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 1006 - Accounting Periods and Methods of Accounting (§§ 30171 — 30182) › § 30178 - Incentive stock option

(a) In general.— If corporate stock is transferred to an individual in a transference with respect to which the provisions of subsection (b) are complied with:
(1) No income shall be recognized at the time the individual exercises the option with respect to such stock, not at the time in which the transfer of such stock to the individual after he/she has exercised such option;
(2) no deduction under the provisions of § 30121 of this title (in connection with expenses of the trade or business) shall be allowed at any time to the corporation of which the individual is an employee or director, or its parent or subsidiary corporation with respect to the transferred stock, and
(3) no amount other than the price paid under the option shall be treated as received by such corporations for any transferred stock.
(b) Qualified transfer.— The provisions of subsection (a) of this section shall apply with respect to the transfer of corporate capital stock from a corporation to an individual for his/her exercise of a qualified option (as such term is defined in subsection (c) of this section), if at all times during the period beginning on the date of the granting of the option and ending three (3) months before the date of such exercise, the individual was an employee or director of either the corporation granting the option or a parent or subsidiary corporation of such corporation.
(c) Incentive stock option.— For the purpose of this section, the term “incentive stock option” means an option granted to an individual for any reason in connection with his/her employment or function as director of a corporation, if such option is granted by the employer corporation or its parent or subsidiary corporation, to purchase stock of any of such corporations, but only if:
(1) The option is granted pursuant to a plan which:
(A) Includes the aggregate number of shares which may be issued under options; and
(B) includes the employees (or class of employees or directors) eligible to receive options, and
(C) is approved by the stockholders of the granting corporation within twelve (12) months before or after the date such plan is adopted.
(2) Such option is granted within ten (10) years from the date the plan is adopted, or the date the plan is approved by the stockholders, whichever is earlier.
(3) Such option by its terms is not exercisable after the expiration of ten (10) years from the date the option is granted.
(4) In case the stock of such options are traded in recognized stock exchanges, the option price may not be less than the fair market value of the stock at the time such option is granted. In case the stock of options that are not traded in recognized stock exchanges, the option price may not be less than the book value per share, determined according to the financial statements of the granting corporation for the taxable year immediately preceding the date on which the option is granted. The statements shall be made in accordance with generally accepted accounting principles.
(5) Such option by its terms is not transferable by such individual otherwise than by will or the laws of descent and distribution, and is exercisable, during his/her lifetime, only by him/her.
(6) Under the terms of the plan, the aggregate market value or the aggregate book value (determined at the option is granted) of the stock, with respect to which the incentive stock option may be exercised for the first time by such individual during any calendar year (under any incentive stock option plan of the employer corporation or its parent or subsidiary corporation) shall not exceed one hundred thousand dollars ($100,000).
(d) Special rules.—
(1) Exercise of option by estate.— If an option to which this section applies is exercised after the death of an employee or director by the estate of such decedent or the person who acquired the rights to exercise such option by bequeath or inheritance or by reason of death of the decedent, the provisions of subsection (a) shall apply in the same manner as if the option had been exercised by the decedent, except that the requirement set in subsection (b) that he/she be an employee or director, shall not apply.
(2) Permissible provisions.— An option which meets the requirements of subsection (c) shall be treated as an incentive stock option even if:
(A) The employee may pay for the stock with stock of the corporation granting the option,
(B) the employee has a right to receive property at the time of exercise of the option, or
(C) the option is subject to any condition not inconsistent with the provisions of subsection (c) of this section.
(3) Special rule when disabled.— For purposes of subsection (b) of this section, in the case of an employee or a director who is disabled, the three (3)-month period of subsection (b) shall be one (1) year.
(4) Fair market value.— For purposes of this section, the fair market value of stock shall be determined without regard to any restriction other than a restriction which, by its terms, will never lapse.
(5) Application of plans in effect.— The provisions of this section shall apply to plans established under Section 1046 of the Puerto Rico Internal Revenue Code of 1994, as amended, and Section 44A of the Income Tax Act of 1954, as amended.
(e) Temporary provisions.—
(1) Option to prepay the special tax on gains accrued on the incentive stock options or partnership interest or interest or on stock or transferred proprietary interest. It shall be subject to the provisions of clauses (2) and (3) of this subsection,
(A) Any individual who, being the holder of an incentive stock option (whether or not it is an incentive stock option under Section 1046 of the Internal Revenue Code of 1994, as amended) or partnership interest, had paid in advance during the period between July 1 of 2006 to December 31, 2006, a special tax of five percent (5%) on the total or part of the gain accrued on the option, and
(B) any individual who, being the holder of corporate stock or partnership interest acquired through the exercise of an option (whether or not it is an incentive stock option under Section 1046 of the Internal Revenue Code of 1994, as amended) or to acquire such stock or proprietary interest, had prepaid during the period between July first (1st) of 2006 to December 31, 2006, a special five percent tax (5%) on the total or part of the gain accrued on the stock or proprietary interest so transferred.
(2) Increase in the basis to determine gain accrued on the option or corporate stock or partnership interest acquired through the exercise of the option.— The basis of the individual in the option or corporate stock or partnership interest acquired through the exercise of an option shall include the amount of the increase in the gain accrued upon which the individual made an election to pay taxes pursuant to the provisions of subsection (e) of Section 1046 of the Internal Revenue Code of 1994, as amended. The basis so determined shall be taken into account at the time or on the date in which the individual sells the transferred stock or partnership interest. Notwithstanding the foregoing, any increase in the gain accrued on such corporate stock or partnership interest, occurred after the election provided in said Section, shall pay taxes pursuant to the provisions of law in effect at the time in which the sale of such stock or partnership interest is finally completed.
(3) Recognition of loss.— The amount of loss generated as a result of the subsequent sale of corporate stock or partnership interest subject to Section 1046 of the Internal Revenue Code of 1994, as amended, shall be adjusted pursuant to the tax rate in effect applicable to this type of transaction at the time in which the sale of such stock or partnership interest is made, prior to its use or carryforward by the taxpayer or individual. In accordance to which, such loss shall be adjusted by a formula or fraction whose numerator shall be the five percent (5%) rate and whose denominator is the tax rate in effect as on the date in which the sale of such stock or partnership interest is made.
History —Jan. 31, 2011, No. 1, § 1040.08, retroactive to Jan. 1, 2011; Dec. 10, 2011, No. 232, § 47.