I INTRODUCTION

Brazil's employment law was a matter of extensive debate in Congress, Brazil's Labour Reform2 (Labour Reform) came into effect on 11 November 2017. The Labour Reform extensively changed the Brazilian Labour Code (CLT) and, as a result, companies reviewed their employment relations in Brazil, especially regarding executive remuneration.

The main purpose of the Labour Reform was to:

  1. provide more certainty to employment relationships;
  2. stimulate a better business environment in Brazil;
  3. modernise and loosen labour and employment regulations;
  4. reduce litigation; and
  5. stimulate negotiations and interactions between employers and employees.

Some of the changes introduced by the Labour Reform have directly affected employment agreements held with employees in executive levels.

At the time of writing, Congress had approved the Bill of the Social Security Reform. It still needs the approval of the Senate; the text under approval does not change the obligation of employers to collect social security taxes upon the payroll and compensation paid to employees and executives. What could possibly affect this scenario is an ongoing government and Congress debate about a tax reform: some bills have in common a proposal to substitute or reduce the social security tax upon the payroll and compensation due by employers as a means to promote employment.

In our experience, the Labour Reform itself has already affected labour relations, including regarding executive compensation, where direct negotiations with an employer is admitted and enforceable. These factors can have an impact on the interpretation of which types of executive compensation are subject to the collection of social security taxes, especially when it comes to share-based payments.

There is ongoing extensive debate about the taxation applicable for share-based payments, with the lack of legislation upon this matter leading to opposite interpretations about it. One interpretation of the Brazilian Internal Revenue Service advocates the taxation of gains as compensation, irrespective of which kind of share-based plan is applied. Another advocates that in stock option plans there is no compensation granted, provided an executive needs to pay the exercise price to acquire the shares, based on decisions issued by the Superior Labour Court. Taxpayers, both companies and executives, hold that this encompasses a commercial contract, and subjects gains upon a sale of shares to income tax on capital gains.

There is less debate about the tax treatment applicable to a share-based payment in which there is no payment of any acquisition price. In this scenario, it is commonly understood that such a scheme encompasses compensation, and the respective tax treatment. Surprisingly, few judicial decisions from the state courts have interpreted that in such case, no compensation is granted. These decisions were not expressly based on the legal scenario brought about under the Labour Reform. However, in some ways, they can be seen as the precursors of a new understanding of the legal environment when it comes to share-based executive compensation.

The financial industry remains the only industry to have a specific regulation enacted by the Central Bank – Resolution 3.921/2010 – to guarantee that executives (board members and statutory officers that make up the management of a financial institution) have their variable compensation tied to long-term business results. A minimum of 50 per cent of the variable compensation is share-based (tied to the performance of equity instruments) and a minimum of 40 per cent of the variable compensation is deferred to future payment (after a minimum of three years), dependant on the business results of the financial institution in the respective deferred period.

It seems the debate about the tax and labour treatment of share-based payments will be the hot topic in coming years. Uncertainty does not benefit business development, or the attraction and retention of executives. This scenario has led many Brazilian companies to adopt share-based payments as part of the executive compensation portion of remuneration for tax purposes. However, jurisprudence construed in this new legal environment can affect this position and offer companies an opportunity to recover social security taxes collected on such arrangements. The legal scenario is changing on these matters, and future years will certainly bring changes to past standards.

II TAXATION

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 (in force as of calendar year 2015):

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:3

Capital gains (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 forms part of the compensation depends upon an analysis of each case to verify that three conditions are met:

  1. the participant accepts such granting as an investment opportunity, separate from his or her employment relationship;
  2. the participant has to contribute with his or her own financial assets to acquire shares, or exercise the options; and
  3. the corresponding investment must be subject to common market value fluctuations.

In principle, and based on current view of the Brazilian tax authorities, if a 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

In addition, the following tax treatment should apply to phantom stock plans:

Phantom stocks (payment of cash prize, calculated based on shares value or appreciation)
Tax treatment upon grant? No taxation
Tax treatment upon vesting? No taxation
Tax treatment upon delivery? WHT and social taxes due by employee and company
Tax treatment upon sale of underlying shares? Not applicable

If, however, the long-term incentive does not qualify as compensation (not applicable for phantom stock plans), 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

Note that, according to Brazilian tax authorities, share-based plans should always be treated as compensation for tax purposes. Accordingly, tax authorities usually challenge the application of the non-compensation treatment, both at the company and the participant level. Discussions on that matter are still under the review of the administrative and judicial courts. To date, there has been no definitive ruling on the matter. However, in general, judicial courts have adopted a more favourable view, in comparison with the administrative courts, of the possibility of application of the non-compensation treatment, whenever the aforementioned three conditions are found.

