2023 Laws of Puerto Rico › TITLE THIRTEEN - Taxation and Finance (§§ 1 — 33423) › Subtitle 17 - Internal Revenue Code of 2011 (§§ 30001 — 33423) › PART II - Income Taxes (§§ 30041 — 30622) › Chapter 1010 - Estates and Trusts (§§ 30391 — 30419) › Subchapter A - Employee Trusts (§§ 30391 — 30396) › § 30391 - Employee trusts

(a) Exemption.— A trust organized under the laws of Puerto Rico that forms part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of its employees resident of Puerto Rico or who performs services primarily in Puerto Rico, or of their beneficiaries; or a trust organized under the laws of Puerto Rico or considered a domestic trust under the United States Internal Revenue Code of 1986, as amended, or any successor legal provision, that forms part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of its employees resident of Puerto Rico or employees resident of Puerto Rico and the United States or of their beneficiaries shall not be taxable under this Subchapter and no other provision of this subchapter shall apply with regard to said trust or its beneficiaries:
(1) If contributions are made to the trust by such employer, or employees or both, for the purpose of distributing to such employees or their beneficiaries the corpus and income of the fund accumulated by the trust in accordance with such plan;
(2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of its employees or their beneficiaries (but this clause shall not be construed to prohibit the return of a contribution under Section 403(c) of the Employee Retirement Income Security Act of 1974 (ERISA));
(3) if the trust, or two (2) or more trusts, or the trust or trusts and the annuity plan or plans are designated by the employer as constituting part of a plan intended to meet the minimum coverage requirements provided in this paragraph.
(A) Coverage requirements.—
(i) The plan benefits at least seventy percent (70%) of the employees who are not highly compensated employees, as defined in subsection (d)(3)(E)(iii); or
(ii) the plan benefits a percentage of employees who are not highly compensated employees which is at least seventy percent (70%) of the percentage of highly compensated employees benefiting under the plan, or
(iii) the plan meets with the requirements of paragraph (B).
(B) Average benefit percentage test.—
(i) In general.— A plan shall be treated as meeting the requirements of this paragraph if:
(I) The plan benefits such employees as qualify under a classification set up by the employer, and found by the Secretary not to be discriminatory in favor of highly compensated employees, and
(II) the average benefit percentage for employees who are not highly compensated employees is at least seventy percent (70%) of the average benefit percentage for highly compensated employees.
(ii) Average percentage benefit.— For purposes of this paragraph the term “average benefit percentage” means, with respect to any group of employees, the average of the “benefit percentages” computed separately with respect to each employee in such group (whether or not the employee is a participant in the plan).
(iii) Benefit percentage.— For purposes of this paragraph:
(I) The term “benefit percentage” means the employer-provided contribution or benefit for an employee under all qualified plans maintained by the employer, determined on the basis of a percentage of such employee’s compensation.
(II) Period for computing the percentage of benefit.— At the election of an employer, the benefit percentage for any plan year shall be computed on the basis of contributions or benefits for such plan year, or any consecutive plan year period (not greater than three (3) years), which ends with such plan year and which is specified in such election. An election under this item, once made, may be modified or revoked only with the consent of the Secretary.
(C) Exclusion of certain employees.— For purposes of the computation required under the previous paragraph, the following employees shall be excluded:
(i) Employees who are included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers, if there is evidence that retirement benefits were the subject of good faith bargaining between such employee representatives and such employer or employers;
(ii) Employees who are nonresident aliens and who receive no earned income from the employer from sources within Puerto Rico.
(iii) A plan prescribes minimum age and service requirements as a condition of participation and excludes all employees not meeting such requirements from participation, then such employees shall be excluded from consideration for purposes of this paragraph.
(D) Special rules for certain dispositions or acquisitions.—
(i) In general.— If, as a result of a corporate disposition or acquisition transaction, an entity becomes, or ceases to be a member of a controlled group of corporations, as defined in § 30044 of this title, then the requirements of subsection (a)(3) of this section shall be treated as having been met during the transition period with respect to any plan covering employees of such entity or controlled group of entities if:
(I) The plan has met the requirements of § 30391(a)(3)(C) of this title immediately before the change in members of the controlled group of corporations, and
(II) the coverage under such plan is not significantly changed during the transition period (other than by reason of the change in members of a controlled group of corporations) or such plan meets such other requirements as the Secretary may prescribe by regulation.
(ii) Transition period.— For purposes of this paragraph, the term “transition period” means the period beginning on the date of the change in members of a controlled group of corporations, and ending on the last day of the first plan year beginning after the date of such change.
(4) If the contribution or benefits provided under the plan do not discriminate in favor of employees who are partners, officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees. For purposes of this clause, employees excluded under clause (3)(C) shall not be taken into account.
(5) A classification shall not be considered discriminatory within the meaning of clauses (3)(A)(ii) and (iii) or (4), merely because it is limited to salaried or clerical employees. Neither shall a plan be considered discriminatory within the meaning of such provisions merely because the contributions or benefits of, or on behalf of, the employees under the plan bear a uniform relationship to the total compensation, or the basic or regular rate of compensation of such employees, or differ because of any retirement benefits established by any state or federal law.
(6) A plan shall be considered as meeting the requirements of clause (3) during the whole of any taxable year of the plan if on one day in each quarter it satisfied such requirements.
(7) For purposes of this subsection, in the case of a pension or profit-sharing plan established by an employer, which is a partnership, the term “employees” includes the partners of said partnership that render services to it. For purposes of these provisions, the term “partners” includes all industrial partners, even when there are professional service contracts between the partnership and the partner. Capital partners whose only relationship with the partnership is as investors shall not be treated as employees.
(8) In the case of any plan that provides contributions or benefits to employees, all or any of which are owner-employees (as defined in subsection (f)), a trust that is part of such plan shall constitute a qualified trust under this section only if it meets the requirements of subsection (g). For the loss of exemption under certain circumstances in the case of employee trusts, see §§ 30486 and 30487 of this title.
(9) The plan shall also comply with the applicable provisions of the Employee Retirement Income Security Act of 1974, known as ERISA.
(10) A trust that is part of an employee stock ownership plan (as defined in subsection (h)), shall not constitute a qualified trust under subsection (a) of this section, unless it meets the requirements provided in paragraphs (A) and (B).
