On September 11, the Superior Court of Justice (STJ) issued a binding precedent on Topic 1,226, , to define the incidence of Individual Income Tax (IRPF) on stock options offered by companies to employees. The understanding established by the Superior Court represents an important direction on the issue.

In this article, we address the theses established by the STJ and the next steps, in addition to gathering basic information necessary to understand stock option plans and to use them as a long-term incentive.

WHAT ARE STOCK OPTIONS AND WHAT ARE THEY USED FOR

In the scientific literature, "agency theory" highlights conflicts between interests of managers and shareholders. While shareholders tend to prefer long-term returns with sustainable stock appreciation and earnings, managers may seek immediate results, even if they are not sustainable in the long term—gains that translate into higher values, job stability, or other priorities that do not coincide with those of shareholders.

Stock options are instruments used by companies to correct this distortion: by linking the earnings of managers to the performance of their own shares in the market, the interests of these managers tend to converge with the interests of shareholders.

This linkage happens because stock options give the employee the possibility, after the vesting period, to exercise the option to acquire the company's shares at a predetermined value, called "strike price", which is not necessarily linked to the market value.

It is common for shares acquired through options of this type not to be available for sale during a certain period (lock-up). This ensures that the employee holds his or her status as a shareholder and, in this way, remains aligned with the company's interests.

With the development of the institute, stock options have gained space as a differential for employee engagement – who are attracted by the possibility of remaining in the company and benefiting, as shareholders, from the growth to which they contribute.

LEVY OF IRPF ON STOCK OPTIONS

The discussion about the tax treatment to be given to stock options is not new. There are three main lines of reasoning:

  • The first, which is not broadly adopted, considers that the granting of the option to the employee would be an event taxable by the IRPF, regardless of whether the employee will exercise it or not. According to this line of thought, the option would be characterized as remuneration for the employee's work and, therefore, is subject to taxation at progressive rates of up to 27.5%.
  • The second, normally adopted by the tax authorities, considers that the exercise of the option by the employee would be a taxable event and that the difference between the market value of the share and the exercise price should be considered income from work (indirect remuneration). Tax assessments usually require that this "income" be taxed by the IRPF at the rate of 27.5%.
  • The third school of thought sees in the granting of the option and its exercise by the employee an expectation of gain that will only be realized if and when there is a sale of the share acquired by the employee for an amount above the exercise price. For this current, there is no "remuneration" when the employee acquires the share.

In fact, there would not even be control of any gain in the future. It may happen that the employee loses money in this context, especially if there is a lock-up period  after the exercise of the option – which causes exposure to fluctuations in the value of the share.

By this last line of thought, only when the shares are sold is the financial result obtained measured – which would be taxed as capital gain, subject to the payment of IRPF at progressive rates from 15% to 22.5%.

HOW IS THE REGULATION ON THE SUBJECT

The Brazilian Corporation Law provides for the possibility of granting the option to purchase shares to managers, employees or individuals who provide services to the company or its subsidiaries.

Bill 2,724/22 (PL 2,724/22) is pending in Congress, which provides for the regime of plans for granting purchase options for equity interest. It is the so-called Regulatory Framework for Stock Options.

The Bill recognizes the commercial nature of the plan to purchase shares that follow the proposed rule. This includes the fulfillment of some minimum conditions for the exercise of the right (such as  12-month vesting, onerous acquisition and form of resolution).

In this context, the Bill provides that the option to purchase equity interest is not part of the basis of tax, labor or social security charges and, therefore, is not incorporated into the employment contract.

The approval of the Regulatory Framework for Stock Options would be important to standardize the topic and guide the implementation of grant plans.

WHAT THE STJ DECIDED: PRECAUTIONS AND NEXT STEPS

On September 11, 2024, the STJ analyzed Repetitive Topic 1,226 and decided that the IRPF should not be charged at the granting of stock options or at the time of exercise by the employee. According to the rapporteur, Justice Sergio Kukina, there is no remunerative content in stock options, but only commercial.

