Brazil: Employee Incentives

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This country-specific Q&A provides an overview to tax laws and regulations that may occur in Brazil.

This Q&A is part of the global guide to Employee Incentives. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/employee-incentives/

  1. What kinds of incentive plan are most commonly offered and to whom?

    The most common incentive plans are the (i) short-term which are: annual profit or result sharing plans; annual variable incentive; retention bonus and spot awards; and (ii) long-term that are usually share-based plans which can be implemented through one of the following types of plans:

    • Stock options plan;
    • Matching shares;
    • Stock grant;
    • Performance shares; and
    • Phantom stock.

    These incentives are designed to be offered to employees, directors and executives of the companies, according to the eligibility criteria and conditions. Usually, for sales force employees, the variable incentive applies on monthly or quarterly basis.

  2. What kinds of share option plan can be offered?

    The only share option plan expressly provided for under the Brazilian Corporation Law is the stock option plan, by which the participant is granted options to acquire shares in exchange for a strike price.

    The stock option plan must be approved by the shareholders in a general shareholders meeting and the bylaws of the company must have an authorized capital stock, within which the new shares may be issued in order to satisfy the exercised options.

    Upon exercise of the options, the company may issue new shares in favour of the participants, without having to comply with shareholders’ statutory pre-emptive rights. The company may also transfer treasury shares to the participants in order to satisfy the exercised options.

  3. What kinds of share acquisition/share purchase plan can be offered?

    The most common types of share acquisition/share purchase plans are the following:

    • Matching shares: the participant is required to purchase shares of the company and keep such shares under lock-up during the vesting period, after which the company delivers a certain quantity of shares to the participant for each share initially acquired by him/her. The company must transfer treasury shares to the participant in order to satisfy the delivery of the matching shares.
    • Stock Grant/Performance Shares: the participant is granted the right to receive shares upon completion of the relevant vesting period, in exchange for a symbolic price (or in a cashless manner). Under a performance share grant plan, the participant is granted the right to receive shares upon completion of the relevant vesting period and achievement of certain performance goals established in the plan, usually in a cashless manner. The company must transfer treasury shares to the participant in order to satisfy the delivery of the awarded shares.
  4. What other forms of long-term incentives (including cash plans) can be offered?

    As a rule, there are two types of long-term incentives in Brazil: the one paid with stock option/share, and the other that is cash based.

    For cash plans, the companies usually set up a differed payment upon performance evaluation and achievement of certain goals. The tax treatment in this case depends on how the plan is structured. Usually, the tax burden will levy in the moment the participant attends the conditions to become entitled to an award.

    In addition, although it is considered more as a short-term incentive, there is a law that permits employers to pay compensation to their employees upon attaining certain goals under a sharing plan based on the company's profits or results. This compensation is exempt of social security contributions.

    The plan that defines the terms for distribution of this compensation must meet certain proceedings and elements as defined by the law and case law – in short:

    a) The plan must be drafted by means of an internal committee or through direct bargaining with the employees' union

    b) If by means of an internal committee, this committee needs to be formed by representatives of the employer and employees, and a representative of the employees' union must be called to participate in the negotiations (although the union representative is not required to attend it)

    c) If through direct bargaining with the employees' union, the employer and union must execute a collective bargaining agreement for the purpose of establishing a sharing plan based on the company's profits or results

    d) The law and case law require objective criteria in the definition of the terms and conditions of the plan (including but not limited to eligibility, goals, performance evaluation, payment methods, etc.)

    The benefits of introducing such plan is twofold: on the employer's side, it prevents the payment of social contributions (average rate is 28.8%); on the employees' side, the income tax applied to such earnings is smaller as indicated in the table below:

    Profit-sharing (R$)

    Rate (%)

    Deduction (R$)

    Up to 6,677.55

    -

    -

    From 6,677.56 to 9,922.28

    7.5

    500.82

    From 9,922.29 to 13,167.00

    15

    1,244.99

    From 13,167.01 to 16,380.38

    22.5

    2,232.51

    Above 16,380.38

    27.5

    3,051.53

  5. Are there any limits on who can participate in an incentive plan and the extent to which they can participate?

    With respect to share-based incentives, only the company’s statutory officers and directors, employees or individuals (or the legal entities owned by them) that provide services to the company can participate in such plans. Such limits are set forth under the Brazilian Corporation Law and also pursuant to the Accounting Pronouncements Committee (“CPC”) 10.