(A) Diversification of investments.—
(i) In general.— A plan meets the requirements of this subsection if each qualified participant in the plan may elect within ninety (90) days after the close of each plan year in the qualified election period to direct the plan as to the investment of at least twenty-five percent (25%) of the participant’s account in the plan (to the extent such portion exceeds the amount to which a prior election under this subparagraph applies). In the case of the election year in which the participant can make his/her last election, the preceding sentence shall be applied by substituting fifty percent (50%) for twenty-five percent (25%).
(ii) A plan shall be treated as meeting the requirements of subparagraph (i) if:
(I) The portion of the participant’s account covered by the election under subparagraph (i) is distributed within ninety (90) days after the period during which the election may be made, or
(II) the plan offers at least three (3) investment options (not inconsistent with the regulations prescribed by the Secretary) to each participant making an election under subparagraph (i) and within ninety (90) days after the period during which the election may be made, the plan invests the portion of the participant’s account covered by the election in accordance with such election.
(iii) Qualified participant.— For purposes of this subsection, the term “qualified participant” means any employee who has completed at least ten (10) years of participation under the plan and has attained age 55.
(iv) Qualified election period.— For purposes of this subsection, the term “qualified election period” means the six (6)-plan-year period beginning with the first plan year in which the individual first became a qualified participant.
(v) Coordination with rules of distribution.— Any distribution required under this clause (10) shall not be considered when determining whether a subsequent distribution is a total distribution within one single taxable year for purposes of subsection (b) of this section.
(B) Valuation formula by a qualified professional.— A plan meets the requirements of this clause if all valuations of the employers securities which are not readily tradable on an established securities market, with respect to activities carried on by the plan, are by a qualified professional (as defined in the regulations promulgated by the Commissioner of Financial Institutions).
(11) For taxable years beginning after January 1, 2012, a trust shall not constitute an exempt trust under subsection (a) of this section, if the plan of which the trust is a part provides for the payment of benefits or contributions with respect to a participant in excess of the following limitations:
(A) In the case of a defined benefit pension plan, the annual benefit with respect to a participant, when expressed as a benefit payable annually in the form of a straight line annuity with no ancillary benefits under a plan to which employees do not contribute and under which no rollover contributions are made, shall not exceed the lesser of:
(i) The applicable limitation for a determined taxable year under Section 415(b) of the United States Internal Revenue Code of 1986, as amended, or any successor legal provision, as adjusted by the United States Internal Revenue Service, or
(ii) one hundred percent (100%) of the participant’s average annual compensation for the period of consecutive calendar years (not more than three (3)) during which the participant had the greatest aggregate compensation from the employer.
(iii) In the case of a defined benefit plan subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA), the limitation of the annual benefit with respect to a participant under this subsection shall not affect the vested rights of the participant under ERISA on his annual accrued benefits as of December 31, 2011.
(B) In the case of a defined benefit pension plan, the annual contributions of the employer and the participant and other additions with respect to a participant, without including contributions rolled over from another qualified retirement plan, shall not exceed the lesser of:
(i) The applicable limitation for a determined taxable year under Section 415(c) of the United States Internal Revenue Code of 1986, as amended, or any successor legal provision, as adjusted by the United States Internal Revenue Service, or
(ii) one hundred percent (100%) of the participant’s compensation paid by the employer during the calendar or plan year, as elected by the employer. The participant’s compensation includes the contributions made by the participant to a qualified plan under a cash or deferred contribution arrangement said year.
(C) In determining that requirements of this clause are met, all defined benefit pension plans maintained by the same employer shall be grouped and treated as one single defined benefit pension plan and all defined contribution plans maintained by the same employer shall be grouped and treated as one single defined contribution plan.
(12) For taxable years beginning after January 1, 2012, a trust shall not constitute an exempt trust under subsection (a) of this section, if the plan of which such trust is a part, the annual compensation of a participant taken into account for purposes of determining the contributions or benefits under the plan and the application of nondiscrimination testing and the limitations in benefits and contributions established in subsections (a) and (d) exceed the applicable limitation for a determined taxable year under Section 401(a) (17) of the United States Internal Revenue Code of 1986, as amended, or any successor legal provision, as adjusted by the United States Internal Revenue Service. In the case of defined benefit plans subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA), the limitation of the annual compensation with respect to a participant under this subsection shall not apply with respect to compensation earned in taxable years beginning before January 1, 2012.
(13) Proof of exemption.—
(A) Exemption requirements.— Any trust claiming an exemption under subsection (a) must apply for and obtain an administrative determination of the Secretary to such effects.
(B) Term to apply for administrative determination.— The application shall be submitted not later than the last day prescribed under this part for filing the income tax return of the employer maintaining or sponsoring the plan of which such trust is a part, including any extension granted by the Secretary for the filing thereof, for the corresponding taxable year of the employer beginning on or after January 1, 2012 in which such plan began to cover participants residing in Puerto Rico or rendering services principally in Puerto Rico.
(C) Effectiveness of administrative determinations.— Administrative determinations relating to the exemption of an employee trust under subsection (a) shall be effective during the period prescribed by the Secretary through regulations, circular letters, or general administrative determinations.
(14) Groups of corporations.—
(A) In general.— For purposes of subsections (a) and (d) of § 30391 of this title, beginning January 1, 2012, all employees of all corporations, partnerships, or other persons that are members of a controlled group of corporations, as defined in § 30044 of this title, of a group of related entities, as defined in § 30045 of this title, or of an affiliated service group, as defined in this clause, or under common control as defined by the Secretary through regulations, and whose employees are bona fide residents of Puerto Rico shall be treated as employed by a single employer.
(B) Affiliated service group.— For purposes of this clause, the term “affiliated service group” means a group consisting of a service organization (hereinafter in this paragraph referred to as the “first organization”) and one or more of the following:
(i) Any service organization which:
(I) A significant portion of the business of such organization consists of service rendering (whether for the first organization, organizations described in subparagraph (i) of this paragraph or both) of the type traditionally rendered in said are of services by employees, and
(II) regularly performs services for the first organization or is regularly associated with the first organization in performing services for third persons, and
(ii) any other organization if:
(I) A significant portion of the business of such organization is the performance of services (for the first organization, for organizations described in subparagraph (i), or for both) of a type historically performed in such service field by employees, and
(II) ten percent (10%) or more of the interests in such organization is held by persons who are highly compensated employees of the first organization or an organization described in subparagraph (i).
(iii) Service organizations.— For purposes of this clause, the term “service organization” means an organization whose principal business is the performance of services.
(iv) Certain organizations performing management functions.— For purposes of this clause, the term “affiliated service group” also includes a group consisting of:
(I) An organization whose principal business is performing, on a regular and continuing basis, management functions for one (1) organization (or for one (1) organization and other organizations related to such organization), and
(II) the organization (and related organizations) for which such functions are so performed by the organization described in item (I).
