Corporate tax in Puerto Rico

Summary

Corporate Income Tax Rate (%) 39 (a)
Capital Gains Tax Rate (%) 20 (b)
Branch Income Tax Rate (%) 39 (a)
Withholding Tax (%)
Dividends 15 (c)
Interest 0 (d)
Royalties 2 to 29
Services Rendered 7 to 15
Branch Remittance Tax 10
Net Operating Losses (Years)
Carryback 0
Carryforward 7 / 10 / 12 (e)

a) This is the maximum tax rate (see Section B). An alternative minimum tax (AMT) may apply instead of the regular tax. For details regarding the AMT, see Section B.

b) Under Act 77-2014, this rate applies to long-term capital gains realized after 30 June 2014.

c) Under Act 77-2014, this rate applies to distributions made after 30 June 2014.

d) A 29% withholding tax is imposed on interest paid to foreign corporations on related-party loans.

e) Net operating losses incurred during tax years beginning after 31 December 2004 and before 1 January 2013 may be carried forward for 12 years. For net operating losses incurred during tax years beginning after 31 December 2012, the carryforward period is 10 years. For years beginning before 1 January 2005, the carryforward period was seven years.

Taxes on corporate income and gains

Corporate income tax. Companies organized in Puerto Rico are subject to Puerto Rico income tax on worldwide income. Foreign companies engaged in trade or business in Puerto Rico are tax­able on income earned in Puerto Rico and on income that is ef­fectively connected with their Puerto Rico operation. Partnerships are treated as pass-through entities. Accordingly, their partners are taxed on their distributive shares of the income and expenses of the partnership. Elections for Special Partnerships, which en­gage only in specified activities and are also treated as pass-through entities, are not available after 31 December 2010.

Limited liability companies are subject to tax in the same manner as regular corporations. However, they can elect to be taxed as partnerships or pass-through entities under certain conditions. If a limited liability company is treated as a partnership or a pass-through entity for federal tax purposes or in a foreign jurisdic­tion, it is treated as a partnership for Puerto Rico tax purposes. However, a limited liability company that is treated as a partner­ship for federal tax purposes or in a foreign jurisdiction is not treated as a partnership for Puerto Rico tax purposes if the entity was operating under any of the tax incentive laws or filed an ap­plication for a tax grant before 1 January 2011.

Rates of corporate income tax. The corporate income tax rates range from 20% to 39%. Special rules may apply to controlled group corporations in determining the net income subject to ad­ditional tax. Taxpayers that made the election to compute their tax liability under the provisions of the Puerto Rico Internal Revenue Code of 1994 (PRIRC) may opt out of such election for the tax years beginning after 31 December 2012 and may make an election subject to the provisions of the 2011 Internal Revenue Code for a New Puerto Rico (IRCPR), as amended by the Tax Burden Redistribution and Adjustment Act (Act 40-2013). After this irrevocable election is made, it is effective for the 2013 tax year and subsequent years.

Certain companies currently doing business in Puerto Rico are op erating under the benefits of industrial tax exemption under various industrial incentives acts enacted by the government in 1963, 1978, 1987 and 1998. Under these acts, the period of tax exemption (10 to 25 years) is determined based on the degree of industrialization of the area or zone where the business is located. Under the 1963, 1978 and 1987 acts, businesses qualifying for industrial tax exemption are exempt from income taxes and prop­erty taxes at a rate of 90% and from municipal license taxes at a rate of 60% during the entire period of tax exemption. In addition, these corporations are not subject to alternative minimum tax (see Alternative minimum tax) on their industrial development in come (IDI), and they benefit from favorable withholding tax rates on profit remittances. Activities qualifying for exemption under the various tax incentives acts include manufacturing, tour­ism, agriculture and export of services.

Under the Puerto Rico Tax Incentives Act of 1998, which expired on 30 June 2008, exempt businesses are subject to flat income tax rates ranging from 2% to 7% on their IDI. Dividends are not sub­ject to withholding tax. Royalties are subject to a withholding tax rate ranging from 2% to 15%.

