Stock option plans have long been a popular tool for companies in Brazil to attract and retain talent. Article 168 of Law 6404/76 contemplates these plans, but the taxation surrounding them has been controversial. After years of legal disputes and conflicting interpretations of the law, Brazil’s Superior Court of Justice (STJ) has finally ruled.

The taxation of stock option plans has been the subject of three competing theories. The first theory argued that stock options should be considered part of an employee’s salary, requiring payment of both income tax and social security contributions when the options were granted. The second theory also treated stock options as salary but considered them taxable when exercised. Lastly, the third theory viewed stock options as an investment rather than salary, meaning they’d be subject to capital gains tax upon sale of the shares.

The federal revenue service (Receita Federal) has favored the first theory, which led to employees being taxed immediately after receiving their stock options. However, the STJ disagreed. Following jurisprudence from the Brazilian Superior Labor Court (TST), the STJ concluded that employee stock option plans should be treated as an investment subject to market risks.

For employees, it’s a big win. Now, they’ll only be required to pay capital gains tax when and if they sell their shares for a profit. For companies, it’s an even bigger win. They no longer need to pay social security contributions on stock options. And for everyone, the decision provides much needed clarity, and hopefully, finality.