NEWS AND ALERTS
Puerto Rico has a New Tax Incentives Code
On July 1st, 2019, the Governor of Puerto Rico signed into law House Bill No. 1635, known as the “Incentive Code of Puerto Rico" and enrolled as Act No. 60-2019 (hereinafter the "Incentives Code"). The purpose of the bill was to consolidate all tax and monetary benefits conferred through separate statutes into a single code and eliminate tax incentives that were either obsolete or that had little or no real and effective contribution to the economy of Puerto Rico. Before the Incentives Code, approximately 76 different laws and programs created between 1945 to 2019, comprised Puerto Rico’s economic incentives legal framework.
With limited exceptions, the final version of the bill retains the majority of existing tax benefits and incentives, makes certain modifications to existing benefits and, finally, adds new tax incentives. Furthermore, the Incentives Code law (Act 60-2019) incorporates into its provisions Act 21-2019 known as the “Puerto Rico Economic Development and Opportunity Zones Act of 2019”, as well as certain technical amendments to the Puerto Internal Revenue Code (“Code”) as amended by Act 257-2018.
Generally, the Incentives Code provides businesses establishing operations in Puerto Rico in several industry categories a 4% income tax rate, a 100% exemption from dividend distributions, a 75% exemption on property taxes and a 50% exemption from municipal taxes. However, certain industries are granted different and specific tax benefits in the Incentives Code.
The following serves to summarize some of the key provisions of the Incentives Code.
Effective Date of the Incentive Code and Impact on Current Tax Incentives’ Grant Holders
The Incentives Code was effective immediately upon being approved on July 1, 2019. However, those seeking an incentives’ grant are given the option of either filing an application on or before December 31, 2019, either under the new Incentives Code Act or under the individual incentive laws in place prior to their consolidation in Act 60-2019. Beginning on January 1, 2020 and thereafter, all applications and requests will need to be filed solely under the provisions of the Incentives Code.
All current tax grants holders (i.e. holders of tax grants under Act 73 of 2008, Act 20 and 22 of 2012, among others) will continue to enjoy the benefits in full, and existing tax grants can be modified or amended under the provisions of the corresponding laws.
Certain Significant Changes in Tax Benefits
New Tax Benefits: The Incentives Code recognizes a new tax benefit afforded to new small and medium-size business ("PYMES", by its acronym in Spanish) in established in Puerto Rico, as well as for businesses establishing operations in Vieques and Culebra or those which require so-called “Difficult Recruitment Professionals”.
PYMES are defined as businesses with an average volume of business of 3 million or less during the 3 previous taxable years. This tax benefit includes a 2% special income tax rate and a 100% exemption from property and municipal taxes during the first 2 years of operations. After the initial 2 years, these businesses will enjoy a 4% income tax rate and a 75% and 50% exemption for property and municipal taxes, respectively.
On the other hand, “Difficult Recruitment Professionals” are defined as professionals who are residents of Puerto Rico having a specialized knowledge in the operation of an exempted business under the Incentives Code or under a superseded tax incentives act. These individuals will enjoy a 100% income tax exemption on the first $100,000.00 of their salary per calendar year.
Benefits for Manufacturing, Export Services, Green Energy and Tourism: The Incentives Code reduces the tax exemption previously conferred for property taxes from a 90% exemption to a 75% one. Moreover, it reduces the tax exemption for municipal license and construction excise taxes from 60% to 50%.
Individual Resident Investors (Act 22): Under the Incentives Code commodities, currencies and any digital asset based on blockchain technology will be subject to the capital gains treatment currently applicable under Act 22-2012 known as the “Act to Promote the Relocation of Individual Investors to Puerto Rico.
Furthermore, the Incentives Code requires that Individual Resident Investors make a donation of at least $10,000 to a not-for-profit organization in Puerto Rico.
Tourism Activities: Tourism activities are now 100% exempted from income taxes on dividend distributions. Previously these distributions were subject to income tax under the Code.
Doctors: The tax benefits under Act 14-2017, as amended, known as the “The Incentives for the Retention and Return of Medical Professionals Act” (“Act 14-2017”) were extended until June 30, 2020 in certain cases.
Tax Benefits under the Incentives Code of Puerto Rico by Classification
Tax Benefits for Individuals: The Incentives Code provides: 1) the tax benefits to Individual Resident Investors which were covered until know by Act 22-2012; 2) the tax benefits for scientists and doctors previously contained in the Code and Act 14-2017, respectively; and 3) a new tax benefit for businesses with “Difficult Recruitment Professionals.”
Tax Benefits for Exports: This classification includes the tax benefits for exports of goods and services. This tax benefit was covered by Act 20-2012, known as the “Act to Promote Export of Services.”
Tax Benefits for International Financial, Banking and Insurance Activities: This classification includes the tax benefits which were covered in Act 273-2012 “International Banking Center Regulatory”, Act 399 of September 22, 2004 known as the “International Insurers and Reinsurers Act of Puerto Rico” and Act 185-2014 known as the “Private Equity Fund Act.”
Tax Benefits for Tourism Activities (Visitor’s Economy): This classification includes the tax benefits in Act 74-2010 known as the “Tourism Development Act of Puerto Rico of 2010.”
Tax Benefits for Manufacturing, R&D and Manufacturing Related Services: This classification includes the tax benefits in Act 73-2018, as amended, known as the “Economic Incentives Acts for the Development of Puerto Rico.”
Tax Benefits for Energy and Infrastructure Related Activities: This classification includes the tax benefits in Act 83-2010 “Green Energy Incentives Act of Puerto Rico” and other construction and housing legislation.
New activity: Under this classification the production of “Highly Efficient Energy” is added as a type of business that can obtain a tax grant under the Incentives Code. The Incentives Code defines the production of highly efficient energy as the production of electric power at a minimum of sixty percent (60%) in a highly efficient manner, as established by the Energy Bureau, in accordance with Law 57-2014, as amended.
Tax Benefits for Agriculture: this classification includes the tax exemptions currently available to bonafide farmers under Act 225-1995, as amended.
Tax Benefits for Creative Industries: this classification includes the tax benefits for the film industry included in Act 27-2011 known as the “Puerto Rico Film Industry Economic Incentives Act.”
Tax Benefits to Other Industries: this classification includes the tax benefits currently applicable to air transportation and maritime cargo under Act 135-1945, as amended, known as the “Tax Exemption for Public Air Carriers Services” and Act 126-1966, as amended, known as the “Act of Maritime Cargo Transportation.”
