Brazil's employment law has been a matter of extensive debate in Congress in recent months. Brazil's Labour Reform (Law No. 13,467) (the Labour Reform) came into effect on 11 November 2017. The Labour Reform is extensively changing the Brazilian Labour Code (CLT) and, as a result, companies are reviewing their employment relations in Brazil, especially with regard to executive remuneration.

The Labour Reform will have an impact on interpretation of social security taxes upon awards granted by the employer, which may encompass some share-based payments.

From an industry perspective, the financial industry remains the only one to have a regulation to guarantee a balance between long-term results and the sustainability of the business.


i Income tax for executive employees and non-employees

Earnings that arise from compensation obtained in Brazil by executive employees and non-employees are subject to individual income tax in the form of withholding tax (WHT), at progressive rates up to 27.5 per cent, as indicated below (for calendar year 2017):

Monthly earnings (reais) Rate (%) Deductible from income tax (reais)
Up to 1,903.98
From 1,903.98 to 2,826.65 7.5 142.80
From 2,826.65 to 3,751.05 15 354.80
From 3,751.05 to 4,664.68 22.5 636.13
Above 4,664.68 27.5 869.36

Some incentive share-based plans offered to executive employees and non-employees have the nature of compensation, and thus the individual taxation will follow the progressive rates mentioned above. However, if not, the gains obtained will be subject to income tax on capital gains according to the chart below:2

Capital gain (reais) Tax rate (%)
Up to 5 million 15
From 5 million up to 10 million 17.5
From 10 million up to 30 million 20
Above 30 million 22.5

Whether a long-term share-based incentive is part of the compensation depends upon the analysis of each case, verifying that three conditions are met:

a the participant accepts such granting as an investment opportunity, separate from his or her employment relationship;

b the participant has to contribute with his or her own financial assets to acquire shares, or exercise the options; and

c the corresponding investment must be subject to common market value fluctuations.

In principle, if the plan is characterised as compensation, the following tax treatment should apply:

Option Restricted stock Restricted stock unit (promise to deliver stock in the future)
Tax treatment upon grant? No taxation No taxation No taxation
Tax treatment upon vesting? No taxation No taxation No taxation
Tax treatment upon delivery? WHT and social taxes due by employee and company WHT and social taxes due by employee and company WHT and social taxes due by employee and company
Tax treatment upon sale of underlying shares? Income tax on capital gain Income tax on capital gain Income tax on capital gain

If, however, the long-term incentive does not qualify as compensation the tax treatment is as follows:

Option Restricted stock Restricted stock unit (promise to deliver stock in the future)
Tax treatment upon grant? No taxation No taxation No taxation
Tax treatment upon vesting? No taxation No taxation No taxation
Tax treatment upon delivery? No taxation No taxation No taxation
Tax treatment upon sale of underlying shares? Income tax on capital gains Income tax on capital gains Income tax on capital gains

As mentioned before, the employment law reform may affect the taxation of share-based payments if they have the nature of an extraordinary award granted by the employer to the employee. In this case, a tax exemption of the social security tax may be applicable, considering that the employment law reform created a specific exemption in the tax law for this case.

Whether a share-based payment will qualify as an extraordinary award depends on a case-by-case analysis: not only the regulations of the specific shared-based payment but also the context in which this award was granted, the number and the qualification of the employee or group of employees that perceived it, and the amounts involved.

From our experience, we can assure that tax authorities will contest the social security tax exemption, to claim that this award had a compensatory nature and therefore is subject to taxation. This is reason enough to be very cautious about what can be considered as an award in each company. Questions arise and are still a matter of discussion among employment and tax lawyers: can a retention bonus qualify as an extraordinary award? Does the company need to have a formal policy to regulate conditions for granting extraordinary awards to a single employee or a group of them? If yes, would they qualify, as something granted by the employers' will or would they have the nature of a bonus for targets achieved by employees (case in which no exemption would apply)?