  6. Can awards be made subject to performance criteria, vesting schedules and forfeiture?

    In Brazil it is common for share-based plans to have the awards subject to the company’s performance goals, vesting schedules and forfeiture upon termination of the participants’ relationship with the company. If the plan is characterised as compensation and the participant is an employee, the case law considers that the employee shall be entitled to a prorated portion of the award in the event of termination by the company without cause. Other situations involving an employment termination and payment of compensation/awards should be analysed on a case-by-case basis.

  7. What are the tax and social security consequences for participants in an incentive plan including: (i) on grant; (ii) on vesting; (iii) on exercise; (iv) on the acquisition, holding and/or disposal of any underlying shares of securities; (v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan.

    1. If the plan is characterised as compensation, the following tax treatment should apply:

    (i) on grant: no taxation

    (ii) on vesting: no taxation

    (iii) on exercise:

    • Earnings that arise from compensation obtained in Brazil by executive employees and non-employees are subject to individual income tax (IRPF) in the form of withholding tax (WHT), at progressive rates up to 27.5 per cent, as indicated below (for calendar year 2018):

      Rate

      Income

      Amount to be deductible from the personal income tax

      Exempt

      Up to R$ 1,903.98

      --

      7.5%

      From R$ 1,903.98 up to R$ 2,826.65

      R$ 142.80

      15%

      From R$ 2,826.65 up to R$ 3,751.05

      R$ 354.80

      22.5%

      From R$ 3,751.05 up to R$ 4,664.68

      R$ 636.13

      27.5%

      Over R$ 4,664.68

      R$ 869.36

    • In addition, social security contribution (INSS) will be due by the employee at progressive rates varying from 8% to 11%, depending on the amount of the contribution salary and will be withheld by the employer directly from the employee’s salary, according to the following table (in force as of 1 January 2019):

      Rate

      Contribution Salary

      8%

      Up to R$ 1,751.81

      9%

      From R$ 1,751.82 to R$ 2,919.72

      11%

      From R$ 2,919.73 to R$ 5,839.45

    The contribution salary is limited to a maximum and minimum value established by the Ministry of Finance (currently the maximum monthly value is R$ 5,839.45).

    The contribution of an administrator or an executive officer who is not an employee is calculated according to the following table:

    Rate

    Contribution Salary

    11%

    Up to R$ 998.00

    20%

    From R$ 998.00 to R$ 5,839.45

    (iv) on the acquisition, holding and/or disposal of any underlying shares of securities:

    • No taxation will be due on the acquisition/holding of any underlying shares.
    • The disposal of the underlying shares may result in a capital gain that will be recognized by the Brazilian employee and subject to income tax.

      Taxable basis is the positive difference between the disposal value and the acquisition cost of the units and the tax rate will vary from 15% to 22.5%, depending on the amount of the gain:

      Rate

      Capital Gain

      15%

      Up to R$ 5,000,000.00

      17.5%

      From R$ 5,000,000.00 to R$ 10,000,000.00

      20%

      From R$ 10,000,000.00 to R$ 30,000,000.00

      22.5%

      Over R$ 30,000,000.00

    (v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan:

    Interest remuneration arising from loans between individuals and legal entities will be subject to WHT at a rate that will vary depending on the term of the loan contract, as follows:

    Contract Term

    Tax Rate

    Up to 180 days

    22.5%

    From 180 days to 360 days

    20%

    From 360 days to 720 days

    17.5%

    Over 720 days

    15%

    2) If the plan does not qualify as compensation, the tax treatment applicable to commercial plans would be as follows:

    (i) on grant: no taxation

    (ii) on vesting: no taxation

    (iii) on exercise: no taxation.

    (iv) on the acquisition, holding and/or disposal of any underlying shares of securities:

    • No taxation will be due on the acquisition of any underlying shares.
    • The disposal of the underlying shares may result in a capital gain that will be subject to income tax, at a rate will vary from 15% to 22.5% depending on the amount of the gain.

    (v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan: the same as applicable for compensation plans.

  8. What are the tax and social security consequences for companies operating an incentive plan?

    Depending on the kind of incentive there will be or not labour/tax costs impact and the legal nature of the incentive is dependent on Courts jurisprudence.

    For example, in Brazil, there is a tax dispute regarding what should be the nature of share-based plans, mainly stock option plans: either compensation for work or commercial agreement.

