Employee share plans in Brazil: regulatory overview

A Q&A guide to employee share plans law in Brazil.

The Q&A gives a high level overview of the key practical issues including, whether share plans are common and can be offered by foreign parent companies, the structure and rules relating to the different types of share option plan, share purchase plan and phantom share plan, taxation, corporate governance guidelines, consultation duties, exchange control regulations, taxation of internationally mobile employees, prospectus requirements, and necessary regulatory consents and filings.

To compare answers across multiple jurisdictions, visit the Employee share plans Country Q&A tool.

This Q&A is part of the global guide to employee share plans law. For a full list of jurisdictional Q&As visit www.practicallaw.com/employeeshareplans-guide.

Contents

Employee participation

1. Is it common for employees to be offered participation in an employee share plan?

It is common for employees who hold strategic management positions (such as members of the board of directors, executive officers, non-statutory officers, general managers and managers) to be offered participation in an employee share plan.

Under Article 168 of Law 6,404/76, a company's bye-laws can provide that the company, within its authorised capital limit, and according to a plan approved by the general meeting, grant purchase options to its officers or employees, or to individuals providing services to the company or to a company under its control.

The purpose of this benefit is to engage employees and officers, motivate those who hold a position of trust and reinforce loyalty between parties. Officers and employees who are also shareholders of the company are encouraged to further their career and be more committed to the company's growth.

 
2. Can employees be offered a share plan where the shares to be acquired are in a foreign parent company?

Employees can be offered a share plan where the shares to be acquired are in a foreign parent company, even where the share option plan is provided for in the employee's foreign contract (if the employee is an expatriate).

 

Share option plans

3. What types of share option plan are operated in your jurisdiction?

The only share option plan expressly recognised in Brazilian law is the share option plan set out under Article 168 of Law 6,404/76.

Other types of share option plans are acceptable, provided that they derive from a signed commercial agreement between the parties.

Grant

4. What rules apply to the grant of employee share options?

Share option plan

Discretionary/all-employee. Options can be granted on a discretionary basis.

Non-employee participation. Options can be granted to non-employee statutory officers and consultants, as well as employees.

Maximum value of shares. There is no maximum value of shares over which options can be granted.

Market value. Options need not have an exercise price equivalent to market value, except where this is expressly set forth in the plan. However, an exercise price below market value may trigger different tax repercussions.

 
5. What are the tax and social security implications of the grant of the option?

Share option plan

There is no legal provision on the taxation and social security implications of share options plans. Whether a plan is subject to taxation requires a case-by-case analysis, to verify whether the plan is a commercial contract or part of the participant's compensation. Based on current case law, a plan has a commercial nature if the following conditions are met:

  • Voluntariness: the participant accepts the grant as an investment opportunity, independently from the employment relationship.

  • Burden: the exercise of share options must be performed through the payment of a certain price by the participant, based on the market value of the shares (that is, the price cannot be symbolic).

  • Risk: the investment must be subject to common market fluctuations.

Where a share option plan is deemed to have a commercial nature, no withholding income tax or social security contributions will be due. If the share option plan is deemed to be part of the participant's compensation, withholding income tax and social security contributions will be due on the difference between the shares' market value and acquisition price, on the exercise of the option.

As a general rule, there is no taxable event for income tax and social security contributions purposes at the time of grant, as the grant is made subject to a vesting period, and the sale is subject to a lock-up period.

The company must register the plan as an expense in accordance with International Financial Reporting Standards (IFRS) (IFRS 2/ IAS 12), which compares to the US generally accepted accounting principles (FAS 123 R). If the share option plan is deemed to be compensatory in nature, the registered expenses are considered as deductible expenses for corporate income tax purposes

The rules above apply both where the shares are in a Brazilian company or in a foreign parent company.

See Question 9 regarding tax implications when shares acquired on exercise of the option are sold.

Vesting

6. Can the company specify that the options are only exercisable if certain performance or time-based vesting conditions are met?

Share option plan

In Brazil, it is common for the parties to specify that the options are only exercisable if certain time-based vesting conditions are met.

 
7. What are the tax and social security implications when the performance or time-based vesting conditions are met?

Share option plan

There are no tax and social security implications when the performance or time-based conditions are met. Potential tax and social security implications can only arise, depending on the nature of the plan (that is, compensation or commercial contract), when the participant exercises the option (see Question 8).

Exercise

8. What are the tax and social security implications of the exercise of the option?

Share option plan

There is no legal provision on the taxation and social security implications of share options plans (see Question 5 ). Therefore, tax and social security implications will depend on the specific characteristics of the share option plan (that is, on whether the exercise of the option is the result of a commercial agreement or is part of the participant’s compensation).

Based on Brazilian case law, if a certain plan is deemed to be part of the participant's compensation, tax and social security implications may arise at the time of exercise of the option.

