Tax Newsletter – Stock Option Plans
On September 11th, , the First Section of the Superior Court of Justice (“Superior Tribunal de Justiça – STJ”) concluded the judgment of Theme 1,226, ruling that the Stock Option Plans (“SOP”) offered by companies to their executives and employees are of a mercantile nature, subject to Individual Income Tax (“IRPF”) on the capital gain arising from the sale of shares by the individual.
The leading case sought to define whether SOP would have a mercantile nature, thus being subject to the levy of IRPF on capital gains, or whether SOP should be treated as remuneration (linked to the employment contract), thereby triggering withholding income tax at the time the options are granted to the individual.
By a majority of votes, the STJ held that SOP have a mercantile nature and that IRPF must only be levied upon the sale of the shares by the individual upon the realized gain, if any. Justice Maria Thereza de Assis Moura had a dissenting opinion arguing that SOP have a compensatory nature, as the options are granted to executives free of charge.
Although the case dealt specifically with the IRPF, the definition of the mercantile nature of the plans also impacts the position taken by the Federal Revenue Service (“RFB”), which has sustained that Stock Option Plans are remuneration and should be subject to social security contributions at the time the options are granted to executives and employees. Thus, the rationale adopted by the STJ may be leveraged by companies in disputes involving social security contributions.
As the decision was rendered under the system of repetitive appeals, it is binding to other judicial instances (except the Supreme Federal Court – “STF”) and must also be observed by the Administrative Council of Tax Appeals (“CARF”).
Finally, it is worth noting that there is a bill (No. 2,724/2022) in progress in Congress to regulate the tax regime of SOP, giving them an exclusively mercantile nature. Currently, in the absence of specific legislation, CARF’s precedents have been that the nature (mercantile or remuneration) is fact specific as it depends on the characteristics of each plan.
At last, we await for the written ruling to be published to verify any other relevant aspect from this decision. In addition, it is important to clarify that this ruling only analyzed SOP. Therefore, other equity award plans (i.e., RSU, Phanton Stock, etc.) were not analyzed by the STJ.
To further questions, our Tax team is available.
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