Taxation of share awards varies from country to country and knowing how tax works is essential to ensure you are making the right decisions with your Restricted Stock Units (RSUs), stock awards or employee stock options (ESOs). We are focusing on one country at a time to highlight for you the key high level tax considerations you should know for that country. Clearly every individual’s tax situation is different so what we share below is high level guidance for typical scenarios but do your own research or seek specific advice on your situation before taking any action.
The focus today is Brazil.
Do employee stock awards have income tax applied at grant date or vesting date?
In Brazil income tax is payable if the plan is deemed to be a normal part of employee compensation. Taxable moment will be at the vesting date for Restricted stock units and restricted stock and on the exercise date for stock options. Income tax is calculated based on the market value (market value less cost for options).
If a stock option plan is deemed to be ‘commercial’ in nature meaning that the employee voluntarily accepts the options as an investment with an option price equal to market value then no income tax will be payable upon exercise but capital gains tax will be due upon sale – see next question.
Are stock awards subject to capital gains tax (CGT)?
Yes, capital gains tax applies upon the sale of the stock. Once vested/exercised the stock is an asset you own and is typically subject to CGT based on the gain made between vesting date and sell date.
Is income tax withheld by the employer or the responsibility of the employee?
As awards are often not classified as ‘normal compensation’ typically the employer does not do any withholding for tax for share plans in Brazil and it is up to the employee to ensure they are complying with the local taxation requirements.
Anything else worth noting about Brazil?
The question of whether a plan is ‘compensation’ or ‘commercial’ is important for tax purposes and local advice should be sought on this. Usually companies do not do withholding and it is up to the employee and their tax consultant to interpret what is taxable. Whether their view will align with the tax authorities is debatable and it is likely that the tax authorities will see more plans as ‘compensation’ and taxable as income than the employees who are receiving the awards.
We hope this was useful, please do visit the website and use our free equity plan valuation tool if you are thinking about tax and need to understand the current value of your employee stock awards / long term incentives.