The Executive Remuneration Review: Brazil


One of the main issues when it comes to hiring an employee in Brazil are the payroll taxes and labour rights costs. The law is very strict regarding employees' classification, which leads many companies to hire their own executives as employees, adding a cost related to payroll taxes and labour rights, of approximately 64 per cent of the employee's base salary (see the table in Section III for more details).

As a consequence of the high employee costs, the main challenge when hiring high-profile employees is the structure of the remuneration package in a manner where it is possible to allocate part of the remuneration free of payroll taxes and labour rights costs.

Is it possible to have part of the remuneration free of payroll taxes and labour rights costs? Yes, it is. All payments with a salary nature are subject to payroll taxes and should be the basis for the calculation of mandatory labour rights. Salary nature is determined when the payment is frequent and aims at compensating employees for the services rendered as opposed to a payment of a car allowance, for example, when the car is need for the employee to render services. Differently from the payroll taxes and labour rights that depend on the concept of salary nature, all remuneration (except payments with an indemnification nature) will be subject to income tax becoming a matter of determining when the remuneration becomes taxable.


i Income tax for employees

Employees' remuneration will be subject to income tax with the exception only for payments with an indemnification nature, such as a reimbursement of expenses or payment for unused vacation.

Income tax rates applicable to employees' remuneration are progressive and for this reason executives are usually taxed at the highest rate following the table below:

RemunerationIncome tax rate
Up to 1,903.98 reaisNo tax
From 1,903.99 to 2,826.65 reais7.5 per cent
From 2,826.66 to 3,751.05 reais15 per cent
From 3,751.06 to 4,664.68 reais22.5 per cent
Above 4,664.68 reais27.5 per cent

Those income tax rates are applicable to all employees, including expatriate employees who are tax resident in the country. Once the expatriate becomes tax resident, his or her worldwide income will be taxed in Brazil.

As said before, all remuneration will be subject to income tax becoming a matter of determining when the remuneration becomes taxable.

The discussion on the time when the remuneration becomes taxable exists specially when it comes to stock awards. Regarding stock granting in general, once the stocks are granted to the employee, the value of such stocks becomes part of employees' assets and consequently is subject to income tax. But what happens when employer uses the stock grant as a retention tool and the grant in the manner of stock options, restricted stocks or restricted stocks units?

When it comes to stock options, Brazilian tax authorities consider that there is only a taxable event if and when, after the vesting period, the employee exercises his or her options. If the employee never exercises his or her options, there is no income to be taxed.

As to restricted stocks, upon granting they become an asset for the employee and therefore their value will be considered income and subject to tax. The stock units, on the other hand, will only be subject to tax following the vesting period when the employee receives the stock or the cash.

The conclusion is that in cases of deferred compensation, such as the examples of stock awards, the taxable event will occur from the tax authorities' standpoint when the value is in fact received by the employee.

The below chart summarises tax treatment of the stock awards during the different phases common to this type of remuneration.

OptionRestricted stockRestricted stock unit (promise to deliver stock in the future)
Tax treatment upon grantNo taxationNo taxationNo taxation
Tax treatment upon vestingNo taxationNo taxationNo taxation
Tax treatment upon deliveryIt depends on the characteristics of the plan (if it has features of an actual commercial transaction, i.e., employees are required to make an actual disbursement to acquire the stocks).
In cases where the options are regarded as salary, the employer must withhold income tax on the positive difference between the market value of the shares transferred to the employee at the date of the exercise/delivery and the disbursement actually made by the employee (i.e., exercise price).
Otherwise, no taxation should be due upon the delivery of the stocks.
Employer must withhold income tax and social security contributions due by both employee and employer on release of the RSUs.Employer must withhold income tax and social security contributions due by both employee and employer on release of the RSUs.
Tax treatment upon sale of underlying sharesEmployees are liable to pay income tax on the capital gain they make on disposal (i.e., the excess of the proceeds of sale over the exercise price paid by the employee on exercise).Employees are liable to pay income tax on disposal of their shares on the excess of the proceeds of sale over the market value of the shares (i.e., the amount subject to income tax) at the date of release.Employees are liable to pay income tax on disposal of their shares on the excess of the proceeds of sale over the market value of the shares (i.e., the amount subject to income tax) at the date of release.

