter.Registration
Does equity-based compensation require registration or notice? Are exemptions, or simplified or expedited procedures available?
Yes. Stock options must be submitted to the shareholders for prior approval. Furthermore, corporations must comply with certain rules and procedures provided by the Brazilian Securities Commission.Withholding tax
Are there tax withholding requirements for equity-based awards?
Whenever an equity-based award is treated as compensation for tax purposes, withholding income tax will apply at progressive rates (the maximum rate of 27.5 per cent) upon the delivery of the equity instrument to the participant.
However, as previously explained, it may be possible to sustain that certain stock option structures should not be taxed as compensation, due to the absence of a specific legal provision regulating the taxation of stock option plans (see question 19). In this case, withholding income tax would not apply. However, note that tax authorities tend to disagree with such a position, resulting in a relevant discussion in Brazil’s administrative and judiciary courts on the matter.
To summarise, based on certain administrative and judicial precedents on the matter, whether a stock option plan is subject to taxation requires a case-by-case analysis to verify if the plan is a commercial contract or (deemed to be) part of the participant’s compensation. A plan will be deemed to have a commercial nature if the following conditions are met:
- the participant accepts the grant as an investment opportunity, independently from the employment relationship (voluntariness);
- the exercise of share options must be performed through the payment of a certain price by the participant, and the price cannot be symbolic (burden); and
- the investment must be subject to common market fluctuations (risk).
However, if such conditions are not met, and the share-based plan has a compensation nature, withholding income tax will be levied on such payments.
Note that in 2014, the Brazilian government enacted a new law (Federal Law No. 12,973/14) that, among other provisions, specifies the general rules for a company to deduct expenses incurred from share-based payments from its corporate income tax. This law refers to such payments as ‘compensation in exchange of services rendered by employees or similar’. Although the law does not specifically state whether income taxes affect share-based plans or not, it is possible that tax courts may come to recognise such plans as compensation for tax purposes, regardless of their specific characteristics.Inter-company chargeback
Are inter-company chargeback agreements between a non-local parent company and local affiliate common? What issues arise?
Yes. Inter-company chargeback agreements between a non-local parent company and local affiliate for equity compensation purposes are common in Brazil. In such structures, Brazilian accounting rules (following International Financial Reporting Standards) will regulate the corresponding accounting adjustments to be carried out by the local affiliate in order to register the corresponding agreement.Stock purchase plans
Are employee stock purchase plans prevalent or available? If so, are there any frequently encountered issues with such arrangements?
In general, stock options are available, but not prevalent. They are more frequent when considering large, publicly listed corporations. The main issue with such structures is related to taxation by withholding income tax and social security contributions, as described in question 21.