We intend to provide an in-depth look into some of these classifications and other aspects of the new Incentives Code in future newsletters.
Should you or your company be interested in learning about the benefits of the New Incentives Code and how they may be of application, you may contact the attorneys at Vidal, Nieves & Bauzá, LLC.
Vidal, Nieves & Bauzá, LLC is a corporate law firm with a special emphasis in energy and environmental matters, corporate, tax, transactional, real estate and insurance practices.
______________________________________________________
Puerto Rico has a New Tax Incentives Code
On July 1st, 2019, the Governor of Puerto Rico signed into law House Bill No. 1635, known as the “Incentive Code of Puerto Rico" and enrolled as Act No. 60-2019 (hereinafter the "Incentives Code"). The purpose of the bill was to consolidate all tax and monetary benefits conferred through separate statutes into a single code and eliminate tax incentives that were either obsolete or that had little or no real and effective contribution to the economy of Puerto Rico. Before the Incentives Code, approximately 76 different laws and programs created between 1945 to 2019, comprised Puerto Rico’s economic incentives legal framework.
With limited exceptions, the final version of the bill retains the majority of existing tax benefits and incentives, makes certain modifications to existing benefits and, finally, adds new tax incentives. Furthermore, the Incentives Code law (Act 60-2019) incorporates into its provisions Act 21-2019 known as the “Puerto Rico Economic Development and Opportunity Zones Act of 2019”, as well as certain technical amendments to the Puerto Internal Revenue Code (“Code”) as amended by Act 257-2018.
Generally, the Incentives Code provides businesses establishing operations in Puerto Rico in several industry categories a 4% income tax rate, a 100% exemption from dividend distributions, a 75% exemption on property taxes and a 50% exemption from municipal taxes. However, certain industries are granted different and specific tax benefits in the Incentives Code.
The following serves to summarize some of the key provisions of the Incentives Code.
Effective Date of the Incentive Code and Impact on Current Tax Incentives’ Grant Holders
The Incentives Code was effective immediately upon being approved on July 1, 2019. However, those seeking an incentives’ grant are given the option of either filing an application on or before December 31, 2019, either under the new Incentives Code Act or under the individual incentive laws in place prior to their consolidation in Act 60-2019. Beginning on January 1, 2020 and thereafter, all applications and requests will need to be filed solely under the provisions of the Incentives Code.
All current tax grants holders (i.e. holders of tax grants under Act 73 of 2008, Act 20 and 22 of 2012, among others) will continue to enjoy the benefits in full, and existing tax grants can be modified or amended under the provisions of the corresponding laws.
Certain Significant Changes in Tax Benefits
New Tax Benefits: The Incentives Code recognizes a new tax benefit afforded to new small and medium-size business ("PYMES", by its acronym in Spanish) in established in Puerto Rico, as well as for businesses establishing operations in Vieques and Culebra or those which require so-called “Difficult Recruitment Professionals”.
PYMES are defined as businesses with an average volume of business of 3 million or less during the 3 previous taxable years. This tax benefit includes a 2% special income tax rate and a 100% exemption from property and municipal taxes during the first 2 years of operations. After the initial 2 years, these businesses will enjoy a 4% income tax rate and a 75% and 50% exemption for property and municipal taxes, respectively.
On the other hand, “Difficult Recruitment Professionals” are defined as professionals who are residents of Puerto Rico having a specialized knowledge in the operation of an exempted business under the Incentives Code or under a superseded tax incentives act. These individuals will enjoy a 100% income tax exemption on the first $100,000.00 of their salary per calendar year.
Benefits for Manufacturing, Export Services, Green Energy and Tourism: The Incentives Code reduces the tax exemption previously conferred for property taxes from a 90% exemption to a 75% one. Moreover, it reduces the tax exemption for municipal license and construction excise taxes from 60% to 50%.
Individual Resident Investors (Act 22): Under the Incentives Code commodities, currencies and any digital asset based on blockchain technology will be subject to the capital gains treatment currently applicable under Act 22-2012 known as the “Act to Promote the Relocation of Individual Investors to Puerto Rico.
Furthermore, the Incentives Code requires that Individual Resident Investors make a donation of at least $10,000 to a not-for-profit organization in Puerto Rico.
Tourism Activities: Tourism activities are now 100% exempted from income taxes on dividend distributions. Previously these distributions were subject to income tax under the Code.
Doctors: The tax benefits under Act 14-2017, as amended, known as the “The Incentives for the Retention and Return of Medical Professionals Act” (“Act 14-2017”) were extended until June 30, 2020 in certain cases.
Tax Benefits under the Incentives Code of Puerto Rico by Classification
Tax Benefits for Individuals: The Incentives Code provides: 1) the tax benefits to Individual Resident Investors which were covered until know by Act 22-2012; 2) the tax benefits for scientists and doctors previously contained in the Code and Act 14-2017, respectively; and 3) a new tax benefit for businesses with “Difficult Recruitment Professionals.”
Tax Benefits for Exports: This classification includes the tax benefits for exports of goods and services. This tax benefit was covered by Act 20-2012, known as the “Act to Promote Export of Services.”
Tax Benefits for International Financial, Banking and Insurance Activities: This classification includes the tax benefits which were covered in Act 273-2012 “International Banking Center Regulatory”, Act 399 of September 22, 2004 known as the “International Insurers and Reinsurers Act of Puerto Rico” and Act 185-2014 known as the “Private Equity Fund Act.”
Tax Benefits for Tourism Activities (Visitor’s Economy): This classification includes the tax benefits in Act 74-2010 known as the “Tourism Development Act of Puerto Rico of 2010.”
Tax Benefits for Manufacturing, R&D and Manufacturing Related Services: This classification includes the tax benefits in Act 73-2018, as amended, known as the “Economic Incentives Acts for the Development of Puerto Rico.”
Tax Benefits for Energy and Infrastructure Related Activities: This classification includes the tax benefits in Act 83-2010 “Green Energy Incentives Act of Puerto Rico” and other construction and housing legislation.
New activity: Under this classification the production of “Highly Efficient Energy” is added as a type of business that can obtain a tax grant under the Incentives Code. The Incentives Code defines the production of highly efficient energy as the production of electric power at a minimum of sixty percent (60%) in a highly efficient manner, as established by the Energy Bureau, in accordance with Law 57-2014, as amended.
