Market Roundup: Are stock options salaries or business transactions?

Market Roundup: Are stock options salaries or business transactions?

Brazil’s second-highest judicial body will decide whether stock options should be interpreted as part of executives’ salaries or as a parallel business transaction between them and the company

(Photo: Roman Samborskyi)

By Fabiane Ziolla Menezes

Mar 30, 2024

• 🔔 The dashboard: Brazil’s benchmark stock index Ibovespa gained 0.85 percent this week. Meanwhile, the Brazilian real lost 0.32 percent against the U.S. dollar.
• Biggest gains: São Martinho (energy): 9.26 percent
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Brazil’s second-highest court may change its view on stock options

The Superior Court of Justice (STJ), Brazil’s second-highest judicial body, is about to decide whether stock options offered as benefits to executives should be legally interpreted as part of their salaries or as a parallel commercial agreement between them and the company.

The decision will serve as a reference for all litigation on the issue.. More than 500 lawsuits in various courts have been stayed pending the STJ’s decision.

State of play. The decision will determine how and when stock options will be taxed.

• Up to 27.5 percent at the time the employee buys the shares, or at 15 percent and only when the shares are sold — in which case the tax would only be levied if there is a capital gain on the transaction (i.e., if the share value increases during the period).

Mixed signals. While the labor court system has a track record of favorable decisions for taxpayers — which read stock option plans as commercial transactions — the tax appeals court, Carf, has often ruled in the opposite direction.

• Mariana Dias Arello, a tax lawyer at Briganti Advogados, points to two aspects that support the labor courts’ understanding: stock option plans involve risks, as the employee does not necessarily make a profit from the transaction, and they are voluntary, as the employee is not forced to acquire the shares after the grace period.

Limited reach. On the other hand, by considering stock options as wages, Carf has insisted on the incidence not only of income tax but also of social security contributions on these securities. The STJ, however, has refrained from discussing said contributions on stock options; it will only decide on the nature of the transactions and the type of income tax to which they will be subject.

Why it matters. The STJ ruling may change the way companies in Brazil use stock options to attract new talent and leaders, especially C-level executives.

• Camila Pelizaro de Arruda Camargo, a tax lawyer at Lopes Muniz, says that recognizing the operation as a commercial transaction would provide more legal certainty for companies to grant such benefits, which could contribute to an increase in the practice.

The devil is in the details. Luis Eduardo Maneira, another tax lawyer, says that for the ruling to be effective, the STJ will have to define the necessary requirements to characterize a stock option plan as a commercial transaction.

• Likewise, the decision may include criteria that indicate plans with a remunerative nature, as these plans “vary greatly from one company to another.”
• In other words, the court will not necessarily decide one thing to the detriment of another.

Yes, but … The STJ decision may not be the end of the discussion. A bill that would establish rules for stock option plans was approved by the Senate in 2022 and has been stuck in the House since last September. Experts expect the STJ ruling to influence the vote on the bill in Congress.

• The bill defines stock option plans as commercial transactions.

What’s next? The nine-judge STJ panel still has to set a trial date.

https://brazilian.report/business/2024/03/30/stock-options-salaries-business-transactions/