Another example that illustrates how Brazilian tax authorities see deferred compensation is Rule 3.291 of the Brazilian Central Bank that requires banks to defer one-third of executive variable remuneration (such as bonus, for example). In this case, employee will only pay income tax when the deferred compensation is paid in the future.

ii Social taxes for employees

Both employee and employer must pay social security contributions in Brazil. The employer will pay between 20 per cent and 28.8 per cent of social security contributions depending on its activity (level of risk and history of work-related accidents or work-related diseases).

Employees will have the social security contributions deducted from their salaries in a progressive rate up to the limit of 11 per cent over the highest monthly benefit paid by the social security authorities, which for 2020 corresponds to 6,101.06 Brazilian reais.

Those rates are applicable to employees and not to self-employed workers or autonomous workers. For self-employed or autonomous workers, the contribution will follow a progressive rate between 7.5 per cent and 14 per cent.

Expatriate employees who become tax residents in Brazil will also have social security contributions withheld from their salaries. If there is a tax agreement between their home countries and Brazil, they will be able to have the time of service and contributions recognised back in their home countries.

iii Other special rules

Fringe benefits are considered part of the employees' salary for payroll purposes and as the basis for calculation of employees' labour rights. Exceptions for the fringe benefits listed under Article 458 of the Brazilian Labour Code, which are tax exempt for all purposes (payroll, labour rights, social security contributions and even income tax), are: uniforms or working clothes, housing, health and dental insurance, life insurance, vehicle used for work, meal or food vouchers, employees' education costs, life insurance, private pension plans and culture vouchers.

Although it is common practice to grant some of the benefits listed above to executives, it is necessary to be careful as it is a requirement to ensure the special tax treatment that benefits are provided for the employee to perform his or her job, like a 'working tool'. A car, for example, when provided for an executive, is hardly considered by the tax authorities and labour courts as tax exempt under the argument that it is not a working tool. Some understandings apply to housing and children's education paid for the executives.

Tax planning and other considerations

Whenever hiring an executive, the main question employers should have in mind is: is this executive classified as an employee under Brazilian laws? The response will determine not only the payroll costs but whether the executive will be entitled to mandatory labour rights, which can sum up to a monthly cost of 64 per cent over the remuneration paid to him or her. While, if hired as a non-employee executive, the monthly cost will be limited to a 20 per cent social security contribution over the remuneration.

The 64 per cent basic costs of such mandatory employment rights are the following:

Employment rightsPercentage (approximately)
Christmas bonus8.33
Vacation bonus2.78
FGTS deposits 8
Fine of 40 per cent over the FGTS account3.2
Social security contributions (INSS) * 27
INSS over the 13th salary and vacation bonus2.99
INSS over vacation2.25
FGTS and Fine of 40 per cent over the 13th salary and vacation bonus1.25
* The INSS – social security contributions percentage may vary a little depending on certain details, such as the activity of the company. The 27 per cent is an average and the variation to a higher or lower percentage is not significant.

The mandatory labour rights listed in the above chart do include benefits that are market practice such as health insurance, meal vouchers, life insurance or private pension plan, or labour rights or benefits provided in collective bargaining agreements.

According to the Brazilian Labour Code, an employee is a person who render services personally, on a frequent basis, under the order or directions of the employer for which he or she will be paid a remuneration.

In practice, most of the characteristics described above as being ones of the employment agreement can also be found on an autonomous or independent contractor's agreement. Therefore, the classification of an individual as an employee will depend mainly on the level of autonomy or independence of the executive to perform his or her job. When verified that the executive has full independence in the performing of his or her activities, with broad powers to represent the company, it means that he or she can be hired as a non-employed executive.

Employment law

Until a recent reform in the Labour Code, Brazilian law did not distinguish between blue-collar and white-collar employees, except when it came to the concept of being exempt for the purpose of working hours control and related payment of income tax. The 2017 reform recognised that employees earning a salary above two times the maximum social security benefit (approximately 12,202 reais in 2020) and with a college degree would be considered 'hipersuficientes'. This means that they would be able to negotiate the conditions of their employment agreements and even waive certain labour rights which other employees would only be able to do with the assistance of the labour union.

Although this recent change in the legislation was considered to have a significant impact for employees such as executives, there were no more changes directed to this population. For this reason, employment agreements are still essential when it comes to executives as the law still has lots of blanks when it comes to remuneration or special covenants.

