Previously seen much more frequently in publicly traded companies and start-ups, stock option plans (SOPs) have been used much less in recent years.
The reason? Lack of legal certainty.
The last decade has been marked by various clashes between taxpayers and the tax authorities, which have repeatedly assessed companies in order to ascribe the legal nature of remuneration to the gains obtained by participants in stock option plans.
The assessments are directed both at the companies - for the collection of social security contributions and/or IRRF, plus fines and interest - and at the beneficiary executives - for the collection of IRPF allegedly due as a result of the options.
In the administrative sphere, most of the decisions of the Administrative Tax Appeals Council (Carf) are unfavorable to the companies. According to the Carf, the existence of the elements of "risk" and "onerousness" is essential to rule out the remunerative nature of the options. This interpretation, however, has been systematically restricted, to the point of understanding that the gains obtained by participants are remunerative in nature simply because the options were given free of charge.
In the labor sphere, on the other hand, the outlook is very favorable for companies.
Labor case law, both of the regional courts of labor appeals and of the Superior Labor Court, in all its panels, has evolved to the understanding that the gains earned by employees as a result of their participation in plans do not have the legal nature of wages. Therefore, they are not subject to labor charges and consequential payments, such as FGTS, repercussions on 13th salary, vacation plus one third, etc.
Labor court decisions rule out the legal nature of remuneration. This is because, even though the granting of the options derives from the employment relationship, there is a risk for employees (who may or may not profit from the purchase of the shares, depending on the appreciation or devaluation of the market value of the shares) and the exercise of the options is via payment. Therefore, any earnings achieved by the employee are not consideration for work.
Along these lines, let us take a look at a recent TST decision on the subject:
(...) STOCK OPTIONS (EMPLOYER'S STOCK OPTION PLAN) (...) - DISCUSSION ABOUT THE LEGAL NATURE (...). The Regional Court of Appeals ruled out the legal nature of salary of Stock Options, recognized by the trial judgment, excluding from the judgment payment of the installments concerning them. Widely used abroad, especially in the United States of America, Stock Options are options to acquire shares in the employer's company, offered to employees for a fee, at lower prices than those charged on the market (Employee Stock Options). (...) the onerous nature of the transaction, the risks borne by the employee - who earns profits or losses according to random factors that are independent of work - and some similarity to PLR [Profit Sharing Plans] contribute to the position that this is a benefit that is foreign to the concept of salary. The Superior Labor Court has some precedents that peremptorily rule out the possibility of integrating stock options into compensation. (...). Interlocutory appeal heard and denied relief.[1] (emphasis added)
Despite the favorable scenario in the Labor Courts, the legal uncertainty brought about by the decisions handed down by the Carf has led many companies to stop implementing stock option programs - it is notable, over the last few years, that companies have migrated to stock grant plans, with the assignment of treatment as compensation: when in doubt, it is better not to take the tax risk.
Judgment on Topic 1226 brings decisive change
This scenario, however, has just had a positive outcome in the STJ. On September 11, the Supreme Court ruled on Topic 1226 and defined that gains from stock option plans do not have the legal nature of compensation for IRPF purposes, but rather capital gains when the shares acquired by the participant are sold.
The STJ's decision provides great legal certainty for companies that choose to implement stock option plans. Firstly, because it aligns the tax understanding with labor case law, establishing the understanding that earnings do not have the nature of compensation. Secondly, because an STJ decision in a repetitive appeal is binding on the Carf, which will not be able to issue divergent decisions on the subject in similar cases.
From now on, a new favorable environment is emerging for implementation of stock option plans by companies in Brazil.
The legal certainty of the plan, however, is directly related to its characteristics: companies that use incentives titled as stock option plans, but do not observe their essential elements, continue to run the risk of disqualification the commercial legal nature of the options.
In this context, it is essential to structure stock option plans in line with the requirements established by the Labor Courts, the Federal Courts, and the STJ itself. The measure is necessary to remove the nature of compensation of any gains made and prevent companies - and participants - from being exposed to risks.
[1] TST - AIRR: 00004433120155020070. Reporting Judge: Alexandre De Souza Agra Belmonte. Date of judgment: December 15, 2021. 3rd Panel. Publication date: February 4, 2022.