In the upcoming years jurisprudence will interpret this modification of the award payment in legislation and we will envision to what extent the employment law reform influenced executive compensation.

ii Social taxes for employees

The two main sources of financing for social security and welfare systems are:

a the contributions of the employer that are payable on the payroll and on other earnings from employment; and

b the contributions of the employee or non-employee.3

Foreign employees and any other persons that render services in Brazil to Brazilian companies, being duly compensated for these services, will also contribute to the social security or welfare system (as well as the respective companies to whom their services are rendered).

The average social tax rate payable by the company on compensation to employees is 20 per cent. In addition to this rate, percentages are added that are intended to cover the costs of occupational accident insurance and contributions to social security services that are specific to each activity carried out by the company. The average rate resulting from these additions is 28.8 per cent,4 a figure that may vary according to each company's line of business.

In the case of executives (non-employee administrators, executive officers and board members),5 the social tax rate payable by the company is 20 per cent on the total compensation paid, with no additional contributions as above.

The employee's contribution is calculated by applying the corresponding rate to the monthly contribution salary, on a non-cumulative basis, according to the following table (in force as of 1 January 2018):

Contribution salary (reais)

Rate (%)

Up to 1,693.72


From 1,693.73 to 2,822.90


From 2,822.91 to 5,645.80


The contribution of an administrator or an executive officer who is not an employee is calculated according to the following table:

Contribution salary (reais)

Rate (%)

Up to 954.00


From 954.00 to 5,645.80


Legislation provides for numerous specific exemptions from social taxes, which include:

a social security benefits, under the conditions and within the limits of the law, except for maternity leave salary payments;

b one-off allowances received exclusively as a result of a change in the working location of an employee;

c the amount of contributions actually paid by the legal entity in respect of a complementary pension programme, whether open or closed, provided that it is available to all its employees and managers; and

d amounts relating to medical or dental care, whether in-house or contracted by the company, provided that cover is provided for all the employees and managers of the company.

Payments not specifically mentioned as being exempt, however, should be interpreted as being subject to social tax on a case-by-case basis.

iii Tax deductibility for employers

The fixed monthly compensation of non-employees is a deductible expense for the employer, while variable compensation is not, except for the expenses of share-based plans.

According to Law No. 12,973/2014, the expenses related to share-based plans are deductible from the corporate income tax (CIT) calculation basis, and this includes the variable amount related to the non-employees by means of the provision of a specific regulation enacted by the Brazilian Internal Revenue Service (BIRS).6 Companies can deduct the respective expense at the moment of payment of the corresponding amount of the share-based incentive or at the moment the shares are delivered.

Compensation paid to employees, including variable amounts (paid according to profit-sharing plans and share-based incentives) are deductible from the CIT calculation basis.

iv Other special rules

There are no special tax rules affecting compensation or incentive plans applicable in cases of a change in control of a company.

In the specific case of social security tax, health plans or life insurance to all employees and managers, the expense of such benefits is not included in the base for calculating social contribution tax, as explained above.

For corporate tax purposes, the rules do not provide for special cases; if a benefit is granted to all employees and managers without distinction, the expense will be deductible for tax purposes.


The tax authorities oppose any type of tax planning that is intended to conceal an employment relationship or to minimise tax payments. In theory, Brazil is not an attractive location for an executive to change residence for tax purposes in an attempt to take advantage of tax planning based upon the application of treaties.

Although Brazil accepts the principle of taxation on a worldwide basis, compensation received by an executive before becoming resident in Brazil for tax purposes is not subject to Brazilian tax. Once the executive becomes resident for tax purposes, however, compensation received abroad is taxable in Brazil.


Brazil's Labour Reform (Law No. 13,467) came into effect on 11 November 2017. The Labour Reform is extensively changing the CLT, and, as result, companies are reviewing their employment relations in Brazil, especially with regard to executive remuneration. The Labour Reform will make the Brazilian labour framework more flexible in favouring negotiation between companies and their executives.