In this case, the company must withhold income tax at progressive rates (up to a maximum rate of 27.5%) and collect social security contributions (at variable rates) on the difference between the acquisition price and the value of the share.

The rules above apply both where the shares are in a Brazilian company or in a foreign parent company.

Sale

9. What are the tax and social security implications when shares acquired on exercise of the option are sold?

Share option plan

The participant will be required to pay income tax on the capital gain arising from the sale of the share (if any) at either:

  • A general 15% rate, for transactions carried out in 2016.

  • Progressive rates ranging from 15% to 22.5%, for transactions carried out as of 1 January 2017.

This applies both where the shares are in a Brazilian company or in a foreign parent company.

 

Share acquisition or purchase plans

10. What types of share acquisition or share purchase plan are operated in your jurisdiction?

There are no provisions in Brazilian law regarding share acquisition or share purchase plans, although the parties can enter into these plans.

There are basically two ways for an employee to exercise a purchase option:

  • By paying the share purchase value, which must be done in compliance with the rules established by the Brazilian Central Bank.

  • Without any disbursement from the employee, under the terms of a phantom share plan, a tie-in purchase and sale agreement or a free cost delivery of shares.

Acquisition or purchase

11. What rules apply to the initial acquisition or purchase of shares?

Discretionary/all-employee. Entitlement to acquire shares can be awarded on a discretionary basis and be offered to few/certain employees only.

Non-employee participation. Shares can be offered to non-employee directors and consultants, as well as employees.

Maximum value of shares. There is no maximum value of shares that can be awarded.

Payment for shares and price. The modalities of payment for the shares and rules governing the price depend on the share acquisition/purchase plan agreed between the parties.

 
12. What are the tax and social security implications of the acquisition or purchase of shares?

There are no tax or social security implications for the company, provided that both:

  • The acquisition is made at market value.

  • No discount applies.

If these conditions are not met, the discount can be considered as part of compensation, and the company will therefore be subject to withhold income tax at progressive rates (up to a maximum rate of 27.5%), and collect social security contributions at variable rates (see Question 5).

The rules above apply both where the shares are in a Brazilian company or in a foreign parent company.

Vesting

13. Can the company award the shares subject to performance or time-based vesting conditions?

The company can subject the award of the shares to performance and/or time-based vesting conditions. There is no formal pattern followed by Brazilian companies.

However, case law is unsettled on this issue. Certain court decisions consider that the share acquisition plan can be terminated if the employee is dismissed before the performance and/or time-based vesting conditions are fulfilled, whereas other decisions do not. In addition, some decisions consider that the award of shares based on performance reclassifies the share plan into a bonus scheme, which is part of the participant’s compensation.

 
14. What are the tax and social security implications when any performance or time-based vesting conditions are met?

There are no tax and social security implications when any performance or time-based conditions are met.

Sale

15. What are the tax and social security implications when the shares are sold?

When the shares are sold, the participant must pay income tax on the capital gain arising from the sale of the share (if any) at either:

  • A general 15% rate, for transactions carried out in 2016.

  • Progressive rates ranging from 15% to 22.5%, for transactions carried out as of 1 January 2017.

This applies both where the shares are in a Brazilian company or in a foreign parent company.

 

Phantom or cash-settled share plans

16. What types of phantom or cash-settled share plan are operated in your jurisdiction?

Phantom share plan

The main characteristic of this plan is the granting of a certain amount of money to the beneficiary, based on the variation of the market value of the company's shares during a pre-determined period (that is, the actual shares are not transferred to the beneficiary).

All companies can offer a phantom share plan, regardless of their corporate structure.

These plans are uncommon due to their labour, tax and social security implications, as they can be construed as bonus schemes.

Grant

17. What rules apply to the grant of phantom or cash-settled awards?

Phantom share plan

Discretionary/all-employee. The awards can be granted on a discretionary basis.

Non-employee participation. Participation in the plan can be offered to non-employees directors and consultants, as well as employees.

Maximum value of awards. There is no maximum award value that can be granted under this plan.

 
18. What are the tax and social security implications when the award is made?

Phantom share plan

There are no tax and social security implications when the award is made.

Vesting

19. Can phantom or cash-settled awards be made to vest only where performance or time-based vesting conditions are met?

Phantom share plan

The awards can vest based on performance or time-based conditions. Although phantom share plans are not common in Brazil (due to their taxation), they usually include time-based conditions.

 
20. What are the tax and social security implications when performance or time-based vesting conditions are met?

Phantom share plan

There are no tax and social security implications when performance or time-based vesting conditions are met.

Payment

21. What are the tax and social security implications when the phantom or cash-settled award is paid out?

Phantom share plan

The company will be required to withhold income tax at progressive rates (up to a maximum rate of 27.5%) and collect social security contributions at variable rates on the amount received by the employee.