Tax Benefits for Agriculture: this classification includes the tax exemptions currently available to bonafide farmers under Act 225-1995, as amended.
Tax Benefits for Creative Industries: this classification includes the tax benefits for the film industry included in Act 27-2011 known as the “Puerto Rico Film Industry Economic Incentives Act.”
Tax Benefits to Other Industries: this classification includes the tax benefits currently applicable to air transportation and maritime cargo under Act 135-1945, as amended, known as the “Tax Exemption for Public Air Carriers Services” and Act 126-1966, as amended, known as the “Act of Maritime Cargo Transportation.”
We intend to provide an in-depth look into some of these classifications and other aspects of the new Incentives Code in future newsletters.
Should you or your company be interested in learning about the benefits of the New Incentives Code and how they may be of application, you may contact the attorneys at Vidal, Nieves & Bauzá, LLC.
Vidal, Nieves & Bauzá, LLC is a corporate law firm with a special emphasis in energy and environmental matters, corporate, tax, transactional, real estate and insurance practices.
______________________________________________________
New Energy Public Policy for Puerto Rico:
100% Renewables by 2050
On October 17, 2018, Senate Bill No. 1121 was presented before the Legislature of Puerto Rico for the creation of the "Public
Energy Policy Act of Puerto Rico". The Bill establishes the new public policy on energy of Puerto Rico in order to create the parameters for a resilient, reliable and robust energy system, with fair and reasonable rates for all classes of consumers, enabling the user of the energy service to produce and participate in the generation of energy, facilitate the interconnection of distributed generation systems and microgrids, and disaggregate and transform the electrical system.
In addition to establishing the new public policy on energy, the Bill also amends Act No. 83 of May 2, 1941, as amended, known as the "Puerto Rico Electric Power Authority Act" in order to restructure the selection process of the Governing Board of the Puerto Rico Electric Power Authority (“PREPA”) trying to provide independence, separate PREPA's Energy Control Center
into a subsidiary of PREPA, and establish the powers, faculties, duties and responsibilities of the new PREPA, as well as establish the requirements for an Integrated Resources Plan and criminal penalties for failure to comply.
The Bill also amends Act No. 114-2007, as amended, in order to increase the size for the interconnection of distributed generation systems to the transmission and distribution grid, and establish a ninety (90) day term for PREPA to evaluate interconnection requests. PREPA’s failure to comply with the above term will result in the automatic approval of the interconnection request. PREPA's non-compliance with the terms for interconnection subjects PREPA to monetary penalties.
Act 82-2010, as amended, known as the "Public Policy on Energy Diversification through Sustainable and Alternative Renewable
Energy in Puerto Rico" is also amended to increase the Renewable Energy Portfolio to 100% of energy from renewable sources by the year 2050; clarify that all Renewable Energy Certificates, including those for renewable energy and those with net metering, can be purchased by a retail energy provider; and require the Energy Bureau of Puerto Rico to conduct a study to determine specific goals for energy storage systems.
The Bill amends Act 57-2014, as amended, known as the "Energy Transformation and RELIEF Act of Puerto Rico” to establish energy demand and efficiency response programs, increase the budget of the Energy Bureau to twenty million dollars ($20,000,000), grant it greater powers and faculties, and implement incentive and penalty mechanisms based on performance metrics. The powers of the Independent Office of Consumer Protection are broadened, and in addition to the electric service, its representation is expanded to include customers of the telecommunications and transport service.
The Bill amends Act 120-2018, known as the "Law to Transform the Puerto Rico Electric System", to extend the term for the Energy Bureau to issue the Energy Compliance Certificate and order that 10% of the payments received from a Transaction of PREPA, as defined in the law be destined to the Green Energy Fund of Puerto Rico. Act 211-2018, known as the "Reorganization Plan Execution Act of the Public Service Regulatory Board of Puerto Rico" is amended to clarify that the budget assigned to the Energy Bureau shall not form part of the funds available for the Public Service Regulatory Board.
In addition to the amendments of the previously mentioned laws, the Bill clarifies that those photovoltaic generation systems approved in accordance with the parameters of Executive Order OE-2017-064, "To energize residences with photovoltaic generation systems and batteries, and accelerate the recovery of Puerto Rico's electric power system after Hurricane María” (“Executive Order”) are automatically approved to operate, as long as they comply with the provisions contemplated in the Executive Order.
You may contact the attorneys at Vidal, Nieves & Bauzá, LLC should you have any questions regarding the Bill.
______________________________________________________
More incentives under Act 20 for trading companies and commercial distribution services
On July 25, 2018, the Governor signed Act 157-2018 (“Act 157”) to further promote the export services incentives under Act 20-2012, as amended (“Act 20”). The new law extends the ninety percent (90%) real and personal property tax exemption to trading companies services and commercial and mercantile distribution of products manufactured in Puerto Rico for jurisdictions outside of Puerto Rico. Pursuant to this amendment, the following activities will be eligible to enjoy property tax exemptions under Act 20:
• Creative industries
• Trading companies
• Headquarters
• Shared services
• Call centers
• Commercial and mercantile distribution of products manufactured in Puerto Rico for jurisdictions outside of Puerto Rico
This property tax exemption is similar to the one proposed in House Bill 1635, known as the "Incentives Code of Puerto Rico", which offers a 90% property tax exemption to all export services activities.
It is important to note that the provisions of Act 157 apply to Grantees with tax exemption grants issued prior to the effectiveness of the Act. The Act is effective upon its approval on July 25, 2018, and Grantees will be eligible for the exemption from said date.
Should your company be interested in learning more about the incentives under Act 20 and/or have any questions with respect to the Act 20/22 Program, you may contact the attorneys at Vidal, Nieves & Bauzá, LLC.
Vidal, Nieves & Bauzá, LLC is a corporate law firm with a special emphasis in energy and environmental matters, corporate, tax, transactional, real estate and insurance practices.
______________________________________________________
Relief for Employment Retention after
Hurricane Irma and María
As of June 2018, over $5 million in cash disbursements have been completed by the PR Treasury to 300 employers in Puerto Rico under the Employee Retention Tax Credit (“ERTC”) granted by the “Disaster Tax Relief and Airport and Airway Extension Act of 2017.” Circular Letter 18-11, issued by the PR Treasury on June 8, 2018, adopts rules to implement the ERTC Implementation
Plan developed between the US Department of Treasury and the PR Treasury.
