Companies vying to make employment both attractive and competitive try to offer a range of benefits that supplement salary. For a growing number of companies, these benefits include the award of stock options. Stock option programs have stirred up debate between tax officials and the business community. The tax department argues that gains from stock options amount to payment, and are therefore subject to tax. Companies, however, disagree, and they have challenged the tax department’s position in court.
Capital gains from stock options have been treated as taxable earnings since 2013. The tax department applies a 20 percent social security tax to gains because employees are allowed to buy shares at prices lower than market value and then sell them at a later date at higher values, explains Bloomberg BNA. Companies have challenged the law, bringing 20 cases into tax courts since 2013 by Bloomberg’s count. Companies have lost 16 of those cases.
However, there is a new case that might sway how taxes are levied on stock options. The case involves the Brazilian subsidiary of Swedish company Skanska. The company challenged the tax department’s policy in 2013 and won. Tax officials appealed. The Third District Court, which covers São Paulo, ruled in favor of the company on June 22. In the ruling, Judge Andre Nekatschalow’s wrote that the Skanska stock option program is a contractual agreement between the firm and its employees. That means that the final value of these stock options is not due to remuneration for employee work, but instead is due to the “mercantile contract” between the company and the worker. Consequently, Nekatschalow wrote, these options cannot be considered payment for work and therefore are not subject to social security taxation.
Skanska and other companies that have challenged Brazil’s taxation policy have argued that employees freely choose to purchase shares and pay for the shares. They use their own money to buy the shares, and those shares are subject to the same market risks as others with no guarantees of profits. Therefore, they believe that stock option programs should not be subject to social security taxes.
Based on the court’s ruling in favor of Skanska, companies that can show that their stock option programs are voluntary for employees and offer shares at market value have a strong case for avoiding social security taxation on capital gains. But Judge Nekatschalow’s decision may not be the final word on the matter. The tax department has told Bloomberg that it will appeal the ruling.
