Decision should boost stock options for executives – 09/29/2024 – What tax is this

The decision of the STJ (Superior Court of Justice) on the form of taxation of stock option plans, the so-called stock options, should boost this type of executive remuneration.

In the opinion of lawyers and experts on the subject, the court’s understanding makes it possible to end the legal uncertainty surrounding several similar cases analyzed in the administrative sphere and in the Judiciary.

It is important, however, to observe at least two characteristics that supported the court’s decision when designing these plans: the existence of a disbursement of money by the executive to purchase the shares (onerosity) and risk in the operation, represented by price fluctuation of the papers.

The STJ defined that stock option plans are commercial in nature, therefore, they are taxed with IRPF (Individual Income Tax) on the capital gain at the time of sale of the shares, paid by the executive. In this case, the rate is 15% for amounts up to R$5 million.

The tax authorities argued that these plans be treated as remuneration, with tax charged according to the progressive table of zero to 27.5%, on the company’s payroll, at the time of purchasing the same securities — along with other salary charges.

The STJ’s understanding will be applied to other processes in the Judiciary and also in Carf (Administrative Council for Tax Appeals), as the issue was judged under the repetitive procedure.

There is another case in court, which discusses the collection of social security contributions on these amounts, which could be analyzed as repetitive. The expectation is that the court will follow the same understanding.

Paulo Saliby, CEO of consultancy SG Comp, calculates that the use of stock options can represent a reduction of at least 40% in companies’ accounting expenses compared to other types of long-term incentives.

As there will be no disbursement to pay taxes, and the executive will have to buy the shares at a future date (even if below market value), the companies would also have a positive effect on their cash flow.

A profitable company will have these profits, but will no longer deduct the expense from taxation on the profit. For companies that are not yet profitable, such as startups and scale-ups, which cannot take the deduction, the gains are even greater.

“For mature, profit-generating companies, this is very good news. For startups and scale-ups, it is exceptional,” says Saliby.

Adriano Moura, tax partner at Mattos Filho, the firm that led the case, states that the court made a decision of broad application and is not restricted to the specific case analyzed. Even so, a plan must meet the burden and risk requirements to have this type of taxation.

“Although this decision has a more open scope, it does not mean a complete release. All the premises that were crucial for him to reach this conclusion to some extent have to be observed”, he states.

Regarding the INSS issue, he says that there is no legal basis that justifies defining that a certain incentive is not remuneration resulting from work for IR purposes, but is for social security contributions.

Andreza Ribeiro, partner at Stocche Forbes Advogados, states that the Treasury is likely to argue that this decision does not apply to social security, but she believes that it would be inconsistent to reach different conclusions for the two taxes. Both affect remuneration, and the STJ confirmed that stock options are not salaries.

She says the court ended a discussion that dragged on for a decade, a period in which many companies abandoned stock option plans, but that this should change now. “As the matter was well resolved, and the STJ concluded that there is a commercial nature, the tendency is for companies to once again evaluate the possibility of granting stock options.”

Pedro Magalhães, Tax partner at Madrona Fialho Advogados, also assesses that companies will return to working with these plans, which need to observe the principles of onerousness and risk for the beneficiary. “It is now up to taxpayers to demonstrate, individually, that their plan is a true stock option.”

Although the STJ’s decision binds the Judiciary, Carf and the Federal Revenue Service, Eduardo Pugliese, partner at Schneider Pugliese, states that there is a need for an opinion from the prosecutor’s office so that inspectors stop fining companies. It is also necessary to wait if there will be an appeal from the Treasury.

“This may have some impact. But our perception is that now we have guidance that should standardize understanding.”

Eduardo Arrieiro, partner at Arrieiro Advogados, says that it is still necessary to wait for resources from the Treasury in relation to the case. Until then, companies must review their plans and verify their adequacy to the new STJ jurisprudence.

Bernardo Leite, partner at ALS Advogados, also states that companies should reevaluate their plans and be aware of the fact that the judgment only covers Income Tax, with there still being a discussion regarding INSS.