Brazil: Non-Applying Of Withholding Income Tax Over Foreign Remittances Of Remuneration Of Technical Services Supplied By Non-Residents In Brazil

The Brazilian Federal Revenue - RFB and the General Attorney of the National Treasury - PGFN changed the understanding that they shared in regard to the applying of Withholding Income Tax (IRRF) over foreign remittances of remuneration of technical services supplied by non-residents in Brazil.

Before that, the RFB1 and the PGFN2 found that such types of foreign remittances fell under Article 7 ("company profit") or Articles 21/22 ("unspecified income") of the OECD convention model, considering same, in any event, taxable at source by Income Tax.

However, such understanding adopted by those authorities conflicted with the Superior Court of Appeals (STJ), which, as of its ruling of Appeal REsp 1.161.467, consolidated the understanding that the "profit of the foreign company" (as per the text of Article 7) does not correspond to the "real profit (lucro real) of the foreign company", which considers other elements (i.e. the adjustments therein authorized in the law).

Thus, the remuneration that is paid for services that were supplied, to the company abroad is only one of the components of the recipient's income, not necessarily representing its "profit"; being possible, inclusively, that the company ultimately suffers a loss in the corresponding fiscal year

Accordingly, a doubt arose as to the non-applying of withholding Income Tax over such payments.

Consistent with the STJ's position, and based on a letter of the Ministry of Finances of Finland, which, pursuant to the Brazilian taxation of technical services policy, indicated that country's intention to unilaterally terminate the agreement that it has with Brazil, the RFB and the PGFN reviewed the position adopted in AND COSIT nr. 1/2000 and issued Opinion PGFN CAT 2.363/12 suggesting the revocation of its former understanding.

This opinion led to the publication of the RFB's Interpretation Decision nr. 5/2014 ("ADI 5/2014"), which revoked Regulatory Declarative Decision COSIT 1/2000 of the RFB ("AND COSIT 1/2000").

The basic reason that supports such opinion refuting the applying of Article 21 of the treaties is that the definition of "real profit" in Brazilian law should not be applied to the coverage of technical services remuneration, applying instead the definition of profit set out in Article 7 of the treaties, which is broad and covers the remuneration of services.

Further, another point that should be stressed is that, even if there is any conflict between the definitions of profit under the national law and the treaties, the principle of specialty would apply and, accordingly, the definition under the treaties would apply.

However, notwithstanding such shift of understanding, the Tax Authority maintained two exceptions to the non-applying of Income Tax, namely:

i. When the service is supplied through an entity that is permanently established in Brazil;

ii. When an international agreement that considers such payments "royalties" exists, transferring the corresponding tax treatment to Article 12 of the OECD convention model.

In the case of (ii) above, the PGFN adopted the definition of "royalties" that is used in the agreements3 to, based on other grounds, reach the same conclusion that was reached in the former technical opinion: that the remittance continues taxed by Income Tax in the instance of the remittance4, only under a different title.

In a few words, the conclusions reached in Opinion PGFN/CAT 2.363/2013 were in the sense that, as a general rule, the remuneration of technical services is included in the definition of "company profit" under Article 7 of the treaties. However, if a treaty contains an express provision stating that the technical services are covered by Article 12, which establishes the taxation treatment that applies to royalties, then such provisions should apply.

However, although this new opinion of the PGFN initially adopts the STJ's viewpoint – to the point that it adopts its conclusion and proposes the revocation of its former understanding – it establishes considerably substantial exceptions in order to maintain the taxation in Brazil.

Therefore, the taxpayer, despite of the good news in regard to the tax burden that applies to its foreign remittances of remuneration of technical services supplied by non-residents in Brazil, must remain attentive to any agreements entered between Brazil and the country of destiny of such payments, to assess the tax cost of the operation.


Some publicly listed corporations in Brazil already adopt stock options programs and grant to their management, employees and independent workers the opportunity to exercise the right of purchase and sale of the company's stock or, further, shares of other companies of the corporate group, in the limits determined in a stock option plan that must be approved by a shareholders' meeting.

Although the Brazilian Corporation's Act (Article 168, Paragraph 3) expressly authorizes stock options, there is still no specific law regulating the matter in Brazilian Labor Law, buts, because such practice has been widely disseminated in Brazil, the labor courts have been ruling the matter, particularly the legal nature of the financial gains obtained in the purchase and sale of stock and the reflections thereof over labor payments, over the social security payments and Income Tax.