What is the Employee Retention Tax Credit? It is a tax credit, generally available to offset the U.S. federal income tax liability, by eligible employers that were affected by Hurricane Irma and/or Hurricane María. In the case of eligible employers in Puerto Rico, the ERTC is paid in cash to qualified employers who make a timely request of the benefits to the PR Treasury.
In general, employers with Net Income Subject to Normal Tax of $10,000,001 or more can claim 26% of up to $6,000 of qualified
wages for each eligible employee for the tax year, while Employers with Net Income Subject to Normal Tax of $10,000,000 or less may claim 32% of such amount.
Who is an eligible employer? An eligible employer includes an individual, corporation or pass-through entity which meets the
following criteria: (i) was actively engaged in a trade or business in Puerto Rico on the day of the disaster; (ii) the employer’s trade or business was rendered inoperable on any day after the disaster and before January 1, 2018; (iii) the employer continued to pay salaries to eligible employees during the non-operational period; and (iv) has complied filing of forms before the PR Treasury such as Withholding Statements, and Employer's Quarterly Return of Income Tax Withheld, among others.
What is inoperable? An employer’s business will be deemed to have become inoperable if one or more of the following is true as a result of Hurricane Irma and/or Hurricane María: (i) the structure of the business was damaged; (ii) the business was not physically available for employees or clients; (iii) the business was unable to receive raw material or inventory; or (iv) the business did not have electricity, water or communication.
What wages qualify for the ERTC? Qualified wages are those paid by an eligible employer to an eligible employee after the hurricane date and before January 1, 2018, in which the business first became inoperable and until it resumed significant operations. Qualified wages include wages paid without regard to whether the employee performed any services, performed services at a different location from his or her principal place of employment, or performed services at the principal place of employment before significant operations had resumed.
How is the ERTC claimed? The ERTC can only be claimed electronically until November 30, 2018.
Should your company be interested in claiming the ERTC, or assessing whether it may be eligible, you may contact the attorneys at Vidal, Nieves & Bauzá, LLC.
Vidal, Nieves & Bauzá is a corporate law firm with a special emphasis in energy and environmental matters, corporate, tax, transactional, real estate and insurance practices.
______________________________________________________
Governor Signs Law Authorizing the Privatization of PREPA and Announces RFQ for Utility Scale Energy Storage System
On June 20, 2018, the Governor signed the “Law to Transform the Puerto Rico Electric System” (“Law”), which gives way to the privatization of the Puerto Rico Electric Power Authority (“PREPA”). The Law defines the legal framework for the energy reform and facilitates the assembling of interested companies to submit offers to participate in the transformation of PREPA, as well as to proceed with their technical, economic and financial evaluation.
As summarized in our News & Alerts vol. 9, this Law authorizes PREPA to sell its generation related assets and transfer or delegate any of its operations, functions or services, and authorizes PREPA together with the Public Private Partnerships Authority ("Authority") to carry out the processes through which these transactions will be consummated. The transformation process will be carried out through the creation of Public Private Partnerships ("Partnerships"), pursuant to procedures established in the Law and the applicable provisions of Act. No. 29-2009, as amended, known as the “Public Private Partnerships Act”.
Some of the key highlights of the newly enacted Law are the following:
-
PREPA may only sell assets related to the generation of energy and it may only establish transactions that are related to the generation, distribution, transmission of energy, measurement and any other functions, services or installations of PREPA through Alliance Contracts, as defined in the Law.
-
Every Contracting Party under an Alliance Contract or Sale Contract granted with respect to a PREPA Transaction will be automatically considered a Certified Energy Company.
-
To avoid authorizing a monopoly in the generation of energy, a Contracting Party under an Alliance Contract granted with respect to the concession or operation of the Electric Grid may not be a Contracting Party under a Contract granted with respect to PREPA’s Facilities dedicated to the generation of energy. Likewise, all assets dedicated to the generation of energy cannot be sold to a single Contracting Party and no Contracting Party can sell to another Contracting Party any asset acquired from PREPA dedicated to the generation of energy, without the authorization of the Legislative Assembly.
-
A Working Group, designated jointly by the Governor and the Presidents of both Legislative Houses, will be responsible for establishing and tempering the public energy policy and the regulatory framework to the new realities of our Island and energy industry to make the use of distributed generation, micro-grids and renewable energy viable, among others, subject to Legislative approval within 180 days from the approval of the Law.
-
Every transaction for the sale of assets must first be approved by the Governor, followed by the approval of the Legislative Assembly; while any other transaction that does not involve the sale of assets must be approved by the Board of the Authority, an entity that has a representative of each legislative body.
Lastly, the Authority and PREPA have already begun the selection process for a Partnership with a private company for the development of a utility scale energy storage system in the Island to provide greater stability and resiliency to the energy grid. The Authority, as representative of PREPA and through the Project Partnership Committee will conduct a Request for Qualifications ("RFQ") process, open to all interested parties, available on the Authority's website at the following address:
http://www.p3.pr.gov/assets/rfq-energy-project-june-2018.pdf
Should your company have any questions with respect to the privatization of PREPA, you may contact the attorneys at Vidal, Nieves & Bauzá, LLC.
Vidal, Nieves & Bauzá, LLC is a corporate law firm with a special emphasis in energy and environmental matters, corporate, transactional, real estate and insurance practices.
______________________________________________________
Proposed Incentives Code of Puerto Rico
Under Legislative Scrutiny
Public hearings to evaluate the new Incentives Code for Puerto Rico, House Bill 1635 (the “Bill”) of May 29, 2018, are now under way. On June 11, 2018, officials from the Department of Treasury (“Treasury”), the Department of Economic Development and Commerce (“DEDC”), and the Puerto Rico Fiscal Agency and Financial Advisory Authority (“FAFAA”) appeared before the House of Representatives in support of the Bill. The Bill aims to simplify the Island’s economic development proposition for the creation of jobs and attraction of investments by compiling around 50 statutes adopted over a 60-year period into one single tax incentives code. Incentives are organized by type, including those applicable to individuals, exports, finance, insurance and investments, visitor’s economy, manufacture, infrastructure, agroindustry, creative industries, and entrepreneurship. Exempt businesses would enjoy a uniform set of tax incentives, including a 4% income tax rate, tax free dividends, 60% municipal tax exemption and 90%property tax exemption.