(III) For purposes of this subparagraph, the term “related organizations” has the same meaning as the term “related persons” when used in § 30137(b)(1) of this title.
(15) A pension, profit sharing, or stock bonus plan may allow participants to make after-tax contributions to the plan; provided that said after-tax contributions:
(A) Do not exceed ten percent (10%) of the aggregate compensation of the employee for all the years he is a participant; and
(B) are used solely for purposes of providing benefits to the participant or his beneficiaries.
(b) Taxability of beneficiary.—
(1) In general.— The amount actually distributed or made available to any participant or beneficiary by any such trusts shall be taxable to such participant or beneficiary in the taxable year in which it is so distributed or made available under § 30101(b)(11)(A) of this title, as if it were an annuity whose price or consideration are the amounts contributed by the participant, except for those amounts contributed by the participant on the basis of a cash or deferred arrangement under subsection (d). If the total payable distributions with respect to any participant or beneficiary are paid to the participant or beneficiary within a single taxable year of the latter due to the participant’s separation from service for any reason, or the termination of the plan (hereinafter referred to as “total distribution”), the amount of such distribution, in the amount which exceeds the amount contributed by the participant, which has already been paid by him/her shall be deemed to be long-term capital gains subject to a twenty percent (20%) rate. The preceding notwithstanding, in the case of total distributions made by a trust which is part of a stock bonus, pension, or profit-sharing plan or the acquisition of stock for employees, if
(A) The trust is organized under the laws of the Government of Puerto Rico or has a trustee resident of Puerto Rico and uses said trustee as paying agent, and
(B) (B) At least ten percent (10%) of the total assets of the trust attributable to participants residents of Puerto Rico, computed on the basis of the average balance of the trust investments during the year of the plan in which the distribution is made and during each of the two years preceding the distribution date, have been invested in registered investment companies organized under the laws of Puerto Rico and subject to taxation under § 30521 of this title, in fixed or variable annuities issued by a domestic or foreign insurance com- pany that during the three calendar years preceding the distribution date derived more than eighty percent of its gross income from sources in Puerto Rico, deposits in interest-bearing accounts in commercial and mutual banks, cooperatives, savings associations authorized by the Federal Government or the Government of Puerto Rico or in any other banking institution located in Puerto Rico including, but not limited to certificates of deposit or any other property qualified by the Secretary as property located in Puerto Rico through regulations or circular letter, then the amount of such distribution in excess of the amount contributed by the participant that has been paid by him, shall be deemed to be long-term capital gains subject to a ten percent (10%) rate. In the case of defined contribution plans whereby a separate account is maintained for each participant or beneficiary, the requirement for investing in “property located in Puerto Rico” may be met in relation to the assets accredited to the account of the participant or beneficiary. In the case of the transfer of a qualified plan under subsection (a) of this section (the transferor plan) to another qualified plan under subsection (a) of this section, the requirement for investing in “property located in Puerto Rico” of this paragraph shall be met with respect to the transferor plan taking into account the period of time during which the transferor plan or the account of the participant in the transferor plan met the investment requirement of this paragraph. The Secre- tary may, through regulations, circular letter, administrative deter- mination or final agreement, provide the manner in which the requirement of investing in Puerto Rico shall be met.
(2) Exception and special rule.—
(A) At the option of the participant or beneficiary, the provisions of clause (1) of this subsection shall not apply to that portion or to the entire total distribution that the plan of which the exempt trust is part transfers directly or that the participant contributes to an individual retirement account or annuity under the provisions of § 30392 of this title, to a nondeductible individual retirement account under the provisions of § 30393 of this title, or to a qualified retirement plan under the provisions of this section for the benefit of said participant or beneficiary not later than sixty (60) days after the payment or distribution was received. In the case of a transfer to a nondeductible individual retirement account, the exception to which this paragraph refers shall only apply to those distributions described in § 30393(d)(5)(A) of this title. The preceding notwithstanding, contributions by transfers to nondeductible individual retirement accounts shall be subject to taxation as provided in § 30393(d)(5) of this title and, for purposes of this clause it shall be considered that the requirements of the same have been met if a contribution is made to the nondeductible individual retirement account in an amount equal to the total amount received from the qualified trust by the participant or beneficiary minus the contribution provided in said § 30393(d)(5) of this title that has been withheld as therein provided.
(B) If a total distribution as described in clause (1) of this subsection includes employer securities, that portion of the total distribution which consists of employer securities shall be excluded from the total distribution for purpose of computing the tax provided in clause (1) of this subsection. To determine profits or losses in the future disposition of these securities, the base of the distributed employer securities shall be zero, increased by the amount contributed by the participant for which he/she has already paid taxes and that has not been taken into consideration under the preceding clause (1) of this subsection when determining the taxation of other trust distributions. The terms “employer securities” and “controlled group” shall have the same meaning provided in subsection (h)(2) of this section. The withholding agent shall not be required to make the withholding required by subsection (b)(3) of this section on that portion of the total distribution consisting of employer securities.
(3) Requirement to deduct and withhold.—
(A) Total distributions.— Any person, acting in any capacity, who makes total distributions payable with respect to any participant or beneficiary shall deduct and withhold from said distributions an amount equal to twenty percent (20%) of the amount thereof in excess of the amounts contributed by the participant to the plan for which he/she has already paid taxes. This deduction and withholding shall be of ten percent (10%) if the trust meets the requirements provided in paragraphs (A) and (B) of clause (1) of this subsection. The employer whose employees participate in the plan or the administrator of the plan shall certify to the person making the distributions of the trust that the requirement of investment in “property located in Puerto Rico” has been met. Once the certification issued by the employer is received, the person making the distributions of the trust shall not be liable for the payment of taxes, interest, or penalties in case this requirement has not been met, but shall be liable for deducting and withholding the ten percent (10%).
(B) Other distributions.— Any person, in whatever capacity acting, who makes distributions or payments other than total distributions or nontaxable loans to participants payable with respect to any participant or beneficiary, such as partial distributions made after the participant’s separation from service and withdrawals made before separation from service, shall deduct and withhold from said distributions or payments an amount equal to ten percent (10%) of the amount thereof in excess of the portion of said distributions or payments corresponding to amounts contributed by the participant to the plan that have already been paid by the latter. Notwithstanding the foregoing, in the case of distributions made to a participant or beneficiary in the form of an annuity or periodical payments to a beneficiary as a result of separation from employment, there shall be deducted and withheld ten percent (10%) of the amount of the distributions paid during the taxable year in excess of the contributions made by the participant to the plan that have been paid by him, increased by:
(C) For purposes of this section the term “periodical payments” shall have the same meaning, as defined in § 30102(a)(13)(D) of this title.
