Originally published in the July 23 edition of World Tax Daily (Copyrights Tax Analysts)
Brazil’s Superior Court of Justice (STJ) has ruled that profit-sharing payments made to a company’s employees are subject to the 20 percent payroll tax due to social security if the profit-sharing plan does not strictly follow the provisions of the Profit Sharing Act.
The decision was rendered by the STJ’s second chamber on June 4 in Special Appeal 856,160. The taxpayer, Milenia Agrociencias S/A, had argued that no payroll tax applied to the profit-sharing payments made to its employees.
The taxpayer claimed that article 28, paragraph 9, item j of Law 8,212/1991 (the Social Security Collection Act) states that profit-sharing payments are not subject to payroll tax or any labor charges or levies.
The STJ rejected the taxpayer’s arguments, claiming that the taxpayer considered only part of the applicable legislation. According to the court, profit-sharing payments are exempt from payroll tax under article 28 of Law 8,212/1991 only if they fully comply with Law 10,101/2000 (the Profit Sharing Act). The Profit Sharing Act requires a minimum period of six months between payments as well as the execution of a profit-sharing plan, which must be filed with the employees’ union. The court added that Brazil’s Federal Constitution (article 7, Item XI) states that the granting of profit sharing as a worker’s right is subject to specific law on the subject, which is clearly Law 10,101/2000. Because the taxpayer made payments in periods shorter than six months and did not have a profit-sharing plan negotiated, executed, and filed in accordance with the Profit Sharing Act, payments made to employees could not be considered true profit-sharing payments and thus were not eligible for the payroll tax exemption.
The decision sets an important precedent, albeit not binding. Many companies have adopted profit-sharing payments as a way to minimize the impact of the 20 percent payroll tax on general employee compensation. But companies that have made such payments without following all the requirements of Law 10,101/2000 and without paying the payroll tax may now be liable for the tax plus penalties of 75 percent and interest. Tax authorities have five years to assess unpaid social security taxes, including payroll tax.
David Roberto R. Soares da Silva