The supposed income calculated when exercising the option is only potential. This income is not immediately incorporated into the employee's patrimonial sphere. The existence of a gain will depend on whether the employee is able to sell the shares at a profit. At this time, the IRPF can be charged on the capital gain earned, if it occurs.

With this, the STJ established the following theses:

  • in the stock option plan regime (art. 68, paragraph 3, of Law 6,404/76), because it is of a commercial nature, the Individual Income Tax/IRPF is not levied on the effective acquisition of shares, with the company granting the call option, given the existence of an equity increase in favor of the opting acquirer.
  • Individual Income Tax/IRPF will be levied, however, when the purchaser of shares in the stock option plan resells them with capital gain.

This precedent must be observed in accordance with the principle of uniformity of the jurisprudence of the courts, established in arts. 926 and 927, III, of the Code of Civil Procedure (CPC),[1] and the principle of legal certainty (article 5, XXXVI, of the Federal Constitution).[2]

In relation to this issue, the STF stated, in the records of RE 1,436,593, that the legal nature of stock options would not be within the scope of the constitutional structure. At the time, the Supreme Court did not admit the appeal presented and recognized that it is up to the STJ to decide on the matter.

We consider that, in general, the theses established by the STJ are in line with the direction given to the subject in PL 2,724/22. This jurisprudential guideline, therefore, may have the effect of speeding up the procedures for approval of the Regulatory Framework for Stock Options.

WHAT ABOUT SOCIAL SECURITY CONTRIBUTIONS?

The trial on the subject by the STJ, although it did not directly address social security contributions, in our view, brings encouragement and directs to the impossibility of demanding social security contributions on the stock options granted to employees. This is due to the understanding that such an instrument has a commercial nature (not labor or remuneration), therefore, it would not qualify as remuneration for social security purposes.

As we have already pointed out in another article, the Superior Labor Court (TST) understands that stock options are not part of the salary of employees covered by these programs. Stock options, therefore, should also not be part of the compensation of employees for social security purposes.

Although the position of the ordinary panels of the Administrative Council of Tax Appeals (Carf) is different, the most recent pronouncement of its Superior Chamber (CSRF) when analyzing the controversy[3] rules out the collection of social security contributions on stock options.[4]

Considering the factual aspects involved and the limits of knowledge of the subject, on other more recent occasions, the CSRF did not hear the matter.[5] The federal regional courts have been recognizing, although not yet unanimously, that stock options are not compensation for employees and, therefore, are not subject to the levy of social security contributions. Thus, the existing controversy in relation to the requirement of social security contributions now has solid guidance from the STJ.

In our assessment, the implementation of a stock option plan still requires legal and practical care, in view of the peculiarities of the STJ's judgment and the applicable regulations.

We are here to help you and your company implement effective long-term incentives that engage employees and align with shareholder interests.

 

[1] Article 926. Courts must standardize their jurisprudence and keep it stable, complete and coherent. (...)

Article 927. Judges and courts shall observe: (...)

III – judgments in incidents of assumption of jurisdiction or resolution of repetitive claims and in judgments of extraordinary and special repetitive appeals; (...)

[2] Article 5 - All are equal before the law, without distinction of any kind, guaranteeing to Brazilians and foreigners residing in the country the inviolability of the right to life, liberty, equality, security and property, in the following terms: (...) XXXVI – the law shall not prejudice the acquired right, the perfect legal act and res judicata; (...)

[3] Ruling 9202-010.634, of March 22, 2023, analyzed only the moment of the levying of the tax, concluding that it should take place when the option was exercised. For procedural reasons, however, the judges, at the time, could not reanalyze the incidence of the tax itself.

[4] Rulings 9202-010.511 and 9202-010.510, judged on February 9, 2023.

[5] Judgment 9202-011.175, judged on March 19, 2024.