(D) Other amounts not subject to withholding.— The provisions of paragraphs (A) and (B) of this clause shall not apply to total or partial distributions that, at the option of the participant, are contributed to an individual retirement account or annuity under the provisions of § 30392 of this title, to a nondeductible individual retirement account under the provisions of § 30393 of this title or to a qualified retirement plan under the provisions of this section for the benefit of said participant or beneficiary, in accordance with clause (2)(A) of this subsection.
(E) For purposes of this subsection, any loans made by a plan to a participant or beneficiary that fail to satisfy the following requirements shall be deemed to be a taxable to participant or beneficiary:
(i) The loan, according to its terms and in its operation, must be repaid by means of partial payments substantially similar at least quarterly; and
(ii) the loan, according to its terms and in its operation, must be repaid within a term not to exceed five (5) years or, in the case of loans taken by the participant to finance the purchase of his principal residence, that term provided in the plan.
(4) Duty to pay or deposit deducted or withheld taxes.— Any person required to deduct and withhold any tax pursuant to the provisions of clause (3), and to pay over any tax to the Secretary shall pay the amount of the tax thus deducted and withheld to the Puerto Rico Internal Revenue Collection Offices of the Department of the Treasury, or deposit it in any of the banking institutions designated as the depositary of public funds, which have been authorized by the Secretary to receive said tax. The tax shall be paid or deposited not later than the fifteenth (15th) day of the month following the date on which the distribution was made.
(5) Tax liability.— Any person required to deduct and withhold any tax pursuant to the provisions of clause (3), shall be liable to the Secretary for the payment of the tax and shall not be liable to any other person for the amount of any such payment.
(6) Information declaration and return.— Any person required to deduct and withhold any tax pursuant to the provisions of clause (3), shall file an information declaration and return relating thereto, pursuant to the provisions of § 30303 of this title.
(7) Failure to withhold.— If the withholding agent, in violation of the provisions of clause (3), fails to make the withholding under said clause, the amount that should have been deducted and withheld (unless the recipient of the eligible distribution pays the tax to the Secretary) shall be collected from the withholding agent following the same procedure that would be used if it were a tax owed by the withholding agent.
(8) Penalty.— In the event that any person fails to deposit the taxes deducted and withheld pursuant to clause (3), within the term prescribed by law, a penalty of two percent (2%) of the amount of the insufficiency shall be imposed on said person if the omission is for thirty (30) days or less, and two percent (2%) for each period or fraction of the additional thirty (30)-day period while the omission subsists, without exceeding a total of twenty-four percent (24%). For purposes of this clause, the term “insufficiency” means the excess of the amount of the tax that should have been deposited on the amount thereof, if any, that was deposited on or before the date prescribed therefor. For purposes of this clause, the omission shall not be deemed as continued after the date on which the tax is paid.
(9) Temporary provisions.— Any distribution or distributions originating from such trusts, only by reason of separation from the service, paid between May 16, 2006, and December 31, 2006, or any undistributed amount accrued from said trusts on which, within the same period, the taxpayer chooses to pay taxes in advance, shall be subject to a special five percent (5%) tax rate in lieu of any tax imposed by the Code or any subsequent similar law. The preceding notwithstanding, and subject to the additional considerations or requirements stated further, said distributions shall be subject to all other provisions of this subsection.
(A) Additional considerations and requirements.—
(i) The special five percent (5%) tax shall apply to the amount distributed in excess of the amount contributed by the participant for which he/she has already paid taxes. Likewise, the participant or beneficiary may pay in advance the special tax on the total amount deposited or accrued, or part thereof, which is in excess of the amount contributed for which the participant has already paid taxes. The amounts on which said taxes have been paid in advance, but that are distributed after the payment of said taxes, shall not be subject to the requirement that the distribution be only made by reason of separation from service.
(ii) The basis of the participant or beneficiary in said trusts shall increase by the amount for which the taxpayer chose to pay taxes in advance pursuant to the provisions of this clause, which shall include the amounts that the participant and/or employee decides to withdraw, if any, in order to pay the special tax provided in this paragraph, which shall not have the effect of disqualifying said distribution. Such partial distributions shall be subject to the rules and limitations applicable to said trust and shall not be available for trusts covered under § 30391(h) of this title. Likewise, the partial amounts thus distributed shall not be subject to taxation.
(iii) In the case of taxes paid in advance by the participant or beneficiary pursuant to this clause, but distributed after payment of such tax, shall not include the amounts accrued in said trusts after the aforementioned payment. At the time of their distribution, said amounts, as well as any amount accrued before their payment and for which taxes have not been paid in advance, shall pay taxes pursuant to clause (1) of this subsection.
(B) Option to pay in advance taxes on undistributed amounts.— The option to pay taxes in advance shall be made within the term provided in this clause of this subsection, upon completing the form provided for such purposes by the Secretary. The tax shall be paid at the Internal Revenue Collection Centers of the Department of the Treasury of Puerto Rico.
(C) Requirement to deduct and withhold:
(i) Any person, acting in any capacity, who makes total distributions payable with respect to any participant or beneficiary by reason of separation from service during the period specified in this clause of this subsection, shall deduct and withhold from said distributions an amount equal to five percent (5%) of the amounts thereof in excess of the amounts paid by the participant of the plan for which he/she has already paid taxes.
(ii) Any person required to deduct and withhold the five percent (5%) tax pursuant to subparagraph (i), shall be subject to clauses (4), (5), (6), (7), and (8) of this subsection, except that the deposit of the tax deducted and withheld shall be made only in the Internal Revenue Collection Centers of the Department of the Treasury.
(10) The employer who maintains or sponsors the plan under which the trust is created shall be severally liable for failure to meet the requirement of the withholding or paying agent established herein.
(c) Treatment of beneficiaries of a trust not exempt under subsection (a).— Contributions to a trust made by an employer during a taxable year of the employer which ends within or with a taxable year of the trust for which the trust is not exempt under subsection (a), shall be included in the gross income of an employee for the taxable year in which the contribution is made to the trust in the case of an employee whose beneficial interest in such contribution is nonforfeitable at the time the contribution is made.