The Economic Incentives for the Development of Puerto Rico Act of 2008 (the 2008 Act) took effect on 1 July 2008. The exemption period under the 2008 Act is 15 years, regardless of the location of the exempt business.

The 2008 Act applies to the following:

  • Eligible businesses engaged in the manufacturing or production of articles in Puerto Rico
  • Entities that intend to perform on a commercial scale in Puerto Rico services destined for foreign markets
  • Entities that provide services subcontracted in Puerto Rico or that provide key supplier services rendered in Puerto Rico at a commercial scale and on a continuous basis to exempt manu­facturing businesses
  • Entities engaged in the manufacturing of high-technology indus­trial units for the production of energy, other than fossil fuels, for use in Puerto Rico, and in the assembly of equipment for the generation of such energy
  • Entities engaged in the construction of social-interest homes (affordable or low-interest housing)
  • Entities dedicated to recycling activities
  • Entities operating at a commercial scale that are engaged in the development of licensed or patented software
  • Certain strategic projects, and entities devoted to the research, development, manufacture, transport, launch and operation of satellites from Puerto Rico
  • Entities engaged in the development of service centers for pro­cessing or warehousing of data
  • Value-added activities for the operation of ports

The 2008 Act provides for a 4% flat tax rate on IDI derived by companies that obtain exemption grants. Special rules may apply to exempted businesses that have had operations under Act No. 135 of 2 December 1997, as amended; these businesses may continue to enjoy a fixed income tax rate on their IDI under this act equal to the rate imposed under the predecessor grant, but not lower than 2%.

An additional 0.5% re duction in the tax rate on IDI is available to exempt businesses operating in a zone of low or intermediate in­dustrial development. The 2008 Act provides a 100% tax exemp­tion during the first 10 years of operations for IDI derived from businesses located in the municipalities of Culebra and Vieques. The 2008 Act provides for no withholding tax on dividends and a 12% withholding tax on royalties paid by exempt businesses to entities not engaged in trade or business in Puerto Rico. Exempt businesses can take advantage of a 2% alternative tax on royalties instead of the 12% withholding tax, but such businesses are sub­ject to a tax at a rate of 8% on IDI. Manufacturers may benefit from a 100% exemption from excise taxes and sales and use tax on raw materials, machinery and equipment. As provided in pre­vious tax incentives acts, the 2008 Act provides a 90% property tax exemption and a 60% municipal license tax exemption. It also grants certain special deductions and credits with respect to the following:

  • Job creation
  • Energy costs
  • Use of intangible property
  • Strategic projects
  • Research and development
  • Net operating losses
  • Investments in buildings, structures, machinery and equipment
  • Purchases of locally manufactured products

The Export Services Act took effect on 17 January 2012. The exemption period under this act is 20 years.

The Export Services Act applies to eligible businesses. These are entities that have bona fide offices located in Puerto Rico and that have the main purpose of providing services to clients out­side Puerto Rico. These services include but are not limited to the following:

  • Research and development
  • Marketing and public relations
  • Consulting
  • Professional services
  • Call centers
  • Centralized management services
  • Shared service centers
  • Promotion services for the establishment of new business in Puerto Rico
  • Distribution of products manufactured in Puerto Rico for juris­dictions outside Puerto Rico
  • Assembly, bottling and packaging operations of products for export
  • Operations of trading companies

The Export Act provides for a 4% flat income tax rate on export income received from services provided by eligible businesses. An additional 1% reduction in the tax rate on export income is available to exempt businesses that derive 90% of their gross income from export services that are considered strategic ser­vices, subject to certain requirements.

The Export Act provides a 90% or 100% property tax exemption for certain eligible activities and a 60% municipal license tax exemption. A 90% municipal license tax exemption is available to exempt businesses operating in the special industrial development zone constituted by the municipalities of Culebra and Vieques.

