Brazil’s STJ decides that only capital gains tax should be levied on stock option plans

In a session held on Wednesday, September 11, the 1^st Section of Brazil’s Superior Court of Justice (STJ) decided that stock options companies grant to their directors, officers, and employees are not of a compensatory nature for Personal Income Tax (IRPF) purposes.

The ruling, issued under the ‘repetitive appeal’ mechanism (which allows Brazil’s higher courts to address numerous appeals on a similar issue at once), sets a binding precedent for entities within Brazil’s public administration to follow – such as the Federal Revenue Service and courts throughout the country.

During the case, the Federal Revenue Service argued that companies should withhold IRPF at the time the options are exercised, alleging such options constitute ‘indirect compensation’, regardless of whether the shares are immediately sold.

However, Justice Rapporteur Sergio Kukina took the view that rather than being indirect compensation, stock options are instead a commercial contract – therefore, they are only subject to capital gains taxation upon the subsequent sale of the shares by the individual. Justice Kukina’s proposition eventually prevailed at the court by a vote of seven to one.

For more information on this topic, please contact Mattos Filho’s Executive Compensation and Tax practice areas.