In its presentation, the DEDC clarified that the Bill does not affect current holders of tax exemption grants.
The FAFAA ensured that the Bill complies with the Fiscal Plan adopted under PROMESA because it provides a more transparent system of incentives, which contributes a measurable return on investment. The FAFAA also stated that the savings generated by the Bill makes the proposed tax reform viable because of the neutral impact they both would have on the Puerto Rico budget.
Treasury pointed out that the Bill would eliminate the bureaucracy of the incentives approval process because the DEDC would be the centralized agency responsible for the process of issuance of tax incentives. In turn, Treasury would focus on the oversight of the Internal Revenue Code, which is expected to result in increased tax collections.
Some changes proposed in the Bill include:
-
Tax Credits: elimination of tax credits generally and adoption of a framework of cash grants tied to the annual budget administered by the DEDC.
-
Individual Investors: limited to individuals who become residents of Puerto Rico before tax year 2035 who were not residents of Puerto Rico from January 12, 1997 to the date of approval of the Bill.
-
Energy: elimination of the exemption to the payment of excise taxes to equipment for the collection, accumulation, generation, distribution and application of renewable energy.
-
Industrial and Manufacturing Incentives: Tax credits codified in Act 73-2008 and related laws are eliminated. Cash grants of up to 50% of the eligible investment in research and development are adopted.
-
Conservation Easements: elimination of the 50% tax credit granted in respect to the value of a conservation easement or donated land parcel, and its substitution with a 30% cash grant.
The existing tax incentives framework which applies to international insurers, their holding companies and protected cells operating under the Puerto Rico International Insurance Center created pursuant to Act 399 of 2004 remains unchanged under the Bill.
You may contact the attorneys at Vidal, Nieves & Bauzá, LLC should you have any questions regarding the Bill.
______________________________________________________
Puerto Rico Energy Commission enacts the
Regulation on Microgrid Development
A key component to a new electric system.
On May 16, 2018 the Puerto Rico Energy Commission (“Commission”) issued a Resolution adopting the Regulation on Microgrid Development (“Regulation”) pursuant to Act 57-2014, as amended, the "Puerto Rico Energy Transformation and RELIEF Act"; Act
82-2010, as amended, the "Public Policy on Energy Diversification by Means of Sustainable and Alternative Renewable Energy in Puerto Rico Act"; Act 83-2010, the "Green Energy Incentives Act"; and Act 38-2017, the "Uniform Administrative Procedure Act of
the Government of Puerto Rico".
In an effort to assist in the rebuilding and strengthening of the electric power system in Puerto Rico, in the aftermath of Hurricanes Irma and Maria, the Commission enacted the Regulation to foster the creation of microgrids.
The Regulation provides the regulatory and legal framework for the development and creation of microgrid systems in Puerto Rico as a means of delivering reliable energy services. The Regulation also promotes and enables customer choice and control over their electric service, increases energy system resiliency and efficiency, fosters environmentally sustainable initiatives and spurs economic growth by creating a market for microgrid services.
Furthermore, the Regulation enables the implementation of the microgrid systems through different business and operational models and classifies them in three main categories: (i) Personal Microgrids; (ii) Cooperative Microgrids and (iii) Third-Party Microgrids, which must comply with requirements specific to each classification.
Moreover, the Regulation provides mechanisms for demonstrating microgrid system compliance, provisions for rates, deposits, rate review and a two tiered registration process. The Regulation could benefit thousands of businesses and families that already have renewable systems, as well as anyone who wants to transition to clean energy generation systems.
You may contact the attorneys at Vidal, Nieves & Bauzá, LLC should you have any questions regarding the Regulation, or need support with respect to any requirement to take advantage of its benefits. Vidal, Nieves & Bauzá, LLC is a corporate law firm with a special emphasis in energy and environmental matters, corporate, transactional, real estate and insurance practices.
______________________________________________________
Puerto Rico Receives Unprecedented Assignment of $18.4 Billion of CDBG-DR Program Funds
to Address Hurricanes Irma and María Catastrophic Damages
The U.S. Department of Housing and Urban Development (“HUD”) on April 11, 2018 announced a historic award of $28 billion dollars for funds directed to supporting long-term disaster recovery in several states, including Puerto Rico. Of the record-setting amount being assigned by Congress through the approval of the “Bipartisan Budget Act of 2018” (Public Law 115-123), the total amount of $18,438,414,000 has been set aside for disaster recovery and mitigation activities in Puerto Rico.
The funds will be provided through HUD´s Community Development Block Grant-Disaster Recovery Program
(“CDBG-DR”) to address seriously damaged housing, businesses and infrastructure around the Island of Puerto Rico, after the significant devastation caused as a result of Hurricanes Irma and María which struck Puerto Rico during the latter part of 2017.
CDBG-DR grants were developed to support recovery activities covering different areas such as housing redevelopment and rebuilding, business assistance through working capital, economic revitalization and infrastructure repair. HUD is expected to issue administrative guidelines shortly for use of the funds by grantees using available funds to address long-term recovery needs.
Of the total assignment awarded to Puerto Rico, the amount of $10,153,130,000 represents an assignment specifically targeted by Congress to address remaining unmet needs resulting from damages caused by these two recent hurricanes occurring in 2017, with close to $2 billion specifically aimed at repairing and upgrading the electrical grid and providing enhanced or improved power systems. The remaining $8,285,284,000 have been assigned to Puerto Rico to support further mitigation activities for presidentially declared disasters from 2015 to 2017.
Congress has provided that 33% of the assignment targeted to address unmet needs during 2017 from both
hurricanes should be delivered within 60 days from the approval of the “Bipartisan Budget Act of 2018” signed into law on February 9, 2018. Furthermore, Congress provided that no less than 100% of the assignment of funds must be allocated by no later than December 1, 2018.
Among other requirements, the HUD Secretary will need to certify that Puerto Rico and other grantees have proficient financial controls and procurement processes, including adequate procedures to avoid duplication of benefits, as a condition to receiving a grant. Moreover, all funds will need to be utilized by Puerto Rico pursuant to an HUD-approved plan detailing the proposed use of funds, eligibility criteria and the manner in which funds will address long-term recovery and restoration of infrastructure and housing, economic revitalization, and mitigation in the most impacted and distressed areas.
