Employee remuneration: is it possible to reward work without increasing tax costs?

The award is a type of remuneration granted to the employee for performance exceeding expectations and which may be granted in cash or goods and services. This definition is in paragraph 4 of article 457 of the Consolidation of Labor Laws (CLT).

In fact, the award is not a recently created form of remuneration. The difference is that, before the 2017 Labor Reform, premiums were incorporated into the salary, resulting in an addition to the calculation basis for payroll charges. With Reform, however, the premium no longer had a “salary nature” and was consequently included in the calculation basis of any contribution.

The Federal Revenue, in line with the legislative change, has already started to apply this understanding in its decisions, as demonstrated in the excerpt from COSIT Consultation Solution nº 151/2019:

As noted in the Consultation Solution, the Federal Revenue already determines that premiums no longer form the basis for calculating social security contributions. However, even in the wording of the Consultation Solution, it is possible to identify the expected requirements for the award to be outside the scope of the contribution to the INSS:

“The premiums excluded from the incidence of social security contributions: (1) are those paid exclusively to insured employees, individually or collectively, not reaching the amounts paid to insured individual contributors; (2) are not restricted to cash amounts and can be paid in the form of goods or services; (3) they cannot arise from a legal obligation or express adjustment, in which case the employer's liberality would be uncharacterized; and (4) they must result from performance that exceeds what was ordinarily expected, so that the employer must prove, objectively, what performance was expected and also how much this performance was exceeded”.

In our understanding, the biggest challenge in granting awards to employees is demonstrating the objective criteria that led to the reward. It is necessary for the employer to maintain objective records — such as sales volume, revenue expectations, etc. — that demonstrate what performance is expected from each employee and how one or more employees exceeded that performance.

It is essential to highlight that the payment of the premium does not eliminate IRRF, since the asset increase will occur and will, consequently, be taxed based on the progressive rate.

Unlike the payment of the premium — which is guided by the employer's liberality in granting it —, the payment of the PLR ​​is subject to negotiation between employer and employee to define the “rules” of the benefit.

The regulation of the granting of PLR programs is set out in Law 10.101/2000, which sets out as a basic guideline that the benefit be the subject of negotiation in which “clear and objective rules must be included regarding the establishment of the substantive rights of participation and the rules adjectives, including mechanisms for measuring information relevant to compliance with the agreement, frequency of distribution, period of validity and deadlines for reviewing the agreement”.

It is essential to mention that, unlike the premium, there is predictability surrounding the receipt of the PLR ​​by employees, since the provisions are set out in a document prepared by the parties.

As in the case of the premium, the payment of PLR has an express provision to determine the exclusion of the benefit from the employee's remuneration, which eliminates the incidence of both the social security contribution owed by the employer and the portion retained in the employee's name (article 3 of Law 10.101/2000). Furthermore, it is also possible for the taxpayer to deduct expenses from the IRPJ and social contribution on net profit (CSLL) calculation base when opting for real profit.

As a general rule, the PLR ​​cannot be extended to individual taxpayers who provide services to companies. However, the Administrative Council of Tax Appeals (Carf) published on February 26th ruling no. 2202-005.997, which reads:

“The technical director/quota partner hired with an employment relationship, duly informed in GFIP/SEFIP, in DIRF, in social and land records, in labor records and in accounting and tax reports, who does not have the characteristics inherent to the employment relationship uncharacterized by supervision, he is a mandatory social security insured as an employee, and in this way, he can receive PLR ​​in accordance with Law 10.101, like any other employee, even more so when the company's PLR program is approved by the supervision”.

Carf's decision is important because it considers the specific case (the director, despite being a shareholder in the company, still maintained all employment relationships with the company) which guaranteed the right to receive the PLR ​​without any social security charges, and not as an individual contributor .

As in the case of the prize, the PLR ​​payment must be taxed by income tax. Taxation will be made exclusively at source with rates ranging from 7,5% to 27,5% with an annual exemption range of up to R$6.677,55.

As you can imagine, the exclusion of these values ​​from the calculation basis for social security contributions results in a direct reduction of 20% on the value of the benefit — which would be the employer's cost of contributing to the INSS. In addition, the payments also relieve the employee, who is no longer subject to withholding 8 to 11% (ignoring the rates arising from the Social Security Reform) on the value of the benefit received.

It is essential to highlight that each of the benefits covered has its own peculiarities and must be followed so that the employer can reduce the tax cost of the operation. As seen in the Carf decisions highlighted, it is necessary for the employer to comply not only with the formal requirements, but also for it to be possible to document the reality of the payments.

Finally, it should be noted that these are not the only reward or remuneration institutions subject to a reduced tax burden. In a future article, we will discuss other mechanisms.