Many companies offer employee stock option (ESO), but in Brazil there are specific aspects to consider when drafting the contract, since it is a fairly recent movement.
The goal – whether is to grant compensation or to effectively retain talents – must me previously defined, considering corporate, labor and tax liabilities over time.
A recent ruling rendered by the Brazilian Federal Administrative Tax Court (CARF) has establish that if the employee stock option is a commercial contract (and not a compensation agreement), the capital gains should not be considered taxable employment income (as type of remuneration and benefits received by an employee from an employer). Therefore, the gains are no subject to Personal Income Tax.
It is a very important rulling, favorable do taxpayers, and it shows the importance of the details when structuring the stock options programs in Brazil. The tax burden can change substantially.
On the one hand, taxable employment income is subject to personal income tax levied at progressive rates that can easily reach 27,5%. On the other hand, individuals are exempt from withholding tax on capital gains on the sale of stocks on the Brazilian market if the sale proceeds are equal to or lower than BRL20,000 in the month in which the sale occurs. If not exempt, private individuals, residents and nonresidents in Brazil are subject to a withholding tax of 15% (up to BRL5,000,000). If the nonresident individual is in a blacklisted jurisdiction (tax haven), the capital gains will be subject to a fixed 25% tax rate.
It is important to notice that the Brazilian Federal Administrative Tax Court had already set criteria in order to exclude the stock options program gains from Social security contributions taxation. The same criteria are used in defining if it is taxable employment income or capital gains for income tax purposes.
To be excluded from taxable employment income, among other criteria, the employer-provided stock options program need to be (i) unrelated to the employee performance and (ii) unrelated to the employee productivity goals. It cannot have incentive awards’ characteristics
Thus, the tax burden varies significantly depending on the specific characteristics of the contract. If the company’s goal is using the stock plan program as a talent retention plan, unrelated to employee compensation, it is important to double attention when structuring the program in Brazil.