Should your company have any questions with respect to the aforementioned, you may contact the attorneys at Vidal, Nieves & Bauzá, LLC.
______________________________________________________
Governor Files Bill to Sell the Island's
Electric System
On March 6, 2018, the Governor's Bill 860 for the creation of the "Law to Transform the Puerto Rico Electric System" was filed before the Legislature for consideration, codified as Senate Bill 860. The Bill aims to propel the process by which the Puerto Rico Electric Power Authority (the "Authority") will be transformed into a modern, sustainable, efficient and reliable system. The adoption of the proposed legal framework will give way to monitoring the market and calling for companies interested in participating in the transformation of the Authority.
The transformation process would be carried out through the creation of Public Private Partnerships following the procedures established in the proposed law and the applicable provisions of Act No. 29-2009, as amended, known as the "Public Private Partnerships Act". The proposed law provides the legal framework for the alliance contracts that arise in connection with the transfer of assets of the Authority.
Specifically, Bill 860 proposes to authorize the Authority to sell its assets and transfer or delegate any of its operations, functions or services, and authorizes the Authority together with the Public Private Partnerships Authority to carry out the processes through which these transactions will be consummated. It also establishes the process that will apply to any transaction through which a Public-Private Partnership is established with respect to any or all of the assets of the Authority, its operations, functions or services. The alliance contracts that arise in accordance with this Law would be carried out under the same regulatory framework that currently governs the Public-Private Partnerships.
The Bill authorizes the Authority to carry out the transactions without having to comply with any process, requirement, approval or review of the Puerto Rico Energy Commission and without having to comply with the provisions of any Integrated Resources Plan or Plan of Energy RELIEF or with the rates, terms or conditions applicable to the Authority.
Although the Energy Commission will supervise the performance and compliance of the Contracting Party under each alliance contract, and will review and approve the rates applicable to any regulated service provided under an alliance contract, it will not have the authority to alter or amend said alliance contract. Practically, this Bill aspires taking the opportunity towards a new and modern electric system that may serve as model worldwide.
Should your company be interested in participating in the transformation of PREPA and/or have any questions with respect to the privatization of PREPA, you may contact the attorneys at Vidal, Nieves & Bauzá, LLC.
Vidal, Nieves & Bauzá is a corporate law firm with a special emphasis in energy and environmental matters, corporate, transactional, real estate and insurance practices.
______________________________________________________
Government of Puerto Rico Announces
the Privatization of the Puerto Rico
Electric Power Authority
The Government wants a new, modern and efficient electric system.
On January 22, 2018, Governor Ricardo Rosselló Nevares informed the citizens of Puerto Rico via a televised message that his administration will take its first step towards the privatization of the Puerto Rico Electric Power Authority (“PREPA”) in order to transform the Island's electrical system into a new, modern and efficient system. The Governor briefly explained the process through which PREPA assets will be sold to companies expecting to transform the generation system in the next 18 months, which will consist of the following three phases:
-
Defining the legal framework through legislation, monitoring the market and calling for companies interested in participating in the transformation of PREPA.
-
Receiving, reviewing and evaluating acquisition offers of interested companies.
-
Negotiating terms with the selected companies that meet the requirements for the transformation and modernization of the energy system.
Notwithstanding the three-phased plan, the transaction for selling the public utility would need to be approved by the Financial Oversight and Management Board of Puerto Rico and the federal judge presiding PREPA’s bankruptcy under Title III of PROMESA.
Should your company be interested in participating in the transformation of PREPA and/or have any questions with respect to the privatization of PREPA, you may contact the attorneys at Vidal, Nieves & Bauzá, LLC. Vidal, Nieves & Bauzá is a corporate law firm with a special emphasis in energy and environmental matters, corporate, transactional, real estate and insurance practices.
______________________________________________________
Environmental Protection Agency and Environmental Quality Board Waive
Power Generator Requirements
The Waivers aim to address the current circumstances after Hurricane María
On September 18, 2017, the Environmental Quality Board (EQB) published Resolution 17-22, temporarily waiving power generators' permit requirements. A week later, the United States Environmental Protection Agency ("EPA") issued two communications temporarily exempting Puerto Rico from the diesel fuel and mobile power generators' Clean Air Act environmental compliance requirements. Through its Resolution, the EQB waives operating time and fuel consumption requirements for power generators that had a permit before Hurricane María. In the case of power generators without a permit, the Resolution authorizes them to operate as long as: (i) the installation complies with the technical requirements of applicable laws and regulations; (ii)they have a manufacturer's certificate of compliance with emission standards; (iii) the generator has an hour meter; and (iv) the opacity of the gases emitted by the generator does not exceed 20%. As an exception, an opacity of up to 60% will be permitted, but only for a period of less than 4 minutes in any consecutive 30-minute interval.
Through a letter to the Governor of Puerto Rico dated September 26, the EPA issued a waiver to allow the use of high sulfur heating oil and marine fuel designated for use in Emission Control Areas (ECA marine fuel) in mobile nonroad generators used for emergency purposes. The requirements of the waiver include that the generator or pump in which the fuel is used must be from a model year 2010 or older, or be above 750 horsepower and be used for emergency purposes. The waiver has been extended through subsequent letters until November 15, 2017. Subsequently, on September 27, the EPA published a No Action Assurance (NAA), which permits the importation, sale, donation or distribution of mobile power generators that are not covered by an EPA issued Certificate of Conformity. The NAA classifies the generators in two categories: Category A, for generators that meet EPA standards but have yet to be certified, and Category B for generators that do not meet EPA standards.
Category A generators must be imported to Puerto Rico by January 31, 2018, and can be sold, leased, donated or transferred until March 31, 2018. Category B generators can only be available for lease or donation. They must also be imported to Puerto Rico by January 31, 2018, but can only be operated until March 31, 2018. Category B generators must be destroyed or exported from Puerto
Rico by April 30, 2018. Through these temporary compliance exemptions, the EQB and the EPA contribute to solve the current electric power and fuel scarcity in Puerto Rico after the impact of Hurricane María. You may contact the attorneys at Vidal, Nieves & Bauzá should you have any questions regarding these EPA communications, or need support with respect to any requirement to do business in Puerto Rico.