 

Corporate governance guidelines, market or other guidelines

22. Are there any corporate governance guidelines, market rules or other guidelines that apply to any employee share plan?

There are no corporate governance guidelines, market rules or other guidelines that apply to any employee share plan.

 

Employment law

23. Is consultation or agreement with, or notification to, employee representative bodies required before an employee share plan can be launched?

Consultation or agreement with, or notification to, employee representative bodies is not required before an employee share plan can be launched.

 
24. Do participants in employee share plans have rights to compensation for loss of options or awards on termination of employment?

Participants do not have rights to compensation for loss of options or awards on termination of employment. All participants' rights are described in each relevant contract/plan.

 

Exchange control

25. How do exchange control regulations affect employees sending money from your jurisdiction to another to purchase shares under an employee share plan?

There are no specific exchange control regulations regarding the purchase of shares under an employee share plan. These purchases are treated as investments abroad by Brazilian individuals. Brazilian individuals can freely remit funds abroad for investment purposes (including for the acquisition of shares and other financial assets), provided that these transfers are made through an authorised financial institution in Brazil. Generally, to complete the transfer and hold the shares abroad, the employee will be required to open an account with a financial institution abroad.

 
26. Do exchange control regulations permit or require employees to repatriate proceeds derived from selling shares in another jurisdiction?

There is no requirement to repatriate any proceeds derived from the sale of shares in another jurisdiction. The proceeds from such sale can be kept abroad and be reinvested in other assets. However, the employee must report to the tax authorities in Brazil all assets held abroad and related income, and pay the applicable taxes. In addition, assets held abroad for an amount exceeding US$100,000 must be reported annually to the Brazilian Central Bank.

 

Internationally mobile employees

27. What is the tax position when an employee who is tax resident in your jurisdiction at the time of grant of a share option or award leaves your jurisdiction before any taxable event affecting the option or award takes place?

The tax position will only change if the employee ceases to be a Brazilian tax resident, but residency status does not change by the mere fact that the employee leaves the jurisdiction.

If the employee ceases to be a Brazilian tax resident, tax implications will still depend on the specific characteristics of the plan. If the plan grants rights to purchase shares of a Brazilian entity, there will be tax implications in Brazil. However, if the plan grants rights to purchase share of a foreign entity, no Brazilian taxes will be due.

 
28. What is the tax position when an employee becomes tax resident in your jurisdiction while holding share options or awards granted abroad and a taxable event occurs?

If an employee becomes a tax resident in Brazil, tax will be due in Brazil on the occurrence of any taxable event.

 

Securities laws

29. What are the requirements under securities laws or regulations for the offer of and participation in shares under, and participation in, an employee share plan?

There are no requirements under securities laws or regulations regarding the participation in an employee share plan.

 
30. Are there any exemptions from securities laws or regulations for employee share plans? If so, what are the conditions for the exemption(s) to apply?

Not applicable.

 

Other regulatory consents or filings

31. Are there any other regulatory consents and filing requirements and/or other administrative obligations for an offer of shares under, and participation in, an employee share plan?

Not applicable.

 
32. Are there any data protection requirements or obligations for an offer of shares under, and participation in, an employee share plan?

There are no data protection requirements regarding participation in an employee share plan.

The employer is not subject to data protection requirements/obligations for sending employees' data to an overseas parent company or plan administrator. The employee's consent is not required in such a case, since all companies from the same economic group are considered as a sole employer under Brazilian Law (Article 2, Brazilian Labour Code). Therefore, all the companies of a group can receive and process employees' data.

 

Formalities

33. What are the applicable legal formalities?

Translation requirements. It is not a legal requirement to translate the plan documents into Portuguese. However, it is customary to do so, as documents will need to be translated to be accepted in courts in the case of a dispute.

E-mail or online agreements. Employees can enter into binding agreements to participate in employee share plans electronically, although this is unusual in Brazil.

Witnesses/notarisation requirements. Legal agreements must be witnessed to be enforceable (Article 784, III, Brazilian Civil Procedure Code).

Employee consent. The employee's consent is required to deduct amounts from his/her wages. The employee's consent is not required for the transmission of his/her personal details to an overseas parent company or plan administrator, provided that personal data are not disclosed to third parties that are not connected to the share plan.

 

Developments and reform

34. Are there any current trends, developments and reform proposals that have or will affect the operation of employee share plans?

Trends and developments

During 2014, the Administrative Council of Tax Appeals has shown some inclination to apply compensation taxation rules to amounts received under share plans, especially considering the provisions of the Federal Law No. 12,973/14 (see below, Reform proposals).

Reform proposals

In 2014, the Brazilian Government enacted a new law (Federal Law No. 12,973/14) that, among other provisions, specifies the general rules for a company to deduct expenses incurred from share-based payments from its corporate income tax. This law refers to such payments as "compensation in exchange of services rendered by employees or similar".