(d) Cash or deferred arrangement.—
(1) General rule.— A profit-sharing plan or a stock bonus plan shall not be considered as not satisfying the requirements of subsection (a) merely because the plan includes a qualified cash or deferred contribution arrangement.
(2) Qualified cash or deferred contribution arrangement.— A qualified cash or deferred contribution arrangement is any arrangement which is part of a profit-sharing plan or stock bonus plan which meets the requirements of subsection (a) of this section and:
(A) Under which a covered employee may elect to have the employer make payments as contributions to a trust under the plan on behalf of the employee or to the employee directly in cash.
(B) Under which amounts held by the trust which are attributable to employer contributions made according to the employee’s election may not be distributable to participants or other beneficiaries earlier than:
(i) Separation from service, death, or disability;
(ii) termination of the plan without the establishment of a successor plan;
(iii) the date of the sale by a corporation of substantially all of the assets used by such corporation in its trade or business with respect to an employee who continues employment with the corporation acquiring such assets;
(iv) the date of sale by a corporation of its shares in a subsidiary when the employee continues his/her employment with such subsidiary;
(v) reaching the age of fifty-nine and a half (59 ½), or
(vi) a case of extreme economic hardship, and
(vii) the amounts shall not be distributable merely by reason of the completion of a stated period of participation or the lapse of a fixed number of years, and
(C) which provides that an employee’s right to his/her accrued benefit derived from employer contributions to the trust according to the election of the employee is nonforfeitable, and
(D) which does not require as a condition to participate in the arrangement, that an employee complete more than one (1) year of service with the employer.
(3) Application for participation and discrimination standards.—
(A) A cash or deferred contribution agreement shall not be treated as a qualified cash or deferred contribution arrangement unless:
(i) Those employees eligible to benefit under the arrangement satisfy the provisions of subsection (a)(3), and
(ii) the actual deferral percentage for highly compensated employees as such term is defined in paragraph (E)(iii) for any year bears a relationship to the actual deferral percentage of all other eligible employees for the taxable plan year which meets either of the following tests:
(I) The actual deferral percentage for the group of highly compensated employees is not more than the actual deferral percentage of all other eligible employees multiplied by one point twenty-five (1.25).
(II) The excess of the actual deferral percentage for the group of highly compensated employees over that of all other eligible employees is not more than two (2) percentage points and the actual deferral percentage for the group of highly compensated employees is not more than the actual deferral percentage of all other eligible employees multiplied by two (2).
If two (2) or more plans which include cash or deferred contribution agreements are considered as one plan for purposes of clauses (3) and (4) of subsection (a), the cash or deferred contribution arrangements included in such plans shall be treated as one arrangement for purposes of this clause.
If any highly compensated employee is a participant under two (2) or more cash or deferred contribution arrangements of the employer, for purposes of determining the deferral percentage with respect to such employee, all such cash or deferred contribution arrangements shall be treated as one single arrangement.
(B) For purposes of paragraph (A), the actual deferral percentage for a specified group of employees for the taxable plan year shall be the average of the ratios calculated separately for each employee in such group, of:
(i) The amount of employer contributions actually paid over to the trust on behalf of each of such employees, for such taxable plan year, with
(ii) the employee’s compensation for such plan year.
(C) A cash or deferred agreement shall be treated as meeting the requirements of subsection (a)(4) with respect to contributions, if the requirements of paragraph (A)(ii) are met.
(D) For purposes of paragraph (B), the employer contributions paid on behalf of any employee:
(i) Shall include any employer contribution made according to the employee’s election under clause (2), and
(ii) under such rules and regulations as the Secretary may prescribe, may, at the election of the employer, include:
(I) Matching contributions as defined in paragraph (E)(i), which meet the requirements of paragraphs (B) and (C) of clause (2), and
(II) qualified nonelective contributions (within the meaning of paragraph (E)(ii)).
(E) Definitions.— For purposes of this section:
(i) Matching contributions.— The term “matching contributions” means:
(I) Any employer contribution to the plan on behalf of an employee, to match the contributions made by such employee, and
(II) any employer contribution made to the plan on behalf of an employee, on account of an employee’s elective deferral.
(ii) Qualified non-elective contributions.— The term “qualified non-elective contribution” means any employer contribution, other than a matching contribution, with respect to which:
(I) The employee may not elect to have the contribution paid to him/her in cash instead of being contributed to the plan, and
(II) the requirements of paragraphs (B) and (C) of subsection (d)(2) are met.
(iii) Highly compensated employees.— For purposes of this subsection, the term “highly compensated employee” means any employee who:
(I) is an official of the participating employer,
(II) owns five percent (5%) or more of the voting stock or the total value of all classes of stock of the corporation that is a participating employer,
(III) owns five percent (5%) or more of the capital or profit interests of the employer,
(IV) for the preceding taxable year had compensation from the employer in excess of the limit applicable for a specific taxable year under Section 414(q)(1)(B) of the United States Internal Revenue Code of 1986, as amended, or any other successor legal provision, as adjusted by the United States Internal Revenue Service.
(V) In order to determine whether an employee owns five percent (5%) of more of the stock, capital or profits, there shall be taken into account the rules of the controlled group of the employer, as defined in § 30044 of this title, of the group of related entities, as defined in § 30045 of this title and of affiliated services group, as defined in § 30391(a)(14)(B) of this title.
(4) Other requirements.—
(A) Benefits other than matching contributions shall not be considered under the conditions for the election to defer.— A cash or deferred contribution arrangement of any employer shall not be treated as a qualified cash or deferred contribution arrangement, if any other benefit provided by such employer is conditioned, directly or indirectly, on the employee electing to have the employer make or not make contributions under the arrangement, in lieu of receiving cash. The preceding sentence shall not apply to any matching contribution made by reason of such an election.
(B) Non-eligibility of the state and municipal governments.— A cash or deferred contribution arrangement shall not be treated as a qualified cash or deferred contribution arrangement if it is part of a plan maintained by the Legislative Assembly of Puerto Rico, the Administration of the Capital City, municipalities and agencies, instrumentalities and public corporations of the government of Puerto Rico.
(5) Contributions to the plan.— Employer contributions made on behalf of an employee to a trust that is a part of a cash or deferred contribution arrangement, shall not be treated as distributable or available to the employee, nor as contributions made by the employee to the trust, merely because the agreement includes provisions by which the employee may elect whether the contributions shall be made to the trust or received in cash.