The Small and Medium Business Employment Creation and Retention Incentives Act (Act 120-2014) is intended to encour­age the creation and expansion of small and medium businesses operating in Puerto Rico by providing state tax and payroll incen­tives. The following businesses may apply for these incentives:

  • Microbusiness: annual gross income less than USD500,000 and 7 or fewer employees
  • Small business: annual gross income less than USD3 million and 25 or fewer employees
  • Medium business: annual gross income less than USD10 mil­lion and 50 or fewer employees

Other Puerto Rico legislation grants tax exemptions to enter­prises engaged in specified economic activities. For example, under the Puerto Rico Tourist Development Act of 1993, as amended, or under the Puerto Rico Tourist Development Act of 2010, quali­fied tourist activities may enjoy exemption from income tax (90% to 100%), municipal license tax (90% to 100%), excise tax (100%) and real and personal property taxes (90%). In addition, under the Agricultural Tax Incentives Act of 1995, as amended, bona fide farmers may enjoy exemption from income tax (90%), municipal license tax (100%), excise tax (100%) and real and personal prop­erty taxes (100%).

Alternative minimum tax. The alternative minimum tax (AMT) is designed to prevent corporations with substantial economic in­come from using preferential deductions, exclusions and credits to substantially reduce or eliminate their tax liability. The AMT is the greater of the following:

  • The regular AMT at a rate of 30%
  • The sum of the following two items:

— 20% of the payments made to or expenses incurred with respect to related parties, including the allocation of expens­es from a home office to a branch not subject to tax in Puerto Rico.

— 2% to 6.5% of the purchases of personal property from related persons made by a business (subject to certain excep­tions), with the percentage based on the purchaser’s gross revenue from the conduct of a trade or business in Puerto Rico. The following is the table of percentages.

Gross revenue Percentage (%)
Equal or higher than USD10 million
but less than USD500 million
2.5
Equal or higher than USD500 million
but less than USD1.5 billion
3
Equal or higher than USD1.5 billion
but less than USD2 billion
3.5
Equal or higher than USD2 billion
but less than USD2.75 billion
4.5
Equal or higher than USD2.75 billion 6.5

The AMT applies to the extent that the AMT exceeds the regular tax liability.

For purposes of the AMT, personal property refers to tangible property used in a trade or business in Puerto Rico except for raw materials or intermediate products used in manufacturing.

A related person is a member of a controlled group having 50% ownership.

Alternative minimum taxable income is determined by adding back certain tax preferential deductions to the taxable income comput ed for regular income tax purposes. The deduction for payments with respect to intercompany services incurred outside Puerto Rico that are not subject to tax is an adjustment for AMT purposes for the tax years beginning before 1 January 2013. As a result of the changes introduced by Act 40-2013, this deduction is not an AMT adjustment for tax years beginning after 31 December 2012.

In addition, Act 72-2015 limits the net operating loss deduction to 70% (rather than 80%) of the alternative minimum taxable income.

Sixty percent of adjusted financial statement income in excess of adjusted taxable income is included in determining the amount subject to tax. Any AMT paid may be recovered in subsequent years as a credit to the regular tax when the regular tax is in ex­cess of that year’s AMT. The allowable credit may not exceed 25% of the excess of the net regular tax over the net AMT.

Special tax on gross income. One of the major changes introduced by Act 40-2013 was the adoption of the special tax on gross in­come, known as the gross receipts tax. For tax years beginning after 31 December 2013, the gross receipts tax is no longer a component of the AMT (as it was in prior years) but is determined separately and in addition to the normal tax, surtax and alternative minimum tax applicable to corporations. The tax paid is deduct­ible for regular income tax purposes. Entities engaged in trade or businesses in Puerto Rico are subject to the special tax on their gross income at the following rates.

Gross revenue  
Exceeding Not exceeding Rate
USD USD %
3,000,000 100,000,000 0.35
100,000,000 300,000,000 0.50
300,000,000 600,000,000 0.70
600,000,000 1,500,000,000 0.80
1,500,000,000 1.00

 

Corporations and flow-through entities are subject to the special tax. However, entities operating with tax grants under tax incentive acts, including agricultural businesses and not-for-profit entities, are not subject to the special tax. Retail food sellers are subject to reduced tax rates, subject to limitations.