______________________________________________________
Governor signs Executive Order to expedite
the installation of solar energy generation
and storage systems
The Order promotes clean energy generation by the private sector
On October 16th, 2017, Governor Ricardo Rosselló Nevares signed OE-2017-64, Executive Order to Energize Residences with Installed Photovoltaic Generation Systems and Batteries, and to Accelerate the Recovery of the Puerto Rico Electricity System After Hurricane María (the "Order").In order to operate, most photovoltaic cell systems ("solar systems"), need either energy storage capabilities or to be interconnected to a traditional utility, such as the Puerto Rico Electric Power Authority ("PREPA"). Hurricane María impacted over 80% of PREPA’s transmission and distribution infrastructure, preventing most existing solar systems from operating. The Order waives the procedural requirements that apply to existing and newly constructed solar systems that want to be modified to include energy storage systems in order to operate immediately, and to be interconnected once the grid is rebuilt. The Order also prohibits additional PREPA charges.The Order divides solar systems in three types: residential systems already interconnected before Hurricane María ("Group 1"), residential systems already constructed but not interconnected ("Group 2"), and residential and commercial systems to be constructed while the Order is in effect ("Group 3"). In order to enjoy the benefits of the Order, all solar systems must: (i) comply with the technical requirements of current interconnection regulations, (ii) include an energy storage system, (iii) include a manual switch that prohibits the system from transferring energy to PREPA's infrastructure while it is being repaired, and (iv) be certified by a licensed electrician or a certified electrical engineer.Group 3 systems must additionally limit the energy they export to PREPA’s grid to an amount not exceeding 10% of the nominal capacity of the solar system.
Any Group 3 system that exports energy must also be able to be monitored every four seconds and be operated remotely by PREPA.In addition, the Order directs PREPA to provide net metering equipment needed to interconnect Group 2 systems within 30 days after it is requested. It also provides that existing solar systems without batteries will be interconnected once PREPA restores power.The Order has the potential of benefiting thousands of businesses and families that already have solar systems, as well as anyone who wants to transition to clean energy generation and energy storage. You may contact the attorneys at Vidal, Nieves & Bauzá should you have any questions regarding the Order, or need support with respect to any requirement to take advantage of its benefits.
______________________________________________________
Amendments to Act 22 Promoting Relocation
of Investorsto Puerto Rico Approved
by Puerto Rico's Legislature
$5,000 Annual Contribution to Non-Profits and Other Requirements.
Puerto Rico's Legislature recently approved SB 369, to amend the requirements to receive the tax benefits afforded by Act 22-2012 (Act 22). Under Act 22, individuals who relocate their residence to Puerto Rico will benefit from a complete exemption from the payment of taxes on their passive income derived from investments. Act 22 also offers covered individuals a preferential tax rate of 5% for any capital gains accrued before becoming a resident of Puerto Rico, but recognized at least ten (10) years after becoming a resident of Puerto Rico. All capital gains accrued while being a resident of Puerto Rico receive a 100% tax exemption.
To be considered a resident of Puerto Rico under Act 22, essentially a person has to live on the Island for at least 183 days out of the year. To receive the benefits of the law, the person relocating to Puerto Rico may not have been a resident of Puerto Rico during the previous six (6) years. Eligible individuals should be able to benefit from Act 22 until December 31st of 2035. If signed into law by the Governor of Puerto Rico, SB 369 would require individuals who benefit from Act 22 to file an annual report with evidence of compliance with the conditions established in their decree, and evidence of having donated annually $5,000 to exempt non-profit entities that operate in Puerto Rico. The bill also eliminates the requirement of a Certification of Compliance with the law, and instead, the holder of a tax grant must accompany his or her first annual report with evidence of filing U.S. Internal Revenue Service (IRS) Form 8898, notifying the IRS that the grantee became a bona fide resident of Puerto Rico; or its equivalent if the person was not a U.S. resident before relocating to Puerto Rico.
The bill also changes the frequency of compliance audits made by the Puerto Rico Exemption Office to Act 22 individuals from once a year to once every two (2) years. This bill, as well as previous amendments to Act 22, such as the one that eliminates the requirement to purchase a residential property in Puerto Rico, should continue to make the law more attractive to individuals looking to benefit from Act 22's tax advantages. Vidal, Nieves & Bauzá is a corporate law firm with a special emphasis in corporate, transactional, insurance and infrastructure practices.
______________________________________________________
Proposed amendments make Act 20 promoting the exporting of services even more attractive
Minimum employment requirement dropped; additional services added
to preferential tax regime.
Earlier this month Puerto Rico’s Legislature approved bills SB 60 and HB 878, which remove current minimum employment requirements under Act 20-2012; would allow applicants engaged in exporting services prior to the filing of their application to receive the full benefits of Act 20; and expand the services which may receive tax benefits under the law. The bills are pending signature by the Governor of Puerto Rico.
Under Act 20, eligible businesses can benefit from a preferential tax rate of 4% on income derived from the export of services. Additionally, businesses may also have the benefit of a 60% exemption from municipal license taxes, as well as, depending on the type of eligible services which are provided, receive a 100% exemption from property taxes during the first five years of operation, and a 90% exemption for the remaining fifteen years. Shareholders of eligible businesses are also exempt from income taxes on distributions of dividends from utilities and benefits arising from income from the export of services. Act 20 benefits are memorialized in a government issued tax grant to eligible businesses for a period of 20 years, with an optional extension of 10 additional years.
Under current law, eligible businesses must employ a minimum of five persons in Puerto Rico during the first two years of operation. HB 878 eliminates the minimum employment requirement, and allows the Secretary of the Department of Economic Development and Commerce (“DDEC”) to determine for each tax grant it issues, the number of jobs needed in order for an eligible business to conduct its operations. When evaluating an Act 20 application, the Secretary of the DDEC can adopt such criteria as the eligible business's contribution to the economic development of Puerto Rico, job creation and capital investment. Finally, the bill prohibits eligible businesses which have a tax grant under Act 20 (and current applicants) from discharging their employees due to the approval of the amendment to the law.
In the case of businesses that were already providing export services before receiving an Act 20 tax grant, under current law they are only eligible to receive Act 20 income tax benefits with respect to the part of their income above their average annual income for the years in which they operated without an Act 20 decree. That average annual income is referred to in the law as the “Base Period Income.” SB 60 reduces the “Base Period Income” by 25% each year, making all of the business's income eligible for the tax benefits after the fourth year. This change would only apply to tax grants issued after June 30, 2017. Finally, HB 878 expands the eligible services which may benefit from an Act 20 tax grant by including “medical tourism” and “telemedicine” to the list of eligible export services. You may contact the attorneys at Vidal, Nieves & Bauzá should your company have any questions regarding Act 20 and Act 22, or need support with respect to any requirement to conduct business in Puerto Rico.