(6) Excess contributions.—
(A) In general.— A cash or deferred contribution arrangement shall not be treated as failing to meet the requirements of clause (3)(A)(ii) for any taxable plan year if, before the close of the following taxable plan year:
(i) The amount of the excess contributions for such taxable plan year and any income allocable to such contributions is distributed, or
(ii) to the extent provided in regulations, the employee elects to treat the amount of excess contributions as an amount distributed to the employee and then contributed by the employee to the plan.
Any distribution of excess contributions and income attributable to such excess contribution may be made without regard to any other provision of law.
(B) Excess contributions.— For purposes of paragraph (A), the term “excess contributions” means, with respect to any taxable year of the plan, the excess of:
(i) The aggregate amount of employer contributions actually paid to the trust on behalf of highly compensated employees for such taxable plan year over
(ii) the maximum amount of such contributions permitted under the limitations of clause (3)(A)(ii), determined by reducing the contributions made on behalf of highly compensated employees in order of the actual deferral percentages beginning with the highest of such percentages.
(C) Method of distributing excess contributions.— Any distribution of the excess contributions for any taxable plan year shall be made to highly compensated employees on the basis of their respective portion of excess contributions attributable to each of such employees.
(D) Imposition of tax.— If a plan does not adjust (through distributions or any other method provided by the Secretary through regulations, circular letter, or administrative determination of a general nature) the excess contributions not later than the last day provided by this part to file the income tax return of the employer that maintains or sponsors the plan of which the trust is a part, including any extension granted by the Secretary to file the same, for the taxable year of the employer during which the excess contributions were made, a contribution equal to ten percent (10%) of the unadjusted excess contributions shall be imposed to such employer.
(7) Limitations on cash or deferred contributions.—
(A) Cash or deferred contributions.—
(i) Cash or deferred contributions with regard to which the employee has exercised the option provided in clause (2)(A) of this subsection for any taxable year, shall not exceed the amounts stated below:
Taxable year beginning on Amount January 1, 2011 $10,000 January 1, 2012 $13,000 January 1, 2013 $15,000
(ii) If the employee participates in two (2) or more plans, said plans shall be treated as if they were one for the purpose of determining the amount of the preceding limitation. Notwithstanding the provisions of clause (1), in the case of an employee of the Federal Government, or an employee that participates in a qualified plan under § 30391(d) of this title and Section 401(k) of the United States Internal Revenue Code of 1986, as amended, or any other successor provision, in lieu of the limitation provided in said subparagraph (i), the limitation provided in Section 402(g) of the United States Internal Revenue Code of 1986, as amended, or any other successor provision shall apply.
(iii) In the case of an employee participating in a qualified plan under § 30391(d) of this title and Section 401(k) of the United States Internal Revenue Code of 1986, as amended, or any other successor provision who also makes contributions to an individual retirement account under § 30392 of this title for any taxable year, the maximum limitation of contributions under subparagraph (ii) of this paragraph, added to the contribution made under the provisions of § 30392 of this title, shall not exceed the sum of the limitation of contributions under subparagraph (i) of this paragraph and the limitation of contributions under § 30392 of this title, excluding any contribution to an individual retirement account attributable to the spouse of the taxpayer.
(iv) If the employee participates in two (2) or more plans, such plans shall be treated as one for purposes of determining the amount of the limitations of paragraph (A) of this clause 7.
(B) Treatment of contributions in excess of the limitations established under clauses (6)(A) or (7)(A) of this subsection.— Any cash or deferred payment in excess of the limit established in clauses (6)(A) or (7)(A), for any taxable year, shall be included in the gross income of the employee for such taxable year.
(C) Catch-up Contributions.—
(i) A catch-up contribution shall be allowed to employees participating in a plan containing a cash or deferred agreement, if at the close of the plan year, the employee has attained the age of fifty (50). Catch-up contributions shall not exceed the amounts indicated below:
Taxable year starting on Contribution January 1, 2011 $1,000 After December 31, 2011 $1,500
(ii) These amounts shall not affect the actual deferral percentage test, itemized in items (I) and (II) of paragraph (A)(ii) and subparagraphs (i) and (ii) of clause (3)(B) of this subsection. Catch-up contributions shall not be taken into account for purposes of the limitation established in paragraph (A) of this clause in cases where a participant of a plan containing a cash or deferred agreement also makes contributions to an individual retirement account.
(iii) These catch-up contributions may receive matched contributions, as they are defined in clause (3)(E)(i) of this subsection.
(iv) If the employee participates in two (2) or more plans, such plans shall be treated as one for purposes of determining the amount of the preceding limitation.
(v) Notwithstanding the provisions of subparagraph (i) of this paragraph, in the case of an employee of the federal government, in lieu of the limitation provided for in said clause, the limitation provided in Section 414(v) of the United States Internal Revenue Code of 1986, as amended, or any other successor legal provision, as adjusted by the United States Internal Revenue Service, shall apply.
(e) Definitions and rules related to self-employed individuals and owner-employees.— For purposes of this section:
(1) Self-employed individual treated as employee.—
(A) In general.— The term “employee” includes, for any taxable year, an individual who is self-employed for said taxable year.
(B) Self-employed individual.— The term “self-employed individual” means, with respect to any taxable year, an individual who had earned income for such year, as defined in clause (2). To the extent provided in the regulations prescribed by the Secretary, such term also includes, for any taxable year:
(i) An individual who would be a self-employed individual within the meaning of the preceding sentence, but for the fact that the trade or business carried on by such individual did not have net profits for the taxable year, and
(ii) an individual who has been a self-employed individual within the meaning of the preceding sentence, for any prior taxable year.
(2) Earned income.—
(A) In general.— The term “earned income” means the net earnings from self-employment. Such net earnings shall be determined:
(i) Only with respect to a trade or business in which the personal services of the taxpayer are a material income-producing factor;
(ii) without regard to items which are not included in gross income for purposes of this part and the deductions properly allocable to, or chargeable against such items, and
(iii) with regard to the deductions allowed to a taxpayer under § 30129 of this title.
(B) For purposes of this subsection, the term “earned income” includes gains, other than any gains under any other provision of this part treated as gains from the sale or exchange of a capital asset, and net gains derived from the sale or other disposition of, or the transfer of any interest in, or the licensing of the use of property (other than good will) by an individual whose personal efforts created such property.
(3) Owner-employee.— The term “owner-employee” means an employee who:
(A) Owns the entire interest in an unincorporated business, or
(B) in the case of a special partnership or corporation of individuals, is the partner or shareholder, as the case may be, who owns more than ten percent (10%) of either the capital or the profit interest in such partnership or corporation of individuals.