The special tax is subject to estimated tax payment requirements. The special tax does not apply for tax years beginning after 31 December 2014, in the case of entities taxed as corporations, and for tax years beginning after 1 January 2014, in the case of entities taxed as partnerships, special partnerships or corpora­tions of individuals.

Capital gains. Under Act 77-2014, for sales or exchanges occur­ring after 30 June 2014, the holding period for long-term capital transactions is one year, and the special applicable tax rate is 20%.

Losses from the sale or exchange of capital assets are allowed only to the extent of 90% of the gains from the sale or exchange of such assets for tax years beginning after 31 December 2013 and ending before 1 January 2015. The percentage is reduced to 80% for tax years beginning after 31 December 2014.

Capital losses can be carried forward for seven years to offset capital gains for tax periods after 31 December 2012.

Business assets that are not part of inventory are generally accord­ed capital gain treatment in the case of a gain and ordinary loss treatment in the case of a loss.

Administration. Corporate tax returns are due on the 15th day of the fourth month after the close of the taxable year. Extensions are available for up to three months; however, the tax must be fully paid by the original due date. Estimated tax payments are required on a quarterly basis. For tax years beginning on or before 31 December 2012, the estimated tax payments generally totaled 90% of the final liability or 100% of the preceding year’s tax. Act 40-2013 modified the determination of the estimated tax liability for the tax years beginning after 31 December 2012. Under Act 40-2013, estimated tax equals the lesser of the following:

  • 90% of the tax for the tax year
  • The greater of the following:

— 100% of the total tax liability of the prior year

— The tax liability determined using current tax rates and ap­plicable law based on the taxable income from the preced­ing year’s tax return

The special tax on gross income is subject to the estimated tax calculation described above. Taxpayers that had made an election to continue to file their income tax returns in accordance with the prior tax code of 1994 (Option 94) must also pay estimated tax with respect to the special tax on gross income.

Tax returns of partnerships, Special Partnerships and limited lia­bility companies that elected to be treated as partnerships and corporations of individuals, among others, are due on the 15th day of the third month after the close of the tax year. Extensions are also available for up to three months. However, the tax must be fully paid by the original due date.

Dividends. Corporations engaged in a trade or business in Puerto Rico may deduct 85% of the dividends they receive from domes­tic (Puerto Rican) corporations, subject to limitations. Dividends re ceived by domestic corporations or partnerships from controll­ed domestic corporations or partnerships are 100% deductible.

Dividends paid to nonresident corporations are subject to a 10% withholding tax.

Act 77-2014 established a new 10% tax on implicit dividends. This tax is imposed on the implicit dividend received by a foreign owner from an entity taxed as a corporation. A foreign share­holder is defined as a nonresident person who owns directly or indirectly 50% or more of the interests in an entity. For these purposes, an implicit dividend is defined as the lesser of the fol­lowing:

  • The average value of certain assets held outside Puerto Rico
  • Earnings and profits of the corporation at the end of the year

The following entities are excluded from this tax:

  • Not-for-profit organizations
  • International insurers
  • International financial entities
  • Foreign corporations taxed under IRCPR Section 1092.02

Foreign tax relief. A tax credit is allowed for foreign taxes in­curred, but is limited to the equivalent Puerto Rican tax on the foreign-source portion of taxable income. A foreign tax credit is also allow able under the AMT system, subject to limitations.

Determination of trading income

General. Income for tax purposes is computed in accordance with generally accepted accounting principles, as adjusted for certain statutory provisions. Consequently, taxable income frequently does not equal income for financial reporting purposes.

Interest income derived from certain instruments issued by the governments of the United States or Puerto Rico is exempt from tax. Expenses related to the generation of this type of income are not deductible.

