Originally published in the August 10 edition of World Tax Daily (Copyrights Tax Analysts)
Brazil’s Federal Revenue Department (FRD), in a recent private letter ruling (PLR 98/08), clarified the tax treatment of stock options awarded by a foreign company to an officer of its Brazilian subsidiary.
PLR 98/08 also addresses the tax treatment of stock options that are repurchased in a corporate reorganization before exercise.
The FRD concluded that the value attributed by the foreign company to the options granted at no cost to a Brazilian individual does not qualify as payment of compensation due to the lack of relationship between the beneficiary and the foreign company. However, if the options are repurchased by the foreign company before exercise, the sales price received by the Brazilian individual qualifies as capital gains subject to tax in Brazil.
PLR 98/08, issued by the FRD’s Regional Superintendence for the Seventh Region,1 was published in Brazil’s official gazette on March 30. PLR 98/08 is valid only between the tax administration and the filing taxpayer. However, it serves as an important precedent to taxpayers when receiving stock options from their employers. Its summary reads:
The value attributed to stock options, granted for free by a company headquartered abroad to an officer of a subsidiary headquartered in Brazil, does not qualify as payment of compensation, due to the lack of any relationship between the beneficiary and grantor. However, the acquisition of such options by the [foreign] holding company resulting from a corporate reorganization qualifies as “repurchase” of rights subject to capital gains by the individual seller. The positive difference between sales price and acquisition cost (the latter equal to zero) must be subject by seller to tax (resident and domiciled in Brazil) at the rate of 15 percent and paid by the last business day of the month following receipt of sales price.
- Analysis
The letter ruling’s summary is unusually long, with an odd description of its rationale. The text indicates that the grant of stock options by foreign companies is not subject to tax in Brazil, but the letter ruling creates confusion over why no such tax should apply. It says that no tax applies because there is no relationship between the foreign grantor and the Brazilian beneficiary.
However, such an argument should not be relevant to determine taxation. The most important aspect preventing taxation should be that the stock option does not represent an accretion to the taxpayer’s wealth at the time of grant. That is because article 43 of Brazil’s National Tax Code states that the income tax base is accretion to the taxpayer’s wealth, without which no tax should apply.
In the case of stock option grants, the taxpayer does not have any immediate accretion to his personal wealth, but rather a right to acquire a given stock in the future for a given purchase price established at the time of grant. At the time of grant, the taxpayer has only a purchase right with zero acquisition cost.
However, PLR 98/08 confirms that the sale of the options before the exercise is subject to capital gains tax. That position makes sense and is in accordance with Brazil’s tax rules because the stock options, before exercise, are an asset to the taxpayer with zero acquisition cost. If the options are an asset to the taxpayer, any gain arising from their sale should be treated as capital gain taxed at 15 percent.
Although some of the letter ruling’s statements seem inaccurate, the good news for the taxpayer is that the FRD states that no taxable income must be reported at the time the grant is received, at no cost, by the taxpayer.
- FOOTNOTE
1 The FRD’s Regional Superintendence for the Seventh Region has jurisdiction over the states of Rio de Janeiro and Espírito Santo in southeastern Brazil.
David Roberto R. Soares da Silva