To the extent provided in regulations prescribed by the Secretary, the term “owner-employee” also means an individual who has been an “owner-employee” within the meaning of the preceding sentence.
(4) Employer.— An individual who owns the entire interest in an unincorporated business shall be treated as his/her own employer. A special partnership or corporation of individuals shall be treated as the employer of each partner or shareholder who is an employee within the meaning of clause (1).
(5) Contributions on behalf of an owner-employee.— The term “contribution on behalf of an owner-employee” includes, except as the context otherwise requires, a contribution under a plan:
(A) By the employer for an owner-employee, and
(B) by the owner-employee as an employee.
(f) Additional requirements for qualification of trusts and plans benefiting owner-employees.— A trust which is a part of a pension or profit-sharing plan and which provides contributions or benefits for employees, some or all of whom are owner-employees, shall constitute a qualified trust under this section only if, in addition to meeting the requirements of subsection (a), the plan and the trust which is a part of the plan meets the following requirements:
(1)
(A) If the plan provides contributions or benefits for an owner-employee who controls, or for two (2) or more owner-employees who jointly control the trades or businesses with respect to which the plan is established, and who also control as owner-employee or as owner-employees, one or more of other trades or businesses, such plan and the plans established with respect to such other trades or businesses, when coalesced, shall constitute a single plan that meets the requirements of subsection (a) and of this subsection with respect to the employees of all such trades or businesses, including the trade or business with respect to which the plan intended to qualify under this section is established.
(B) For purposes of paragraph (A), an owner-employee, or two (2) or more owner-employees, shall be considered to control a trade or business if such owner-employee, or such two (2) or more owner-employees jointly:
(i) Own the entire unincorporated business, or
(ii) in the case of a special partnership or a corporation of individuals, own more than fifty percent (50%) of the capital or the profit interest in such partnership or corporation of individuals. For purposes of this subparagraph, an owner-employee, or two (2) or more owner-employees, shall be treated as owning any interest in a special partnership which is owned, directly or indirectly, by a special partnership that such owner-employee, or such two (2) or more owner-employees, are considered to control within the meaning of the preceding sentence.
(2) The plan does not provide contributions or benefits for any owner-employee who controls, or two (2) or more owner-employees who jointly control, as owner-employee or as owner-employees, any other trade or business, unless the employees of each trade or business which such owner-employee or owner-employees control are included in a plan that meets the requirements of subsection (a) and of this subsection, and provides contributions and benefits for employees that are not less favorable than contributions and benefits provided for owner-employees under the plan.
(3) Under the plan, the contributions or benefits on behalf of any owner-employee may be made only with respect to earned income by such owner-employee that is derived from the trade or business with respect to which such plan is established.
(4) Under the plan:
(A) Contributions and benefits shall not be available for any owner-employee, unless such owner-employee opts to have him/herself included in the plan, and
(B) no benefit in excess of the contributions made by an owner-employee shall be paid to such owner-employee, unless he/she becomes disabled, before attaining the age of fifty-nine and a half (591/2).
(g) Definitions and rules applicable to employee stock ownership plans.— For purposes of this section:
(1) Employee stock ownership plan.—
(A) In general.— The term “employee stock ownership plan” means a defined contributions plan:
(i) That is a qualified stock bonus plan, or a combination of a qualified stock bonus plan and a cash contribution plan, qualified under subsection (a) of this section, designed to invest primarily in the employer securities that qualify under the definition of clause (2) of this subsection, and
(ii) that not less than twenty percent (20%) of the equity of the company shall be offered to investors through a recognized stock market, or a stock market of Puerto Rico as of July 1, 1998, no later than the third anniversary of the effective date of the employee stock ownership plan of the company or business. Provided, That the Secretary may authorize the extension of this three (3)-year term for up to one (1) additional year, when in his/her judgment it is justified. The provisions of this subparagraph shall not be applicable to stock ownership plans established by a corporation with respect to the privatization of a program, service, or enterprise of the Government of Puerto Rico, or of a public corporation.
(iii) those otherwise defined in the regulations promulgated by the Secretary.
(B) Additional requirements.— A plan shall not be treated as an employee stock ownership plan unless it meets the following requirements:
(i) If the employer securities are not tradable in an established market, each participant in the plan shall be entitled to require the employer to repurchase his/her stock, under a fair value formula, as provided in subsection (a)(10)(B) of this section. Provided, That the Commissioner of Financial Institutions shall be empowered to promulgate the form and manner in which the stock repurchase procedure shall be conducted.
(ii) The plan provides for the distribution of the account balance of the participant of the plan, should he/she so choose, to begin not later than one (1) year after the close of the year in which the participant separates from the service, whether for having reached the normal retirement age under the plan, disability, or death, or not later than one (1) year after the close of the fifth (5th) plan year in which the participant otherwise separates from service, except that the latter shall not apply if the participant is reemployed by the employer before distribution is required to begin, as provided under this subparagraph. For purposes of this subparagraph, the account balance of a participant shall not include any employer securities acquired with the proceeds of a loan described in § 30129(a)(1)(G) of this title, until the close of the plan year in which said loan is repaid in full.
(iii) Unless the participant elects otherwise, the plan provides that the distribution of the participant’s account balance shall be made in substantially equal periodic payments (but not less frequently than annually) over a period not greater than five (5) years, or in the case of a participant with an account balance of five hundred thousand dollars ($500,000), five (5) years plus one (1) additional year (but not more than five (5) additional years) for each one hundred thousand dollars ($100,000) or fraction thereof by which said balance exceeds five hundred thousand dollars ($500,000), whichever of these two (2) periods is greater.
(iv) A plan to which § 30144(r) of this title applies shall provide so that no portion of the assets of the plan attributable to (or allocable in lieu of) such employer securities acquired by the plan in a sale to which said § 30144(r) of this title applies, may be accrued (or allocated directly or indirectly under any employer plan meeting the requirements of subsection (a) of this section):
(I) During the nonallocation period, for the benefit of any taxpayer who makes an election under § 30144(r)(1) of this title with regard to employer securities, or for the benefit of any individual who is related to the taxpayer, or
(II) for the benefit of any other person who holds (after applying § 30044(e) of this title), without regards to subsection (e)(3)(A) of said section) more than twenty-five percent (25%) of any class of outstanding stock of the corporation that issued the employer securities or of any other corporation that issued the employer securities or of any other corporation that is a component member of the same controlled group of corporations to which said corporation belongs, or more than twenty-five percent (25%) of the total value of any class of outstanding stock from any of said corporations.