Additionally, as previously mentioned, the employment law reform can be a factor that will affect the taxation of share-based payments if they have the nature of an extraordinary award granted by an employer to an employee. In this case, an exemption of the social security tax may be applicable, but will still not be tied to the nature of the compensation, but rather to the recurrence of the payment. The interpretation that a share-based payment does not encompass compensation for any purpose due to the exposure of this portion to market oscillation is still a minor part of the recent few court decisions on the subject. However, as previously stated, they can be the precursors of a new interpretation of the legal environment affected by the Labour Reform.

Whether a share-based payment will qualify as an extraordinary award depends on a case-by-case analysis: not only the regulation of a 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 received it, and the amounts involved.

From our experience, we are sure that the 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. Several questions have arisen and are still a matter of discussion among employment and tax lawyers:

  1. Can a retention bonus qualify as an extraordinary award?
  2. Does a company need to have a formal policy to regulate conditions for granting extraordinary awards to a single employee or a group of them?
  3. If yes, would they qualify, as something granted by an employer's will, or would they have the nature of a bonus for targets achieved by employees (in which case no exemption would apply)?

In future years, jurisprudence will interpret this modification of an award payment in legislation, and it will be seen to what extent the employment law reform has influenced executive compensation.

ii Social taxes for employees

The two main sources of financing for social security and welfare systems are the contributions of employers that are payable on the payroll and on other earnings from employment and the contributions of employees and non-employees.4

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 a company. The average rate resulting from these additions is 28.8 per cent,5 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),6 the social tax rate payable by a company is 20 per cent on the total compensation paid, with no additional contributions as above.

An 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 8
From 1,693.73 to 2,822.90 9
From 2,822.91 to 5,645.80 11

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

  1. a contribution salary of up to 954 reais: 11 per cent; and
  2. a contribution salary from 954 reais to 5,645.80 reais: 20 per cent.

As mentioned in Section I, employee rates will be affected by the Social Security Reform, which remains to be approved by the Senate, so its is recommended that this information is verified by reader before making any assumption about the Brazilian scenario. In addition, if a tax reform is approved, the social security tax legislation could substantially change.

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

  1. social security benefits, under the conditions and within the limits of the law, except for maternity leave salary payments;
  2. one-off allowances received exclusively as a result of a change in the working location of an employee;
  3. the amount of contributions actually paid by a 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
  4. amounts relating to medical or dental care, whether in-house or contracted by a company, provided that cover is provided for all the employees and managers of that 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 employers, while variable compensation is not, except for the expenses of share-based plans.

According to Law No. 12,973/2014, expenses related to share-based plans are deductible from the corporate income tax (CIT) calculation basis, and this includes the variable amount related to non-employees by means of the provision of a specific regulation enacted by the Brazilian Internal Revenue Service (BIRS).7 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 for 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.

IIi IMPACT of the LABOUR REFORM ON company and EXECUTIVE EMPLOYMENT RELATIONSHIPS

After the enactment of the Labour Reform, the Brazilian labour framework has become more flexible in favouring negotiations between companies and their executives. Employees who have college decrees and whose monthly salary is higher than 11,678.90 reais8 are allowed to negotiate with their employers and enter into individual agreements regarding some labour and employment matters,9 and such individual agreements shall prevail not only over the law, but also over collective bargaining agreements.

Managers and executives usually fit the education and salary requirements mentioned above, meaning that the use of individual agreements has increased over the past two years among executives, who are now allowed to freely negotiate the terms and conditions that will govern their employment agreements with regards to a broad range of subjects, including the possibility to recognise their job position as a position of trust for purposes of exemption of working time control and overtime payments, incentive awards and profit-sharing plans, among other matters.

In this new context, the execution of out-of-court settlements, especially with executives, became a very effective alternative for companies to solve controversial matters that could potentially trigger a judicial dispute. By means of out-of-court settlements negotiated and executed with executives upon their termination, employers agree to pay compensation to these employees (in addition to the statutory severance). The employees, in their turn, agree to grant the full and irrevocable release regarding the extinct employment contracts. As expected, out-of-court settlements have strongly contributed to the decrease of litigation rates in Brazil.