______________________________________________________
Puerto Rico Electric Power Authority Files
for Title III Debt Adjustment
Financial Oversight and Management Board Certifies Bankruptcy Case Petition
and Approves Budget of Several Covered Infrastructure Entities
On July 2nd, the Financial Oversight and Management Board for Puerto Rico (Oversight Board) filed a petition in court on behalf of the Puerto Rico Electric Power Authority (PREPA) to restructure its debt under Title III of the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA). This decision comes after the Oversight Board unanimously certified the Governor of Puerto Rico's petition during its eighth Board Meeting on Friday, June 30th.
The Oversight Board’s action allows PREPA to start a debt restructuring process under Title III of PROMESA. This decision by the Oversight Board follows their decision earlier this week not to approve the $9 Billion Restructuring Support Agreement (RSA) that PREPA had reached with its creditors. One of the reasons the Oversight Board gave for not approving the RSA, was that it would have exponentially increased electricity costs in Puerto Rico, making it harder for the island to get out of its current fiscal emergency. In a statement, the governor said that the purpose of PREPA's Title III filing was to adjust its debt in a way consistent with the liquidity provisions of the Fiscal Plan, and to make sure that there wouldn't be an interruption in PREPA's services. To help with PREPA's development, the government plans to develop energy infrastructure projects through public-private partnerships. Notwithstanding, the Oversight Board continues to negotiate with PREPA's creditors trying to reach a consensual agreement.
In another unanimous vote, the Oversight Board approved PREPA's budget, and gave the government entity forty five (45) days to resubmit an amended fiscal plan and budget for PREPA. During the Board Meeting, the Oversight Board also approved the budgets of the Government of Puerto Rico, the Puerto Rico Aqueduct and Sewer Authority, the Department of Transportation and Public Works, and the Government Development Bank. The Oversight Board still needs to evaluate the budget and fiscal plan for the Public
Corporation for the Supervision and Insurance of Cooperatives of Puerto Rico, and for the University of Puerto Rico, since those budgets and fiscal plans have not been submitted before the Oversight Board yet. Vidal, Nieves & Bauzá is a corporate law firm with a special emphasis in corporate, transactional, insurance and infrastructure practices.
______________________________________________________
Puerto Rico Electric Power Authority Governance and Restructuring Effort Developments
New Governing Board Announced, While Restructuring Support Agreement Fails to Win Financial Oversight and Management Board Approval
The governor of Puerto Rico, Ricardo Rosselló Nevares, signed into law House Bill No. 475 on June 26, 2017, reorganizing the composition of the Governing Board (Board) of the Puerto Rico Electric Power Authority (PREPA), and days later appointed Edwin Alexis Irizarry Lugo, Ernesto Sgroi and Omar Marrero Díaz as the first three members of the new Board. According to the Act's preamble, this law reflects the agreements between PREPA and its creditors regarding the restructuring of PREPA, and incorporates requirements of the Financial Oversight and Management Board for Puerto Rico (Oversight Board).
The new Board will consist of seven (7) members. Three (3) of the members to be chosen by the Governor with the consent of the Senate, from a list of ten (10) candidates compiled by a talent recruitment agency. The candidates must have educational backgrounds in electrical engineering, business administration, economics, finance, or law, and must have at least ten (10) years of experience in their field. At least five (5) of the candidates in the list should be residents of Puerto Rico. The other three (3) members will be chosen by the Governor at his discretion, one (1) of whom must be an independent member with expertise in energy matters.
The remaining Board member will be an elected PREPA customer representative, and must have an educational background in electrical engineering, business administration, economics, or finance; ten (10) years of experience in his or her field; and an expertise in energy matters. The term for each member will be five (5) years, except for the two non-independent discretionary members who the governor can remove at his/her will. No member shall serve for more than three (3) consecutive terms.
The Oversight Board notified the public on June 28, its decision not to approve PREPA's $9 Billion Restructuring Support Agreement (RSA). As per its public notice, the Oversight Board understands that under these circumstances the reorganization of PREPA will most likely happen under Title III of the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA). However, in a separate statement the Oversight Board indicated that negotiations with PREPA's creditors are continuing.
You may contact the attorneys at Vidal, Nieves & Bauzá should your company have any questions regarding Energy Law matters, or need support with respect to any requirement to conduct business in Puerto Rico.
______________________________________________________
PUERTO RICO’S TREASURY DEPARTMENT ANNOUNCES THE OPENING OF “SURI”:
A new online transaction portal for businesses.
The Puerto Rico Treasury Department or “Hacienda”, as this government agency is commonly referred to in Spanish, has announced that on Monday, October 31, 2016, it will be launching a new online portal for businesses. The new portal will be known as the “Internal Revenue Unified System” or “SURI”, by its Spanish acronym. SURI will gradually substitute all other online portals which up to know had been available to businesses in Puerto Rico conducting online transaction with Hacienda. Hacienda has indicated that the transition to its new SURI portal will occur in several phases. The first phase is slated to begin on October 31, 2016 and covers Sales and Use Tax (“SUT”) transactions. Hacienda has further announced that businesses need to make sure that they safekeep their login and password information for the following websites which up to now have been available to conduct transactions with Hacienda, as they were scheduled to be shut down and replaced by the SURI portal on the day listed below.
http://www.hacienda.pr.gov | http://www.hacienda.pr.gov
October 27, 2016 October 28, 2016
Hacienda is also reminding businesses in Puerto Rico that they are required to register with SURI by November 20, 2016; that last date on which their first SUT monthly return will need be filed through the new SURI portal. Businesses are also required to update their “Merchant’s Certificate Registration” prior to November 20, as Hacienda will be issuing a new certificate that will replace the current “Merchants´ Registration Certificate” businesses had been issued by Hacienda. The new certificates will only be available online through SURI. Hacienda has informed the public that it will no longer be mailing the certificates to businesses in Puerto Rico. You may contact the attorneys at Vidal, Nieves & Bauzá should your company have any questions with respect to SURI, or need support with respect to this or any other requirement to conduct business in Puerto Rico.
Vol. 17 - August 2019
