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A wasted chance
By Alexis Borowik Rosa, Ana Carolina Monguilod | 17 June 2021 at 2:00 PM
The Legal Framework for Startups could have, but missed the opportunity, to better regulate Stock Option Plans
On June 1st 2021, the Legal Framework for Startups (LC 182/2021) was sanctioned, with vetoes, by the President of the Republic. For many, and we align ourselves with this understanding, it was timid in the changes and innovations it promoted.
On one hand, (i) brought the definition and requirements for a company to be considered a "startup"; (ii) regulated who can make contributions of resources in these companies and what types of contributions can be made; (iii) sought to bring legal certainty to investors, providing that investors are not liable for the debts of the invested companies; (iv) created a special form of bidding to stimulate the participation of startups in bidding contests; and (v) gave more flexibility to the Securities and Exchange Commission (CVM) to facilitate the access of smaller companies to the capital market. All these points are to be celebrated.
On the other hand, especially from a fiscal point of view, we missed the opportunity to address certain issues that afflict not only the country's innovation ecosystem, but also companies of the most diverse sizes.
In this aspect, we highlight the issue of stock option plans, to which a simple mention was made in the original text of the Bill (PLP 146/2019), with worrisome details approved by the House of Representatives in the final wording sent to the Senate. The Senate ended up removing the provisions that treated as income taxable by income tax and social security contributions the fair value of the options at the time of exercise of the stock purchase.
The Bill was certainly not perfect in many ways. It should have been improved to better address all the relevant controversial points. However, by simply abandoning the subject in view of the risk of having a mistaken regulation, civil society lost the opportunity to discuss its wording in order to bring the legal security desired by the market.
Share-based payment plans are often adopted by companies as a way of retaining relevant executives, key employees, or service providers, allowing them to own a future stake in the company, and to enjoy long-term growth and appreciation of the company.
Currently, in the Brazilian legislation, two mentions of stock option plans call our attention. The first, and most relevant, is in §3 of art. 168 of the Corporations Law (Law No. 6,404/1976), which provides for the granting of options within the limit of the authorized capital. The second is art. 33 of Law No. 12,973/2014, which deals with the timing of the deductibility of "compensation for services provided by employees or similar" when made through a share-based payment arrangement.
And the characterization of these programs as "remuneration" or not corresponds exactly to the dispute between companies and tax authorities. In its assessments, the Tax Authorities usually seek to characterize the granting of stock options as a benefit of a compensation nature, which would make the companies subject to the payment of social security contributions with potential income tax incidence for individuals.
In our understanding, the stock options plan, when correctly structured, consists of a commercial contract unrelated to the employment contract, since it is voluntary and onerous, as well as presenting the risks arising from the operation for its beneficiaries.
The Superior Labor Court itself has already recognized that the right arising from the option plan is an eminently commercial advantage and is not tied to the labor force, since it does not have the nature of consideration.
Another controversial point is the moment when the beneficiary of the stock options is subject to income tax. The wording initially approved by the House, but later excluded, provided that the gain would be calculated at the time of exercise of the stock option. In our view, however, when the beneficiary of the plan exercises his options, upon payment of a certain price (commonly called exercise price), he becomes the mere owner of the shares, and there is not yet an effective realization of income, a fact that will only occur when the beneficiary sells the shares to third parties.
In the absence of legislation expressly regulating the matter, taxpayers can only reaffirm the commercial nature of their option plans, eventually seeking protective legal measures.
We know that the theme is not trivial and would require in-depth debates by the Legislative. But it seems to us that the decision to abandon it was not the right one. Stock option plans, widely used by companies of various sizes, are particularly common in the innovation ecosystem. More often than not, they are the only way for entrepreneurial partners to convince skilled professionals to believe in their projects. So, we missed the chance to address this issue, missing an opportunity to pacify at least one controversial subject in this country.
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