Following Brazil’s Labor Reform (effective November 11, 2017), it became established that: (i) bonuses do not constitute salary, even if paid on a recurring basis, do not become part of the employment contract, and are not subject to payroll taxes or social security contributions; and (ii) such bonuses are defined as discretionary payments granted by the employer in recognition of performance exceeding what is ordinarily expected.
However, under Brazilian labor law’s “substance over form” principle (known as the primacy of reality), simply labeling a payment as a “bonus” is not sufficient. Employers must be able to substantiate both the legal nature of the payment and its compliance with statutory requirements.
This leads to a practical challenge: how can an employer demonstrate, at the same time, true discretion and objectively superior performance? The need to establish clear, pre-defined performance criteria inevitably raises a tension, at what point does formal structuring undermine the very notion of employer discretion?
The discussion has also extended into the tax arena. In Administrative Ruling (Solução de Consulta) COSIT No. 151/2019, the Brazilian Federal Revenue Service established key parameters, including: (i) the payment must be made exclusively to employees (not independent contractors); (ii) it may be granted in cash, goods, or services; (iii) it cannot stem from a legal obligation or an express agreement; and (iv)the employer must objectively demonstrate both the expected performance level and how it was exceeded.
More recently, Administrative Ruling COSIT No. 10/2026 expanded the warning by replacing the term “express agreement” with “any type of arrangement that undermines the employer’s discretion.” The message is clear: employers cannot simply reclassify ordinary compensation as a “bonus”. The payment must remain genuinely discretionary and tied to exceptional performance.
At the same time, the Brazilian Federal Revenue Service clarified in this Administrative Ruling that merely establishing objective criteria in an internal policy does not, by itself, eliminate the discretionary nature of the bonus, provided there is no reciprocal arrangement transforming it into a mandatory compensation component (for example, through a collective bargaining agreement).
Even so, caution is essential. The mere existence of a written policy does not create a presumption of legal compliance. If tax authorities determine that the policy reflects a prior agreement or an expectation incorporated into regular compensation, the amounts may be reclassified and become subject to payroll taxation.
In light of this framework, it is legally defensible for companies to implement structured bonus programs, provided 4 key safeguards are observed:
1. Clear and objective performance criteria;
2. Concrete evidence that ordinary performance standards were exceeded;
3. Alignment between the written policy and actual business practice, particularly with respect to preserving the employer’s discretion;
4. Care to ensure that targets and metrics do not disguise recurring compensation as discretionary bonuses.
COSIT No. 10/2026 brings greater interpretative predictability. The real challenge, however, lies in execution: what regulators will ultimately examine is not merely the existence of a policy, but the consistency between its form, the company’s actual practices, and the legal purpose the rule is intended to protect.