The Labour Reform set out a meaningful change in the CLT by amending or adding more than 100 sections. The employees' fundamental rights guaranteed by Federal Constitution were maintained with no amendments, and some changes aim to favour negotiation between the parties, by means of collective bargaining agreements or through direct negotiation with the workforce.

One of the most important changes is the prevalence of collective bargaining agreements to prevail over the employment laws regarding several matters. Currently, the Labour Reform presents an exhaustive list of matters that cannot prevail over the laws,7 which, by the reverse, authorises the negotiation on any matter that is not on that list.

In addition, if an executive with a university degree and a monthly salary higher than double the ceiling for social security contributions purposes (around US$4,000 per month) enters into an agreement with an employer regarding labour and employment matters not prohibited by the exhaustive list of matters that cannot prevail over the laws mentioned above, this agreement shall prevail not only over the employment laws, but also over collective bargaining agreement.

Therefore, executives may enter into agreements directly with their employees in order to negotiate several employment matters, including to grant full release. Such matters, however, must be reviewed on a case-by-case basis.

Furthermore, there will be another important change in executives' remuneration. According to the Labour Reform, the following items shall not be considered part of the executive's compensation for tax and employment purposes, even if granted on the usual basis:

a any type of reimbursement;

b meal allowance, when granted in goods;

c travel allowances;

d awards (in goods or cash) discretionarily granted by the employer to the executive (or to a group of employees) as a result of an extraordinary performance; and

e medical and dental assistance even in the case of different plans and coverage for employees.


Securities offered to employees generally do not need to be registered under Brazilian securities law, as this states that only public offerings must be previously registered with Brazil's securities regulatory body, the CVM. In reviewing an inquiry submitted by a company wishing to offer shares to its employees, the CVM stated that an offer is deemed 'public' if it is directed to the general population; an offering made to a company's employees would be not characterised as a public offering and is thus exempt from registration.8 Under regulations applicable to the securities market, executives and members of any other statutory bodies that have technical or advisory duties in a public company must inform the company of any beneficial ownership of shares issued by the company itself, its parent or its subsidiaries (in the latter two cases, this requirement is applicable only to public companies), or trades or dealings in such securities. Securities owned by a spouse, partner or any dependants included in their annual income tax returns or by companies directly or indirectly controlled by the latter should also be included in this notification, which must be made within five days of each trade, on the first business day after taking up a position, and when submitting documentation to register a company as publicly traded.

The company must send the aforementioned information to the CVM, and to the stock exchanges or organised over-the-counter market entities in which the company's shares are listed for trading (if applicable) within 10 days of the end of the month in which the alteration of the positions held occurs, or of the receipt of a notice delivered by the executives and members of any other statutory bodies aiming at updating the information previously provided to the company, or in the month in which the aforementioned persons take up their positions. This information should be delivered on an individual basis and consolidated by body (executive management, board of administration, compliance board and committees). Consolidated data will be available to the public, but individuals' details will not be disclosed.

Executives must comply with the blackout periods prior to the disclosure of any material act or fact to the market or the company's quarterly or annual financial statements, provided that a trading policy previously approved by the company may allow certain transactions within the banned period. Such blackout provisions do not apply for the transfer of treasury shares to executives or the subscription of new shares by executives under a stock-based plan approved by the general shareholders meeting. In addition, Brazil's Corporate Law states that, upon signing the official document on taking office, an executive officer or administrator of a public company must declare his or her holdings and state the number of shares, warrants, stock options and convertible debentures issued by the company and subsidiaries or by the same group.

Further, at the request of shareholders representing 5 per cent or more of a company's shares, an executive officer or administrator must disclose the following data, inter alia, at an annual general meeting:

a the number of securities issued by the company or its subsidiaries, or by the same group, or purchased or disposed of, directly or indirectly, in the previous year;

b stock options that have been granted or exercised in the previous year;

c benefits or advantages, indirect or supplementary, received or being received from the company and affiliated companies, subsidiaries or members of the same group; and

d the conditions of employment contracts that have been signed by the company with the directors and senior management employees.