    The repercussion of such dispute affects both the company and participants considering that, depending on the legal nature of the share-based plan, the taxation can be either more favourable or more burdensome.
    According to the labour jurisprudence, the main characteristics to identify a stock option plan as of commercial nature are:

    a. Willingness: the participant accepts the granting of the stock options as an investment opportunity, separated from its employment relationship.

    b. Burden: the participant must exercise the stock options through the payment of a fair price.

    c. Risk for the Participant: the investment made by the participant must be subject to common market oscillations.

    1. If the plan is characterised as compensation, the following tax treatment should apply:

      (i) on grant: no taxation.

      (ii) on vesting: no taxation.

      (iii) on exercise:

      a. The company will be required to withhold at source the WHT, as described in question 7 above.

      b. The average INSS rate payable by the company on compensation to employees is 20 per cent. In addition to this rate, percentages are added to cover the costs of occupational accident insurance and contributions to social security services that are specific to each activity carried out by the company. The average rate resulting from these additions is 28.8 per cent, a figure that may vary according to each company’s line of business.

      c. If the participant is an employee, such compensation is taken into account in the calculation of the other employment statutory rights, as it may apply, such as (1) 13th salary; (2) weekly rest ; (3) overtime and night shift pay ; (4) premium for working under unhealthy or hazardous conditions at the workplace ; (5) unemployment fund; (6) severance pay, and (7) paid vacation plus 1/3 of vacation bonus.

      d. on the acquisition, holding and/or disposal of any underlying shares of securities:

      The compensation for work paid with share-based plans shall be added to the corporate income tax (CIT) calculation basis in the period in which the corresponding cost/expense was recorded.

      Such compensation amount may be deducted from the CIT calculation basis upon effective payment (settlement in cash or other financial asset) or after ownership transfer of the shares or plans.

      e. No tax consequences will arise from the holding/disposal of any underlying shares.

      f. in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan:

      Considering that the lender is domiciled in Brazil, the tax on financial operations (IOF) will be due on the loan amount at a 0.0082% rate per day, limited to 1.5%, plus and additional of 0.38%, regardless of the operation term.

    2. If the plan does not qualify as compensation, the tax treatment applicable to commercial plans would be as follows:

      a. on grant: no taxation.

      b. on vesting: no taxation.

      c. on exercise: no taxation.

      d. on the acquisition, holding and/or disposal of any underlying shares of securities: No tax consequences should arise.

      e. in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan: the same as applicable for compensation plans.

  9. Do participants in incentive plans have a right to compensation for loss of their awards when their employment terminates? Does the reason for the termination matter?

    The employment law does not have specific provisions on the right to compensation for a loss in the event of employment termination. Also, the payment of awards will depend on the type of incentive plan, and the terms and conditions of such plan. As a rule, if the plan is characterised as compensation and the participant is an employee, the case law considers the payment of a prorated portion of the incentive of the respective year of termination that the employee should be entitled for in the event of termination without cause or resignation. Other situations involving an employment termination and payment of compensation/award should be analysed on a case-by-case basis.

  10. Do any data protection requirements apply to the operation of an incentive plan?

    The Brazilian Data Protection Act (Law no. 13,709/2018 or “LGPD”) was approved in August 2018 and will come into force in February 2020. There is no specific provision regarding incentive plan or compensation requiring a special treatment in terms of data protection. Therefore, it is a professional personal data related to the employment contract conditions and the treatment of such information shall be made in accordance with the law. The company shall observe the following main rules, while processing individual’s personal data of individuals located in the Brazilian territory:

    (i) Abide to the data protection principles imposed by the LGPD: purpose, adequacy, necessity, free access, data quality, transparency, security, prevention, non-discrimination, liability and accountability.

    (ii) Define the lawful grounds for processing personal data: Company may rely on the employee’s consent to process his/her personal data. It must be a free, informed, and unambiguous expression through which the data subject agrees with the processing of personal data for a determined purpose.

    (iii) Transparency: Company shall provide clear and complete information to the employee.

    (iv) Data subject’s rights. The law grants several rights for data subjects including the right to obtain from the controller, at any time, and upon request: confirmation of the existence of the data processing; access to the data; rectification of incomplete, inaccurate, or outdated data; anonymization, blocking, or elimination of data that is unnecessary, excessive, or processed non-compliant with the provisions of the LGPD.

    (v) Record keeping. Company shall have systems in place to record the data processing activities.