Furthermore, the Labour Reform has provided that the following items shall not be considered part of employees' compensation for social security taxes and employment purposes, even if granted on recurrent basis:

  1. any type of reimbursement;
  2. meal allowances, when granted in goods;
  3. travel allowances or travelling expenses;
  4. medical and dental assistance even in the case of different plans and coverage for employees;
  5. additional allowances; and
  6. awards (in goods or cash) discretionarily granted by an employer to an executive (or to a group of employees) as result of an extraordinary performance (achievements that exceed what is ordinarily expected from the employees).

Companies in Brazil have been dedicating great attention to these new provisions with the purpose of implementing new models of incentive awards to their executives.

Regardless of the provisions introduced by the Labour Reform concerning executive employees, other relevant features of the employment contracts must be observed as follows.

Iv TAX PLANNING AND OTHER CONSIDERATIONS

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 an executive becomes resident for tax purposes, however, compensation received abroad is taxable in Brazil.

V RESTRICTIVE COVENANTS

During the term of an employment contract, an employee has a duty of loyalty to his or her employer, and thus cannot carry out competing activities unless the employer has given an authorisation in this regard (intermittent work on demand is an exception to this rule). Because of the constitutional principle of the freedom to work, after the termination of an employment, an employee is free to work in or carry out competing activities, unless he or she has executed a non-competition agreement with the employer, following certain specific rules given by case law.

The execution of non-competition covenants with executives is common in Brazil. Employees who hold management and trust positions are usually provided with great and broad knowledge about the business of their employer. Besides, they often have specific expertise and know-how that are key success factors for a company. This is why, upon the engagement of top executives, companies in Brazil are becoming more and more concerned with the stipulation of non-competition covenants.

The understanding that non-competition agreements are not permitted in Brazil is outdated. According to Labour Court precedents, the constitutional principle of freedom to work is not absolute, and can be limited according to the interest of the contracting parties provided that the covenant obligation is reasonable and necessary to protect an employer's business.

According to recent Labour Court precedents, non-competition covenants in Brazil are deemed valid and enforceable, provided that they observe certain conditions and requirements, as follows:

  1. the non-competition agreement must be limited to a certain period. Although there is no specific regulation about the matter in Brazil, based on court precedents, it has been established that non-competition obligation must not exceed 12 months following the termination. Otherwise, the chances of having a restrictive covenant declared null would be high;
  2. the non-competition covenant must be limited to a geographical area and to the business area of an employer. Preventing an employee from performing competing activities in the entire country if an employer's activities are limited to one state, for example, could be considered abusive.
  3. an employee who agrees to undertake a non-competition covenant must be paid in return, meaning that he or she will be entitled to receive monthly compensation during the non-competition period. Although there is no specific regulation about the matter in Brazil, it is understood (based on court precedents) that a former employee should be paid a monthly compensation equivalent to his or her last salary as an employee, or a reasonable portion of it, which must be analysed on a case-by-case basis; and
  4. the purpose of a non-completion covenant must be necessary to protect an employer's business: if an employee, due to his or her position, had no access to relevant knowledge about a business, or an employee does not own a specific expertise and know-how to impact a business, a non-competition covenant may be considered illegal.

Confidentiality and non-solicitation covenants, which are very common among executive employees, are also valid, and their enforceability does not depend on payment to employees. For these obligations to be valid after termination, an express agreement in this regard is required. A company may choose to execute a separate document, provided that it is executed simultaneously with the employment contract.

It is advisable, although not mandatory, that restricted covenants are negotiated and executed upon hiring. These can be included as a clause in an employment contract or be regulated in a separate document on the same date. The parties may also stipulate such obligations during the employment contract or upon termination, but the chances of the covenants being declared null would be higher.

Vi EMPLOYMENT LAW

As mentioned before, Brazil's Labour Reform came into effect on 11 November 2017. The Labour Reform extensively changed the CLT, and, as result, companies are reviewing their employment relations in Brazil, especially with regard to executive remuneration. The Labour Reform provides grounds so that the Brazilian labour framework can become 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. Employees' fundamental rights guaranteed by the Federal Constitution were maintained with no amendments, and some changes aimed to favour negotiation between 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,10 which, as a 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 agreements.

Therefore, executives may enter into agreements directly with their employees to negotiate several employment matters, including a grant of 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 an executive's compensation for tax and employment purposes, even if granted on the usual basis:

  1. any type of reimbursement;
  2. meal allowances, when granted in goods;
  3. travel allowances;
  4. awards (in goods or cash) discretionarily granted by an employer to an executive (or to a group of employees) as a result of an extraordinary performance; and
  5. medical and dental assistance even in the case of different plans and coverage for employees.