Public companies, regardless of their size, are required to supply certain information concerning executive compensation, including the highest, lowest and average individual compensation of directors, officers and members of the audit committee.

Insofar as general meetings decide overall or individual amounts paid to directors and officers, including benefits and representation allowances, closely held companies will also eventually disclose details of compensation paid to their executives; usually, the information in the minutes of the general meeting, which must be filed on public record and are therefore available to the public, includes the overall compensation paid to directors and officers.

Information that must be disclosed by public companies includes:

a a description of compensation policy or practices for executives, statutory committees and audit committees, and risk, financial and compensation committees;

b fixed and variable compensation, post-employment benefits, benefits due to termination of mandate, and stock-based compensation recognised in income statements for the past three fiscal years and scheduled for the current fiscal year, for directors, officers and members of the audit committee, grouped by body;

c the number of shares or quotas held, directly or indirectly, in Brazil or other countries, and other securities convertible into shares or quotas issued by the company, or its directly or indirectly controlled subsidiaries or companies under common control, of members of the board of directors, the executive body, or the audit committee, grouped by body, as of the closing date of the latest fiscal year;

d the amount of the highest, lowest and average individual compensation of members of the board of directors, the executive body and the audit committee, for the past three fiscal years; and

e a description of contractual arrangements, insurance policies or other instruments containing mechanisms for compensation or indemnification for directors and officers in the event of dismissal or retirement, stating the financial consequences for the issuer company.

Information need only to be disclosed for executives on a group basis.

Public companies, as well as large private companies,9 must follow international accounting standards, and thus the value of options must be calculated at their fair value as of the grant date.

If shareholders holding 5 per cent or more of the stock of a public company so request, directors and officers must disclose to the general meeting the conditions of employment contracts that have been signed by the company with executive officers and senior management employees.

Finally, a copy of the share-based compensation plan used by public companies shall be disclosed to CVM and the market, even if the compensation plan is based on the equity interest of their controlling shareholder, controlled companies or companies under common control.


Compensation for directors and officers of any joint stock corporation, whether publicly or closely held, irrespective of its size, is decided at the general meeting, and compensation should take into account responsibilities, time devoted to duties, competence and professional reputation, and the value of their services in the market. As a rule, there is no need for additional approvals.

The overall or individual amount is decided at the general meeting, and stock option plans and restricted stock plans must be approved at the general meeting.

Typically, the general meeting also decides the aggregate amount of compensation for administrators and executive officers and the board of directors allocates payments individually.

There is no law requiring approvals from governmental authorities, labour unions or works councils, but if a rule exists in a collective labour agreement or collective bargaining agreement it will be considered mandatory, and approval will be required.

Compensation must be decided annually. If compensation paid to directors and officers exceeds the amount approved by the shareholders at a shareholders' meeting, the company may hold to account the directors and officers who authorised payment to be made in amounts that exceeded the limit set.


Financial institutions and similar entities are subject to specific rules, which stipulate that at least 50 per cent of variable compensation must be paid in shares or share-based instruments, compatible with the creation of long-term targets and the acceptable time frame for risk. Financial institutions and similar entities may also be required to have a statutory compensation committee, comprising at least three members, at least one not being a member of the company's management team, which should report to the board of directors.

These rules apply to financial institutions and other institutions authorised to operate by the Central Bank of Brazil, except for credit unions and entities lending to micro and small businesses, and managers of purchasing consortiums. They apply only to administrators and executive officers, and the Central Bank of Brazil is in charge of implementing or overseeing them.


Employment aspects

Brazil's Labour Reform that came into effect on 11 November 2017 has extensively changed the Brazilian employment laws with a substantial impact on executives' remuneration.