(v) For purposes of subparagraph (iv), an individual shall be deemed to be related to the taxpayer, if any of the following relationships exists between them:
(I) Whole or half-blood brother or sister, spouse, ancestors or lineal descendants.
(II) An individual and a corporation with more than fifty percent (50%) of the value of the issued stock, of which is owned directly or indirectly by or for such individual.
(III) A grantor and a fiduciary of a trust.
(IV) A fiduciary of a trust and the fiduciary of another trust, if the same person is the grantor of both trusts.
(V) A fiduciary and a beneficiary of the same trust.
(VI) A fiduciary of a trust and a beneficiary of another trust, if the same person is the grantor of both trusts.
(VII) A fiduciary of a trust and a corporation more than fifty percent (50%) in value of the issued stock of which is owned directly or indirectly by or for the trust, or by or for a person who is a grantor of the trust.
(VIII) A person and an organization to which § 30471 of this title (related to certain tax exempt educational and charitable organizations) applies, which is controlled directly or indirectly by said person or by members of his/her family.
(vi) If a plan does not meet the requirements of subparagraph (iv):
(I) The plan shall be treated as having distributed to any person described therein the amount allocated to the account of said person in violation of the provisions therein, as of the date of said allocation;
(II) the provisions of § 30486 of this title shall apply, and
(III) the period for the assessment of any tax imposed under § 30486 of this title shall not expire before four (4) years counted from the first allocation of employer securities with regard to the sale to the plan to which § 30144(r) of this title applies, or the date on which the Secretary is notified of the noncompliance with the above, whichever date is later.
(vii) For purposes of subparagraph (iv), the provisions of item (I):
(I) Shall not apply to any individual related to the taxpayer if said individual is a lineal descendant of the taxpayer and the total amount allocated to the benefit of all such lineal descendants during the nonallocation period does not exceed more than five percent (5%) of the employer securities (or the amounts allocated in lieu thereof) held by the plan, which are attributable to a sale to the plan by any person related to said descendants for being his/her brother or sister (whether whole or half-blood), spouse, or ancestor or lineal descendant, in a transaction to which § 30144(r) of this title applies.
(II) A person shall be treated as failing to meet the twenty-five percent (25%) limitation established under subparagraph (iv)(II) of this paragraph, if the person fails to meet said limitation at any time during the one (1) year period ending on the date of the sale to the plan of the qualified stock or on the date in which the qualified stock is allocated to the participants in the plan.
(viii) The term “non-allocation period” shall mean the period beginning on the date of the sale of the qualified stock and ending ten (10) years after the date of sale or the date of the plan allocation attributable to the final payment of the indebtedness incurred in connection with such sale, whichever date is later.
(ix) If the employer holds any class of stock subject to registration under Section 12 of the Securities Exchange Act of 1934 or any class of stock that could be required to be registered if it were not for the exception provided in subsection (g)(2)(H) of said Section 12, or registrable under any similar provision pursuant to the “Uniform Securities Act” of Puerto Rico, each participant or beneficiary in the plan shall be entitled to instruct the plan on how to vote with regards to the employer’s voting stock and which are allocated to the account of said participant or beneficiary.
(C) Any corporation that fails to meet this requirement shall be subject to denial of the tax benefits granted in connection with this plan. In said case, the deductions claimed by the employer under the provisions of subsections (a)(1)(G) and (d) of § 30144 of this title for contributions made to a trust that is part of an employee stock ownership plan and for the dividends paid in cash shall be denied and the taxable net income for said years shall be recomputed. The deficiency, if any, shall be computed from the year in which the deductions were claimed and shall be subject to the payment of interest, penalties, and surcharges, as applicable.
(2) Employer stock.—
(A) In general.— The term “employer securities” means common stock issued by the employer (or by a corporation which is a member of the same controlled group), which is readily tradable on an established securities market.
(B) Special rule when there is no readily tradable common stock.— If there is no common stock which meets the requirements of paragraph (A), the term “employer securities” means common stock issued by the employer (or by a corporation that is a member of the same controlled group) having a combination of voting power and dividend rights equal to or in excess of:
(i) That class of common stock of the employer (or of any other corporation of the same controlled group) with the greatest voting power, and
(ii) that class of common stock of the employer (or of any other corporation of the same controlled group) having the greatest dividend right.
(C) Certain preferred stock deemed as employer securities.— Noncallable preferred stock shall be treated as employer securities if said stock is convertible at any time into stock that meets the requirements of paragraphs (A) or (B) (whichever is applicable), and if said conversion is at a conversion price as of the date of the acquisition by the employee stock ownership plan is reasonable. For purposes of this paragraph, and pursuant to the regulations promulgated by the Secretary, preferred stock shall be treated as noncallable if, after the call in, there shall be a reasonable opportunity for a conversion that meets the requirements of this paragraph.
(D) Application to controlled groups of corporations.—
(i) For purposes of this clause, the term “controlled group of corporations” shall have the same meaning given to said term under § 30044(a) of this title (determined without regard to § 30044(e)(3)(C) of this title).
(ii) For purposes of subparagraph (i), if the common parent corporation owns directly stock possessing at least fifty percent (50%) of the voting power of all classes of voting stock and at least fifty percent (50%) of each class of nonvoting stock in a subsidiary (and all other corporations below it in the chain that would meet the eighty percent (80%) test of § 30044(a) of this title) if the first tier subsidiary were the parent corporation), they shall be treated as includible corporations in the controlled group of corporations.
(iii) For purposes of subparagraph (i), if the common parent corporation owns directly stock possessing all of the total combined voting power of all classes of stock and all the nonvoting stock in a first tier subsidiary, and if said subsidiary owns directly stock possessing at least fifty percent (50%) of the total combined voting power of all classes of stock and at least fifty percent (50%) of each class of nonvoting stock in a second tier subsidiary of the common parent corporation, such second tier subsidiary (and all other corporations below it in the chain that could meet the eighty percent (80%) test of § 30044(e) of this title if the second tier subsidiary were the common parent corporation) they shall be treated as includible corporations in the controlled group of corporations.
(h) Notification requirement.— For purposes of this section, before the beginning of each taxable year, the Secretary shall notify the limitations applicable under the United States Internal Revenue Code of 1986, as amended or any other successor legal provision, through regulations, circular letter, or administrative determination to be issued upon the publication by the United States Internal Revenue Service of the limitations applicable under said Code.
History —Jan. 31, 2011, No. 1, § 1081.01, retroactive to Jan. 31, 2011; Dec. 10, 2011, No. 232, § 95; Sept. 19, 2014, No. 159, § 5.