Vii DISCONTINUING EMPLOYMENT

Although the Federal Constitution protects employment relationships against arbitrary dismissals or terminations without cause, such restriction is considerably softened by a complementary law that allows employers to dismiss employees without cause, provided that the employer pays a fine corresponding to 50 per cent of the employee's FGTS accrual, of which 40 per cent belong to the employee and 10 per cent is referred to taxes.

As a result, in practice, employments in Brazil are at will, meaning that an employer may terminate an employment agreement for whatever reason, without cause, upon granting the mandatory prior notice and payment of the statutory severance, including the FGTS fine mentioned above.

Of course, the possibility to terminate employments without cause does not allow employers to dismiss an employee based on unlawful reasons, such as discrimination based on gender, age or racial origin. In addition, if an employee is entitled to any kind of stability or tenure, a termination without cause would only be feasible if the employee agrees to waive it, and if the employer indemnifies or compensates the entire tenure period.

The standard and legally provided ways to terminate an employment agreement in Brazil are: termination without cause, termination with cause, resignation by the employee, constructive termination and termination by mutual consent.

  1. termination without cause:
    • accrued salary;
    • accrued and prorated vacations, if applicable;
    • accrued and prorated Christmas bonus;
    • FGTS payment (8 per cent over the severances due);
    • FGTS fine (50 per cent over the balance of the FGTS fund, of which 40 per cent belongs to the employee and 10 per cent serve as tax);
    • prior notice (at least 30 days of notice, plus three days of notice for each employment relationship anniversary up to a total of 90 days); and
    • other payments possibly set forth in the employment contract, collective bargaining agreement or internal policies. The employee would be able to withdraw the accrued FGTS and receive public unemployment insurance.
  2. termination with cause:
    • accrued salary;
    • accrued and prorated vacations, if applicable;
    • accrued and prorated Christmas bonus;
    • FGTS deposit (8 per cent over the severances due); and
    • other payments possibly set forth in the employment contract, collective bargaining agreement or internal policies.
      Briefly, the main difference in relation to those items under (a) is that, in the case of a termination without cause, the employer must pay the FGTS fine and prior notice. In addition, in a termination with cause, the employee would not be able to withdraw the accrued FGTS.
  3. resignation by an employee: in cases where an employee decides to resign under his or her own choice, the statutory severance would be the same as in a termination with cause;
  4. constructive termination occurs when an employee's termination of employment is not under his or her own choice, but rather results from his or her employer creating a hostile work environment, not complying with the legal and contractual obligations arising from the employment agreement, or both.12 Generally, when any reason for constructive termination is present, an employee may consider the employment terminated and file a lawsuit against his or her employer claiming for payment of statutory severance in same amounts that he or she would be entitled to receive upon a termination without cause (see point (a)); and
  5. termination by mutual consent: the Labour Reform has introduced the possibility of termination by mutual consent, allowing the parties to agree on the termination in the event both employer and employee intend to end an employment agreement. In this case, the severance would be the same as in a termination without cause, with the difference that the employer would pay only half of the FGTS fine and half of the prior notice. In a termination by mutual consent, the employee is entitled to withdraw 80 per cent of the FGTS accrual.

Viii SECURITIES LAW

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 had 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.13 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.

Companies must send the aforementioned information to the CVM, and to the stock exchanges or organised over-the-counter market entities in which their 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 a 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).14 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 a 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:

  1. 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;
  2. stock options that have been granted or exercised in the previous year;
  3. benefits or advantages, indirect or supplementary, received or being received from the company and affiliated companies, subsidiaries or members of the same group; and
  4. the conditions of employment contracts that have been signed by the company with the directors and senior management employees.

ix TRANSFER OF BUSINESS

Labour legislation provides that changes to corporate shareholdings do not affect employment contracts with employees. Thus, in the event of a change of control, a previously existing employment contract is maintained, and employees may challenge any alteration made to the employment contract that is detrimental to them.

Employment succession will be considered whenever there is continuity of a business. Thus, even if only the assets of a Brazilian company are being acquired (totally or partially), the labour succession of employers will still be considered and existing contractual employment conditions must be maintained.

Likewise, if the successor company continues to employ its employees, but in the future ceases to pay employment rights or its partners cease to exist, nothing can hinder employees, including those that came with the business, from holding the company that acquired the assets, totally or partially, liable for the obligations. The predecessor company will only be held jointly and severally liable with the successor in cases where there was fraud in the transfer of a business.