For expenses to be deductible, they must be incurred wholly and exclusively for the production of income. Statutory provisions limit the amounts of certain deductible expenses. Only 50% of travel and entertainment expenses is deductible. The deduction for charitable contributions may not exceed 10% of taxable income before such deduction.

For tax years beginning after 31 December 2012, Act 40-2013 provides for a disallowance of 51% of payments made to related parties not engaged in trade or business in Puerto Rico, including the allocation of expenses between a branch and its home office. This adjustment does not apply to entities operating with tax grants under tax incentive laws.

Inventories. Inventory is valued for tax purposes at either cost or the lower of cost or market value. In determining the cost of goods sold, the two most commonly used methods are first-in, first-out (FIFO) and last-in, first-out (LIFO). The method chosen must be applied consistently, except that an election to change from FIFO to LIFO may be made without prior permission.

Tax depreciation. A depreciation deduction is available for most property (except land) used in a trade or business. The time period over which an asset is depreciated is based on the asset classifica­tion. The following three depreciation methods are allowed in Puerto Rico:

  • Straight-line
  • A method similar to the US ACRS method
  • Flexible depreciation

Deductions for ACRS depre ciation are allowed only for assets acquired in tax years beginning on or after 1 July 1995. Deductions for flexible depreciation are allowed only for assets acquired in tax years beginning before 1 July 1995. The flexible method is limited to the following types of businesses:

  • Construction
  • Agriculture
  • Selling or leasing of build ings
  • Manufacturing
  • Tourism
  • Shipping

Businesses enjoying tax exemption (see Section B) may not use the flexible depreciation method. The amount of the flexible de­preciation deduction is limited to a percentage of taxable income.

The depreciation expense deduction applicable to automobiles may not exceed USD6,000 per year per automobile for up to five years except, under certain circumstances, for lease businesses (operating leases) and taxi or limousine transportation businesses.

Depreciation computed under the straight-line depreciation meth od is not recaptured on the sale of an asset, but depreciation comput­ed under the flexible depreciation and ACRS methods is subject to recapture.

Intangible property (other than goodwill) acquired by purchase or developed after 1 September 2010 is depreciated using the straight-line method over the lesser of 15 years or the useful life of the property.

Groups of companies. Affiliated corporations doing business in Puerto Rico may not elect to file a single income tax return on a consolidated basis.

Other significant taxes

The following table summarizes other significant taxes.

Nature of Tax Rate (%)
Special excise tax; imposed on the acquisition
from a related party of personal property
manufactured in Puerto Rico and related
services by a nonresident foreign corporation
or partnership; if the provider has gross
receipts in excess of USD75 million for any
of the three preceding taxable years and if
certain other requirements are met (the tax
rate is fixed until 2017 when the tax expires)
4
Excise tax on purchases from a related person
on tangible personal property used in a trade
or business in Puerto Rico; the tax applies to
purchases from related parties by businesses that
had gross revenues in excess of USD10 million;
for the three preceding consecutive years (the
AMT is now the greater of the regular AMT or
the sum of two items; for details, see Section B)
2
Sales and use tax (applicable until 31 March
2016); imposed on tangible personal property,
taxable services, admission rights and mixed
transactions; specific exemptions and
exclusions are provided
10.5
Municipal sales and use tax; imposed by
municipalities on taxable items; specific
exemptions and exclusions are provided
1
Sales and use tax; imposed on certain
business-to-business (B2B) services and
designated professional services (DPS);
B2B services and DPS are not subject to
the 1% municipal sales and use tax
4
Value-added tax (effective from 1 April 2016);
consumption tax to be imposed on the value
of goods and services at every stage of
production and distribution; will co-exist
with the 1% municipal sales and use tax
Standard rate 10.5
Excise taxes on specified items, such as
imports of cigarettes, gasoline and other
fuels, vehicles and alcoholic beverages
Various
Payroll taxes
Federal unemployment insurance (FUTA),
imposed on first USD7,000 of wages (a
credit of 5.4% is given for Puerto Rican
unemployment tax; the overall rate can
be less than 6%)
6
Workmen’s compensation insurance, varies
depending on nature of employee’s activities
Various
Social security contributions; subject to the
same limitations as in the United States;
imposed on
Wages up to USD118,500 (for 2016); paid by
Employer 6.2
Employee 6.2
Medicare portion (hospital insurance;
for 2016); paid by
Employer 1.45
Employee (subject to an additional 0.9%
of Medicare tax for wages in excess of
USD200,000; no employer matching
contribution for Medicare Tax)
1.45
Municipal license tax; on gross sales volume
(if volume exceeds USD3 million, a financial
statement certified by a certified public
accountant [CPA] licensed in Puerto Rico
must accompany the business volume
declaration); rate varies by municipality;
payable by
Financial institutions 1 to 1.5
Other businesses 0.2 to 0.5
Property taxes (if volume exceeds USD3 million, a financial statement certified by a CPA licensed in Puerto Rico must accompany the tax return); rate varies by municipality
Personal property 5.80 to 9.83
Real property 8.03 to 11.83
Additional special tax on insurance premiums;
imposed on premiums earned by insurance
companies; tax must be paid on or before
31 March of the following year (exemption is
provided for domestic insurers maintaining a
home office in Puerto Rico)
1
Money transfer business tax (contained in
Act 136-2014); imposed on money-transmitting
businesses for every money transmission
processed or completed from Puerto Rico
with any foreign entity, person or business
2