    (vi) Sensitive Data. Under the LGPD, the cases for processing sensitive personal data are more restricted. Sensitive data includes information on employee’s health, for example. To the extent sensitive data is being processed, it should be justified under one or more lawful basis provided by the LGDP (e.g., consent or as necessary for the performance of a contract).

    (vii) International data transfers. Company must make sure that international data transfers take place in compliance with the LGPD.

  11. Are there any corporate governance guidelines that apply to the operation of incentive plans?

    Compensation for statutory directors and officers of any corporation, whether publicly or closely held, irrespective of its size, is decided at the general meeting, and compensation should take into account responsibilities, time devoted to duties, competence and professional reputation, and the value of their services in the market. As a rule, there is no need for additional approvals, except otherwise provided under the corporate internal guideline or bylaws/articles of association. With respect to employees that are not statutory directors and officers usually it is approved by board of directors or authorized officers or executives. Stock option plans and stock grant plans must be approved at the general meeting. Phantom Stock plan is usually approved by the board of directors.

    Typically, the general meeting also decides the aggregate amount of compensation for administrators and executive officers and the board of directors allocates payments individually.

    Compensation must be decided annually. If compensation paid to directors and officers exceeds the amount approved by the shareholders at a shareholders’ meeting, the company may hold to account the directors and officers who authorised payment to be made in amounts that exceeded the limit set.

  12. Are there any prospectus or securities law requirements that apply to the operation of incentive plans?

    Securities offered to employees generally do not need to be registered under Brazilian securities law, as this states that only public offerings must be previously registered with Brazil’s securities exchange commission, the CVM. CVM has already stated that an offer is deemed ‘public’ if it is directed to the general population and an offering made to a company’s employees would be not characterised as a public offering and is thus exempt from registration.

    Under regulations applicable to the securities market, executives and members of any other statutory bodies that have technical or advisory duties in a public company must inform the company of any beneficial ownership of shares issued by the company itself, its parent or its subsidiaries (in the latter two cases, this requirement is applicable only to public companies), or trades or dealings in such securities. Securities owned by a spouse, partner or any dependants included in their annual income tax returns or by companies directly or indirectly controlled by the latter should also be included in this notification, which must be made within five days of each trade, on the first business day after taking up a position, and when submitting documentation to register a company as publicly traded.

    The company must send the aforementioned information to the CVM, and to the stock exchanges or organised over-the-counter market entities in which the company’s shares are listed for trading (if applicable) within 10 days of the end of the month in which the alteration of the positions held occurs, or of the receipt of a notice delivered by the executives and members of any other statutory bodies aiming at updating the information previously provided to the company, or in the month in which the aforementioned persons take up their positions. This information should be delivered on an individual basis and consolidated by body (executive management, board of administration, compliance board and committees). Consolidated data will be available to the public, but individuals’ details will not be disclosed.

    Executives must comply with the blackout periods prior to the disclosure of any material act or fact to the market or the company’s quarterly or annual financial statements, provided that a trading policy previously approved by the company may allow certain transactions within the banned period. Such blackout provisions do not apply for the transfer of treasury shares to executives or the subscription of new shares by executives under a stock-based plan approved by the general shareholders meeting.

  13. Do any specialist regulatory regimes apply to incentive plans?

    Financial institutions and similar entities are subject to specific rules, which stipulate that at least 50 per cent of variable compensation must be paid in shares or share-based instruments, compatible with the creation of long-term targets and the acceptable time frame for risk.

    These rules apply to financial institutions and other institutions authorised to operate by the Central Bank of Brazil, except for credit unions and entities lending to micro and small businesses, managers of purchasing consortiums and payment institutions. They apply only to administrators and executive officers, and the Central Bank of Brazil is in charge of implementing and overseeing them.

  14. Are there any exchange control restrictions that affect the operation of incentive plans?

    If the incentive plan requires the acquisition of shares by the participants, there can be exchange control rules related to (i) the acquisition of shares in Brazil by participants who are non-resident in Brazil or (ii) the acquisition, by participants resident in Brazil, of shares of an overseas company.

    (i) There are two major types of investments that are applicable to non-resident investors investing in Brazil (“NRIs”), which are respectively regulated by (i) Law No. 4,131, dated September 3, 1962 and (ii) Brazilian Monetary Council (“CMN”) Resolution No. 4,373, dated September 29, 2014.