Because the law does not address different types of remuneration that could be easily found on an executive package such as bonus, premiums, stock awards, etc., the rules must be agreed upon by the parties. From the eligibility, vesting (if any), deferred payment, forfeiture, to moment for payment, it is necessary that all is put in writing to avoid future disputes.

Labour courts are protective of employees' rights, even when those employees are executives, so it is a mistake to forget that if the rules are not clearly written the general rules will apply such as the impossibility to stop the payments or change the rules of payment.

It is not different when it comes to covenants. Starting from the non-compete clauses, according to labour courts precedents must meet the following requirements in order to be enforceable: compensation; geographic limitation; subject limitation; and reasonable duration.

The compensation should be enough for the employee to continue to be able to afford a living without working or working with the restrictions imposed by the covenant. Usually, this would mean a compensation equal to monthly salary times number of months of the non-compete restriction. For executives with high level salaries, there is court precedent considering enforceable compensation lower than one month's salary.

The geographic restriction should correspond to places of business of the employer, or proven potential places of business for the employer. If the whole country is a place of business or a potential one for the company, it is valid to list Brazil. The company would not need to choose specific states.

The subject limitation should be enough assuming this is the type of business or service that the individual was engaged with during employment. It would still allow him or her to render the same type or similar services to other industries or different types of service for the same industry.

Enforceability of the non-compete will also be affected by the timing when it was negotiated. There is always the risk of allegation of coercion when the when the non-compete clause is included during the course of the employment agreement. This type of covenant should be since the beginning in the employment agreement or included in the context of a separation agreement upon end of employment.

As to the non-solicitation clauses, because they do not represent a limitation to employees' constitutional right to freely engage in an economic activity, such as working, the labour courts' precedents do not require compensation and are lighter when examining the other requirements.

Actually, the challenge in any non-solicit is to prove the breach of clause, that is, the solicitation itself. The solicited party can always indicate that it was its choice to follow the former executive, meaning that there was no solicitation.

Non-solicitation as well as other clauses such as non-disparagement, confidentiality, etc., are considered enforceable despite the moment when they are entered into, whether in the beginning, during the course or at the end of the employment agreement.

Concerning the end of the employment agreement, executive terminations are subject to the same rules as the ones applicable to other employees. If terminated by initiative of the employer without cause, the executive will be entitled to the following mandatory severance in addition to acquired labour rights:

  1. prior notice (from 30 to 90 days depending on the length of service);
  2. 40 per cent FGTS fine (FGTS is a severance guarantee fund in which the employer deposits 8 per cent) on top of employees' salary in a specific account. Upon termination, employees will pay the FGTS fine over the balance of the account); and
  3. any additional severance or right provided in the employment agreement or in the collective bargaining agreement, if any.

In the case of termination for cause, the executive will not be entitled to mandatory severance, but rather only to acquired rights (except for the pro rata 13th salary). The termination for cause is the highest disciplinary measure an employer can impose on an employee and for this reason, it is only allowed under the causes expressly listed in Article 482 of the Brazilian Labour Code:

  1. any dishonest act;
  2. lack of self-restraint or misconduct;
  3. performance of regular business without the employer's consent or whenever there is a conflict of interest between any such activities and those of the employer;
  4. criminal conviction of the employee;
  5. habitual unwillingness to work;
  6. regular intoxication or drunkenness during working hours;
  7. violation of trade secrets;
  8. insubordination;
  9. abandonment of employment;
  10. any act detrimental to the honour or reputation of any person, performed during working hours, as well as physical violence practised under the same conditions, except in the case of legitimate defence;
  11. any acts detrimental to the honour or reputation of the employer or ranking superiors or physical violence against them, except in the case of legitimate defence; and
  12. constant gambling.

There is also the possibility of the employee terminating the employment agreement for cause, when he or she believes there was a constructive termination. In this case, the employee would be entitled to the severance payment as if terminated without cause by initiative of the employer. Finally, when the employee resigns, he or she is still entitled to acquired labour rights, but not to prior notice or FGTS fine.

Following the recent labour reform, the parties are allowed to choose a mutual agreement termination. In this case, the employee will still be entitled to all acquired labour rights and mandatory severance, but the severance will be reduced by 50 per cent, which includes both prior notice and FGTS fine. The employee will only be able to withdraw 80 per cent of the balance of the FGTS (remaining 20 per cent will be available in three years) and will not be entitled to any unemployment benefit paid by the government.

