Income Tax and Stock Options

On October 20, 2016, Tribunal I of the Federal Court of Appeals (the “Court of Appeals”) issued a ruling in “Almirón, Juan Manuel”, a case where an Income Tax assessment over the income arising from exercising a stock option was under discussion.

In this case, Mr. Almirón -as Vice President and General Manager of a local subsidiary- in November 1994 executed a stock option agreement with an expiration date set for October 18, 2014 with the foreign head office. In September 1997 Mr. Almirón’s appointment as Vice President and General Manager ceased. A few months later, in March 1998, he exercised his stock option, acquiring head office stocks for US$ 19.15 each, paying a total of US$ 1,017,888, without transferring the purchased stocks. Later, when presenting his Income Tax affidavits for the 1998 fiscal year, Mr. Almirón did not declare any income for exercising the stock option agreement.

However, the Argentine Tax Authority considered the difference arising from the acquisition price and the stock market value when exercising the stock option as taxable income. While Mr. Almirón claimed that US$ 19.15 was market value, the Tax Authority claimed that the minimum stock value for that day was US$ 71.35 (this information was obtained from specialized websites and Argentine newspapers). On that basis, the Tax Authority by means of an assessment determined a tax debt in their favor for the 1998 fiscal year of US$ 2,275,549.75, as a consequence of omitting to declare taxable income.

Mr. Almirón filed an appeal before the Argentine Tax Court (the “Tax Court”), who ruled in his favor on July 3, 2013. In order to do so, the Tax Court held that income derived from exercising a stock option cannot be considered as taxable income pursuant to Income Tax Law, since it lacks “periodicity”, a distinctive quality to consider income as taxable. Moreover, the Tax Court stated that such capital gain is not included in any of the Income Tax categories; thus, section 110 of Income Tax Law’s Regulatory Decree –when regulating stock option’s tax treatment– is in fact stretching the taxable event, in violation of the rule of law.

The Argentine Tax Authority filed an appeal and the Court of Appeals revoked the decision. The Court of Appeals stated that Income Tax Law is perfectly clear when including as taxable income every kind of “monetary and in-kind compensations” that a taxpayer might receive along with their salary, and that, without the possibility of assuming that a profit-seeking Company structures mechanisms to grant their employees and/or professionals free benefits, profits arising from exercising stock options must be considered to be included within the legal concept of monetary and in-kind compensations. The Court of Appeals also pointed that the Argentine Congress, when referring to “compensations”, considered the multiple ways in which benefits for employees can be granted and decided to tax all of them without exception, and concluded that the Regulatory Decree does not violate the rule of law, but merely clarifies how to adopt that general concept.

In conclusion, the Court of Appeals ruled on the taxability of stock options, declaring that they are included as taxable income derived from labor workforce.