Although the law does not specifically state whether income taxes and social security tax affect share option plans, it is possible that tax authorities may come to recognise these plans as compensation for tax purposes, regardless of their specific characteristics. In addition, tax authorities could also claim the collection of taxes on the fair value of the options on their grant (that is, the moment when the deduction of the corresponding expenses is allowed).

However, as this law has only been enacted recently, and because of the lack of legal precedents in relation to its effects, it is not yet possible to evaluate how Brazilian courts will rule on the matter.

In addition, two bills are currently being discussed in Brazil:

  • The first bill aims to regulate the exemption from social security contributions on amounts paid in share option plans, and is currently being analysed by the Brazilian Senate.

  • The second bill aims to regulate the labour law effects of the granting of share option plans, and is being analysed by the Brazilian House of Representatives.

Actual changes are not expected until 2017.

 

Online resources

Brazilian case law

W https://idg.carf.fazenda.gov.br

Description. Official website providing access to Brazilian case law (in Portuguese only).

Federal Law No. 12,973/14

W www.planalto.gov.br/ccivil_03/_ato2011-2014/2014/Lei/L12973.htm

Description. Official government website providing access to Federal Law No. 12,973/14 (in Portuguese only).

Brazilian Labour Code

W www.planalto.gov.br/ccivil_03/Decreto-Lei/Del5452.htm

Description. Official government website providing access to the Brazilian Labour Code (in Portuguese only).

Brazilian Corporate Law

W www.planalto.gov.br/ccivil_03/leis/L6404consol.htm

Description. Official government website providing access to the Brazilian Corporate Law (in Portuguese only).



Contributor details

Domingos Fortunato Netto, Partner

Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga Advogados

T +55 21 3231 8123
E dfortunato@mattosfilho.com.br
W www.mattosfilho.com.br

Professional qualifications. Brazil, admitted to the Bar in the Federal District, São Paulo, Rio de Janeiro and Pará

Areas of practice. Labour and employment; executive compensation.

Experience

  • Representing management and individuals in the area of employment litigation.
  • Advising clients in disputes involving unions and the Public Ministry of Labour, expat-related issues, executive compensation, reduction of employee working hours, employee transfers, benefit plans, offshore work, and labour and employment aspects of corporate transactions, including mergers and acquisitions.

Non-professional qualifications. Bachelor of Laws, Universidade Presbiteriana Mackenzie; Specialisation in Labour Law​, Pontifícia Universidade Católica de São Paulo​

Languages. Portuguese, English

Professional associations/memberships. Brazilian Bar Association (OAB), Chapters of São Paulo, Rio de Janeiro, Brasília, and Pará.

Leonardo Homsy, Partner

Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga Advogados

T +55 21 3231 8102
E lhomsy@mattosfilho.com.br
W www.mattosfilho.com.br

Professional qualifications. Brazil, admitted to the Bar in São Paulo and Rio de Janeiro.

Areas of practice. Tax.

Experience

  • Tax consulting related to direct and indirect taxes and customs matters in general (with a particular focus on special customs regimes).
  • Tax planning for Brazilian and foreign entities doing business in Brazil, including mergers and acquisitions.
  • Counselling domestic and foreign clients in various sectors, including oil and gas, technology, real estate, hospitality and entertainment.​

Non-professional qualifications. Bachelor of Laws, Universidade Candido Mendes (UCAM); Post-Graduation in Tax Law, Fundação Getulio Vargas.

Languages. Portuguese, English

Professional associations/memberships. Brazilian Bar Association (OAB), Chapters of São Paulo and Rio de Janeiro.

Dario Abrahão Rabay, Partner

Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga Advogados

T ++55 11 3147 4663
E drabay@mattosfilho.br
W www.mattosfilho.com.br

Professional qualifications. Brazil, admitted to the Bar in the Brazilian Federal District, São Paulo, Rio de Janeiro, Santa Catarina and Parana states

Areas of practice. Labour and employment; executive compensation.

Non-professional qualifications. Bachelor in Law, University of São Paulo Law School (USP), 1994; Master in Law (LLM), Instituto de Pesquisa e Ensino (Insper), 2011

Experience

  • Representing companies in various industry sectors in labour disputes with the court and administrative labour authorities in connection with collective bargaining negotiations and other agreements with unions and labour audits.
  • Counselling companies on labour and employment matters and executive compensation, including stock option plans. 

Languages. Portuguese, English

Professional associations/memberships

  • Brazilian Bar Association (OAB), Chapters of São Paulo, Rio de Janeiro, Brasília, Paraná, and Rio Grande do Sul.
  • São Paulo Attorneys' Institute (IASP).
  • São Paulo Attorneys' Association (AASP).

Publications


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