The severance payments described above will only be due in separation scenarios discussed above. Changes in the company's corporate structure, including change of control, will not trigger any obligation for the employer to pay severance or any other type of indemnity, except if previously agreed by the parties (which can be the case in executives' employment agreements). The same when an employee is transferred between entities of the same economic group, the transfer can be implemented unilaterally by the employer and it does not trigger any obligation for the payment of severance to the executive.

Finally, despite the fact that the basic rights upon termination will be the same for the executive as they are for any employee, this does not mean that employers will still have a special concern when it comes to executive termination being one of the possibilities for obtaining a full release and avoid future disputes in court.

However, the rule in labour law is that employees would not be able to waive their labour rights, which include the severance payments, even for executives who would be white-collar employees (see the definition of 'hipersuficiente' above). Therefore, full release would not be enforceable before the labour courts.

The 2017 labour reform brought a solution which is the possibility of having out-of-court settlements submitted to court for ratification and, therefore, to validate the full release given by the employee in the context of a separation agreement.

Securities law

To the extent that stock awards are a common practice when it comes to executive remuneration, no registration is required in connection with the offering of securities to employees under stock award plans.

It must be noted that employees are required to submit a statement to the Brazilian Central Bank if they hold foreign assets worth over US$100,000 on 31 December of each year. Additionally, an employee who holds foreign assets of over US$100 million must make quarterly reports.

Upon the exercise of stock options abroad, any remittance of the purchase price must be made through an agent authorised by the Brazilian Central Bank to operate in the exchange markets.


Publicly traded companies and financial institutions are the only ones required to make public disclosure of its executives' remuneration on an annual basis.

The Brazilian Securities Exchange Commission Rule 480/2009 sets forth the obligation for publicly traded companies to publish the minimum, maximum and average remuneration of its executives.

The Brazilian Central Bank also has Rule 3,921, which requires financial institutions to have a report issued by its internal remuneration committee with details on executives' remuneration, including fix and variable pay, benefits, deferred part of the remuneration. The financial institution must keep the remuneration reports for a period of five years.

Corporate governance

Shareholders' approval is necessary when it comes to executives' remuneration for both publicly traded companies and limited liability companies.

While the Civil Code is brief, stating that the shareholders must approve the type of remuneration, if not already set forth in the company's by-laws, the Publicly Traded Companies Law is more detailed. Such laws state that the shareholders must approve the individual or global remuneration of its officers, including benefits, which must be compatible with their expertise, seniority and market value. Additionally, it states that the company's corporate documents may authorise stock awards to its officers conditioned on the approval of the plan by the shareholders.

Specialised regulatory regimes

In Brazil, only financial institutions are subject to specific rules when it comes to its executives' remuneration. The Central Bank's Rule 3,921 addresses the concern on the criteria used to measure the executives' performance so that it does not increase the level of risk they will take to ensure a hight level remuneration.

In this sense, Rule 3,921 requires financial institutions to have an internal remuneration committee to determine the institution's remuneration policy and to prepare an annual report containing (1) criteria used to measures performance and its correspondence to the level of risk associated to it; (2) detailed composition of the remuneration (fix and variable pay, benefits, stock awards, etc.); (3) payments associated with the hiring of new executives; (4) termination payments indicating the highest amount paid to one single person; and (5) portion of the variable pay that was paid in stocks and deferred. In this last item, it is important to mention that financial institutions are required to pay at least 50 per cent of the variable pay in stock awards and to defer at least 40 per cent of such payment.

Developments and conclusions

Following the developments of the covid-19 pandemic, companies have targeted executive termination either because of its high cost in a time of economic recession or because some of the items in executives' packages were no longer considered attractive (company car, office space, etc.).

In both cases, there will be challenges because Brazilian labour law, as well as labour courts when interpreting it, are strict when it comes to changes in the remuneration packages and would require executives' agreement to implement such changes.

The economic challenges of 2020 will mean executive remuneration will evolve in the near future.

It will also be interesting to continue watching the labour courts ruling on the applicability of the concept of 'hiperfusicientes' (white-collar employees) when it comes to individual negotiations or transactions involving executives and particularly to see what the position of the superior labour court to be consolidated will be.


1 Flávia Martins Azevedo is a partner at Veirano Advogados. The information in this chapter was accurate as at September 2020.

The Law Reviews content