Miscellaneous matters

Financial statements requirements. All entities engaged in trade or business in Puerto Rico must submit specified financial state­ments with their income tax returns.

Audited financial statements are required if the volume of busi­ness is equal to or greater than USD3 million. Not-for-profit corporations and entities with a volume of business of less than USD3 mil lion are not required to file audited financial state­ments.

Financial statements must be prepared in accordance with US generally accepted accounting principles (GAAP) and issued by a CPA licensed to practice in Puerto Rico. Other detailed rules apply to the preparation of financial statements, including rules regarding foreign corporations and related entities.

Entities engaged in a trade or business in Puerto Rico that have a volume of business in excess of USD3 million must submit, to­gether with their property and volume of business declaration tax returns, audited financial statements certified by a CPA licensed to practice in Puerto Rico. In addition, audited financial state­ments are required to be attached to the annual report filed with the Secretary of State in the case of a corporation with a volume of business in excess of USD3 million for tax years beginning on or after 1 August 2008. For corporations with a volume of busi­ness of USD3 million or less, a balance sheet with relevant foot­notes, prepared by a person with general knowledge in accounting, must accompany the annual report filed with the Secretary of State.

For a group of related entities, the business volume is determined by adding the business volume of each of the entities included in the group. If the total exceeds USD3 million, each of the entities must submit audited financial statements with their income tax return. Special additional rules may apply to a group of related entities.

If foreign corporations do not keep available books of account and supporting documents in Puerto Rico, all of their tax deduc­tions may be denied. A foreign corporation is deemed to be in compliance with this requirement if it can physically produce its books and records in Puerto Rico within 30 days. An extension of 15 days may be granted.

Foreign-exchange controls. Puerto Rico does not impose foreign-exchange controls, but large currency transfers must be reported to the US Treasury Department.

Debt-to-equity rules. Puerto Rico law does not include any spe­cific thin-capitalization provisions, but US provisions in this area may be persuasive.

Transfer pricing. Under the income tax law, the tax authorities may redistribute or reallocate income, deductions, credits and other items between related taxpayers to prevent tax evasion. The law does not prescribe transfer-pricing methods. However, regulations identify methods that may be used by the Secretary of Treasury to determine the actual net income derived from sales of tangible property between related taxpayers. In addition, these regulations provide guidance on other types of transactions between related taxpayers, such as intercompany loans, rendering of services and transfers of intangible property.

Tax treaties

Puerto Rico does not participate in US income tax treaties and has not entered into any treaties with other jurisdictions.