    Law 4131/62. Direct acquisition of shares in Brazilian companies by non-resident participants must be registered with the Brazilian Central Bank (“Central Bank”) as a foreign direct investment. The registration with the Central Bank is declaratory in nature – i.e., as a rule, the declarations of the parties are the sole basis for the registration, and parties are required to retain supporting documentation, which may be requested by the Central Bank at any time.

    Resolution 4373/14. Resolution 4373/14 rules investments made in the Brazilian financial and capital markets and the mechanisms through which non-resident investors are authorized to perform this type of investment. In general, such investors have access to the same investments opportunities in the financial and capital markets that are available for Brazilian residents. Under Resolution 4373/14 regime, after the acquisition/receipt of the awarded shares, the participants may elect to sell their shares in the market. Shares held under this regime may only be traded within organized markets.

    (ii) Foreign Exchange Control. The remittance of dividends, interest on capital or as a result of divestment in the awarded shares must be completed through a foreign exchange transaction with a financial institution. There are no restrictions on repatriation of funds or remittance of profits in terms of the amount of capital and the length of time funds must remain in Brazil.

    (iii) Acquisition of Shares abroad of Brazil. Brazilian Central Bank does not require a prior authorization in order to allow the remittance of funds abroad by the participants to acquire the awarded shares. Participants will be required to execute foreign exchange transactions with local banks in order to allow the remittance of funds abroad.

    The participants that are Brazilian residents and own interest in foreign entities have to file the so-called "CBE" with the Brazilian Central Bank in case the equity value of the investment is equal or higher than USD 100,000.00. As a rule, the CBE is filed with BACEN annually.

  15. What is the formal process for granting awards under an incentive plan?

    Usually, a share-based plan is approved at the general shareholders meeting (except for phantom stock plans that are approved by the board of directors) and the awards are granted by the board of directors, and the participants are required to sign an individual agreement setting forth the terms and conditions for the relevant grant.

  16. Can an overseas corporation operate an incentive plan?

    An overseas corporation can offer a share-based incentive plan to its, direct or indirect, Brazilian employees. According to the Accounting Pronouncements Committee (“CPC”) 10, the company that benefits directly from the services provided by the employee/executive is the one that must recognize the expenses related to share-based plans in its accounting books, if the plan has a compensation nature, even if the share-based plan is operated by the overseas corporation.

    The participant can hold shares abroad and/or remit funds abroad as required by the share-based incentive plan, provided that the exchange rules explained above are complied with.

  17. Can an overseas employee participate in an incentive plan?

    Yes, an overseas employee can participate in incentive plans. The Brazilian expatriation law requires employers to (1) grant to employees the rights provided under the local law (or the rights provided under the Brazilian employment law, including occupational health and safety rights, when they are more beneficial than the local law); and (2) the rights provided under the Brazilian expatriation law. In this regard, the employee may participate in any incentive plan offered by the company regardless of being working abroad, provided the employee is eligible to participate in the plan, and any payment made overseas to the employee is subject to the Brazilian employment, tax and social security laws as applicable.

  18. How are share options or awards held by an internationally mobile employee taxed?

    According to the Accounting Pronouncements Committee (“CPC”) 10, the company that benefits directly from the services provided by the employee/executive is the one that must recognize the expenses related to share-based plans in its accounting books, if the plan has a compensation nature.

    In this case, such entity will be the one responsible for including the related amounts in its payroll and taxing it, according to the legislation of its residence.

    Therefore, no Brazilian taxation should be levied upon internationally mobile employee share options or awards.

  19. How are cash-based incentives held by an internationally mobile employee taxed?

    Please refer to question 19 above.

  20. What trends in incentive plan design have you observed over the last 12 months?

    Increase in the number of share-based plans with compensation nature in order to avoid the dispute with Brazilian IRS, with a preponderance for phantom stock plans, restricted stock units and performance share plans.

  21. What are the current developments and proposals for reform that will affect the operation of incentive plans over the next 12 months?

    There are currently 2 different legislative bills seeking to modify certain aspects of the incentive plans taxation, as follows:

    i. At the Chamber of Deputies, legislative bill n° 286/2015 intends to amend the Consolidation of Labor Laws (“CLT”) in order to establish that Stock Options can have either a commercial nature – when the willingness and burden are present – or a compensation one.

    ii. At the Senate, legislative bill n° 306/2014 intends to modify Law n° 8,212/1991, in order to provide for the Social Security Contribution exemption upon stock options plans.