Fired Workers to Pay More Taxes on Amounts Received under Settlement Agreements

RIO DE JANEIRO, BRAZIL – Companies will no longer be able to classify amounts such as unpaid vacations, 13th month’s salary and overtime as indemnities, when included in judicial or extrajudicial settlements with dismissed workers. These amounts must now be classified as remuneration, on which taxes are levied.

The new law seeks to put an end to a practice hitherto common among companies and workers, of classifying the entire amount of the settlement – which should be limited to moral damages, premiums, and bonuses – as indemnities, which are not subject to taxation.

Indemnity payments are not subject to social security and withholding taxes, both of which are which are levied on ordinary remuneration.

The economic team expects to raise R$20 billion (US$5 billion) in revenue within ten years. This estimate was based on the total amount paid under judicially ratified agreements in the Labor Court system in 2018, which totaled R$13 billion.

The government believes that at least half of “indemnity” amounts in fact referred to remuneration. The government estimated the rates of social security and income taxes that would be levied on this amount and came up with a projection of R$2 billion per year.

The law also contains minimum standards for what may be determined as indemnity. It may not have a base of calculation lower than one minimum wage per month or lower than the difference between the wage acknowledged as due and the one actually paid by the employer, the total monthly value of which shall not be lower than the minimum wage.

The changes are contained in a law that further enables the government to pay for experts hired by the federal court system to act in lawsuits by low-income employees against the National Institute of Social Welfare (INSS) when petitioning for a revision or granting of benefits. Previously, experts were directly funded by special civil and criminal courts.

Under the new law, the payment will be granted to the respective court for the examinations already carried out and to be carried out in up to two years. It may also be paid to the state court judging these proceedings in locations where no federal court exists.

Fees and payment procedures will be established by a joint act of the National Council of Justice (CNJ) and the Ministry of Economy. The government plans to advance R$316 million this year.

A further point in the new law limits the jurisdiction of state courts in social security cases to those in which the insured’s domicile is in a city located over 70 kilometers from the federal court city. Currently, there is no distance limit for a lawsuit to be judged by a state court if there is no federal court in the claimant’s city.

Source: Globo

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