And in this regard the STJ has already issued opposite decisions, therefore the employer must be careful in the drafting and signing of labor agreements.

The understanding that prevails at the labor courts is that the stock option is a benefit that has the legal nature of a commercial benefit, which should be governed by Civil Law. In this case, the profit obtained would not reflect over the prior notice of termination, 13th salary + additional 1/3rd, FGTS plus 40% fine applied over the FGTS deposits and INSS.

The Superior Labor Court of Appeals (TST), however, in some cases also recognized the salary nature of the profit, as occurred in its ruling of appeal AIRR 49640-96.2002.5.02.0041, where the TST found that "the shares were granted to the workers because of their efforts in the work that they performed, hence the salary nature of such benefit cannot be denied".

Therefore, for the Stock Option Plan to be characterized as an agreement that has a civil law nature, it is essential that they represent not remuneration for work that was performed, but rather gains that are independent of their performance, without direction to a specific group, and also that there is no retributive nature, non-existence of lack of charge (i.e. the employee pays a certain price for the stock), freedom to exercise the stock option (which does not occur in regard to the salary payments, which cannot be waived) and the assumption of risk by the employee, who, in exercising the stock option is subject to the flotation that is typical of capital markets.

Fulfilled the foregoing requirements, the company is free to establish the conditions for the stock option to be exercised, including a grace period or the condition of continued employment. In this regard the TRT-18, in its ruling of appeal RO 02233-2007-011-18-00-7 recognized that "for being a program introduced at the company, in which the fulfillment of the conditions to purchase the stock occurs only after the employee is dismissed, with his continuity as an employee being a requirement, when absent the characterization of an acquired right to the benefit. Therefore, for being only an expectation of a right, which is not covered by Brazilian law, there is no loss that could otherwise support a recovery of loss".

Accordingly, the termination of employment before the requirements are fulfilled does not characterize damage to the employee's rights, but, fulfilled the grace period, the employee is entitled to exercise the stock option irrespective of the termination of employment.

Finally, in regard to the withholding Income Tax (IRRF), if the civil nature of the gains is considered, according to the prevailing jurisprudence of the TST, the employee may elect either the tax rate of 20% (net gain in variable income) or 15% (capital gain with the sale of assets or rights), in accordance with Law 9.959/2000. On the other hand, if the gains are considered salary, the tax rate of 27.5% and social security apply, in accordance with Law 8.212/91.

The jurisprudence of the labor courts differs from the understanding that the Administrative Council of Tax Appeals (CARF) has been adopting. In Ruling # 2301-003.597 of the 3rd Chamber of the CARF, 1st Panel of Regular Cases, dated June 20, 2013 prevailed the vote of counsellor-judge Marcelo Oliveira, that the gain obtained in Stock Option Plans meets the requirements that characterize the remuneration of individual taxpayers (payment for work rendered or to perform the work, incorporation to the worker's patrimony and irrelevance of the payment title). Additionally, CARF found that it is not a typical financial operation for that there is no uncertainty and the risk that is inherent to the capital markets in the stock action plan.

However, it appears, recently, that CARF has been closely following the labor courts' position as ruling nr. 2803-003.815 recognized the non-applying of social security to the sums that employees receive under stock option plans. According to the prevailing understanding, the stock option plan cannot be considered plainly as compensation but rather a deal entered between the parties. Accordingly, social security does not apply.

Therefore, the Stock Option Plan represents an option to maintain workers, which, with great likelihood, will not be considered salary by the Labor Courts, not reflecting over the payments under the labor agreement or the applying of FGTS. However, it is important to observe that, because of the understanding of CARF the applying of social security is a controversial matter and for this reason the employer must keep in mind the risks involved in the offering of stock options to its employees.


1. Declaratory Act (Regulatory) COSIT nr. 1/2000

2. Technical Opinion PGFN/CAT/ 776/2011 

3. "The word "royalties", adopted in this Article, means all types of remuneration paid for the use or grant of use of a copyright held over a piece of literary, artistic or scientific work (including cinematographic movies, movies or recording tapes of TV or radio broadcasted programs), any type of patent, trademark, invention design or model, plan, formula or secret process, as well as for the use of grant of use of industrial, commercial or scientific equipment and for information corresponding to know how acquired in the industrial, commercial or scientific areas." (emphasis added)

4. 15% or 25%, as the case may be. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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