The Labour Reform provides that former shareholders are secondarily liable for labour-related debts related to the period in which they were shareholders. This liability is limited to labour lawsuits filed until two years after a company's by-laws are amended to provide the shareholders' removal. Before proceeding with enforcement attempts against former shareholders, the plaintiff must try to enforce the award first against the company or employer and second against its current shareholders. In the case of fraud in a change of the corporate shareholders structure, former shareholders will be jointly and severally liable for the labour-related debts.

When it comes to taxes, the successor company is liable for social security taxes not collected by the previous company, and any discussion will only relate to penalties that can be imposed on the successor company in specific situations.

x DISCLOSURE

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:

  1. a description of their compensation policy or practices for executives, statutory committees and audit committees, and risk, financial and compensation committees;
  2. 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 their audit committee, grouped by body;
  3. 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;
  4. 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
  5. a description of contractual arrangements, insurance policies or other instruments containing mechanisms for compensation or indemnification of 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,15 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.

xI CORPORATE GOVERNANCE

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.

In addition, if any joint-stock corporation, whether publicly or closely held, wishes to grant compensation to directors and officers of its controlled subsidiaries, such compensation should be approved by the subsidiary's general shareholders' meeting.16

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.

xII SPECIALISED REGULATORY REGIMES

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, of which at least one not is a member of a company's management team, which committee 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.

Xiii DEVELOPMENTS AND CONCLUSIONS

Brazil's Labour Reform has been helping the parties involved – companies and executives – to reach an equilibrium in their employment relations, both during an employment contract and after its termination. This has brought more certainty to companies, but not regarding taxation on executive share-based compensation, which still is a matter of administrative and court debate.

The Social Security Reform currently under review by the Senate for its approval does not change this tax uncertainty, but a possible tax reform could substantially affect it, providing more certainty to the tax treatment of the share-based compensation that is usually adopted for executives.

Jurisprudence construed within the new legal framework provided by the Labour Reform, and possibly by the Social Security Reform, will also affect future share-based incentives.


Footnotes

1 Isabel Bueno and Dario Abrahão Rabay are partners and Francisco A Coutinho, Marília Ravazzi and Tomás Machado de Oliveira are associates at Mattos Filho Advogados.

2 Law No. 13,467.

3 These rates have 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.

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

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

6 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.

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

8 This amount corresponds to double the current ceiling amount of social benefits paid by the Social Security Agency, which usually increases every year.

9 An exception is made for those matters covered by the exhaustive list of fundamental rights provided by the Labour Reform that cannot be negotiated, which mirrors the fundamental rights guaranteed to all workers in the Brazilian Constitution.

10 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) rules for professional identification; (2) unemployment insurance in cases of involuntary dismissal; (3) the value of monthly deposits and severance indemnity of the Severance Fund (FGTS); (4) the minimum wage; (5) the nominal value of the 13th salary; (6) remuneration of nighttime work that is higher than that of daytime work; (7) protection of salary (its wilful retention is a crime); (8) a social benefit called the family salary; (9) weekly paid rest; (10) remuneration of overtime that is at least 50 per cent higher than regular hour remuneration; (11) the 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 employers; (21) the statute of limitation; (22) prohibition of any discrimination regarding salary and admission criteria for disabled workers; (23) prohibition of nighttime work, or work that is dangerous or unhealthy, for 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 workers with permanent employment relationships and occasional workers; (26) freedom of association of workers, including the right to previously approve any collection or salary discount established in a collective bargaining agreement; (27) the right to strike; (28) a legal definition of essential or urgent services in the event of a strike; (29) taxes and other credits of third parties; and (30) provisions regarding the protection of women, and pregnant and nursing women.

11 Section 482 of the Brazilian Labour Act sets forth a comprehensive list of types of misconduct that may justify a termination with cause. To support a termination with cause, an employer must hold stronger evidence that an employee was involved in at least one of the types of misconduct described in Section 482. Nothing prevents a former employee from bringing a labour lawsuit asking a judge to convert a termination into a dismissal without cause, and claiming for differences of severance and compensation for pain and suffering. In this case, the employer must have enough evidence to prove in court that the termination with cause was properly applied.

12 Section 483 of the Labour Act sets forth a comprehensive list of type of misconduct of an employer that may justify a constructive termination.

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

14 The information must be disclosed through periodic forms made available on the CVM's electronic system (Empresas.NET).

15 Pursuant to Article 3, sole paragraph of Law No. 11,638 of 28 December 2007, a large company is one company 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.

16 Pursuant to Article 154, §2º, 'c' of Law No. 6,404 of 15 December 1976.