The Labour Reform has been helping the parties involved – companies and executives – to reach an equilibrium in their employment relations, both during the employment contract and after its termination. This surely brought more certainty to companies, also in respect to the appropriate taxation upon rights negotiated.

The Labour Reform allowed a more direct negotiation between the companies and their executives with a lower risk in case of the agreements are challenged before Labour Courts.

However, to the extent that the Labour Reform changed several employment dispositions of the Brazilian Labour Code and created new standards, Brazilian Labour Courts continue to construe the understanding around these changes, so new judicial precedents may be developed concerning these matters.


1 Isabel Bueno and Dario Abrahão Rabay are partners and Francisco A Coutinho is an associate at Mattos Filho Advogados.

2 Rates applied from 1 January 2017, according to Law No. 13,259, enacted on 16 March 2016. Until 31 December 2016, the sole tax rate was 15 per cent.

3 Eventually, social security contributions could be due on gross income for specific economic sectors (according to Law No. 12,546/2011 and subsequent).

4 There may be variations in this rate depending upon certain factors, such as the business carried on by the company, the degree of risk of occupational accidents (according to the accident records of the company), and others.

5 The common management structures of Brazilian companies do not have exact equivalents in common law countries such as the United States. Taking the example of a Brazilian SA, which is the approximate equivalent of a classic US corporation, its management is divided between two different bodies: the board of administration and the executive management. The board of administration is the rough equivalent of a board of directors of a US company, whose members ('administrators') are chosen by the shareholders and appointed for fixed terms. The executive management is responsible for the day-to-day management of the company, whose members ('executive officers') are appointed by the board of administration, and no more than one-third of the board of administration may be executive officers. In addition to the foregoing, it is also common for companies to have additional executives that are employees not appointed by the board of administration, but who nonetheless exercise the typical duties of executive officers ('non-statutory officers'). Some companies also feature boards of compliance.

6 BIRS Normative Instruction No. 1,700/2017, Article 161.

7 The Labour Reform is changing the CLT to include Section 611-B. Section 661-B states that it is forbidden to suppress or reduce the following rights: (1) the rules for professional identification; (2) the unemployment insurance in case of involuntary dismissal; (3) the value of the monthly deposits and severance indemnity of the Severance Fund (FGTS); (4) minimum wage; (5) nominal value of the thirteenth salary; (6) remuneration of night work higher than that of daytime work; (7) protection of the salary (its wilful retention is a crime); (8) a social benefit called 'family-salary'; (9) weekly paid rest; (10) remuneration of overtime at least 50 per cent higher than regular hours; (11) number of vacation days; (12) vacation bonus of one-third over the salary; (13) maternity leave with a minimum duration of 120 days; (14) paternity leave; (15) protection of the labour market for women, through specific incentives; (16) prior notice proportional to the length of service, being at least 30 days; (17) standards of health, hygiene and safety at work provided for by law or by regulatory standards of the Ministry of Labour; (18) additional remuneration for strenuous, unhealthy or dangerous activities; (19) retirement; (20) insurance against accidents at work, paid by the employer; (21) statute of limitation; (22) prohibition of any discrimination regarding salary and admission criteria for disabled workers; (23) prohibition of night work, dangerous or unhealthy to minors under 18 years and any work under the age of 16, except as an apprentice, from the age of 14; (24) measures for the legal protection of children and adolescents; (25) equality of rights between the worker with permanent employment relationship and the occasional worker; (26) freedom of association of the worker, including the right to previously approve any collection or salary discount established in a collective bargaining agreement; (27) right to strike; (28) legal definition on essential or urgent services in the event of a strike; (29) taxes and other credits of third parties; (30) the provisions regarding protection of women, pregnant and nursing.

8 Legal opinion/CVM/SJU/No. 81/82.

9 Pursuant to Article 3, sole paragraph of Law No. 11,638 of 28 December 2007, a large company is one or a group of companies under common control whose total assets in the prior fiscal year exceeded 240 million reais in value or whose annual gross income exceeds 300 million reais in value.