NEWS AND ALERTS

Additional Tax Relief to address the cash flow problems faced by businesses and individuals during the COVID-19 emergency.

Vol. 25 - March 2020

After the press conference offered by the Governor of Puerto Rico on March 24, 2020 to announce the first economic package to counter the Coronavirus (COVID-19) crisis in Puerto Rico, the Department of Treasury and other tax authorities issued the following guidelines:

 

Administrative Determination 20-10 of March 24, 2020 (DA-2010) on Measures to Address Cash Flow for Taxpayers and Merchants before the COVID-19 Emergency

 

A. Sales and Use Tax

 

Sales and Use Tax Filing: The deadline to file the monthly sales and use tax returns for February, March, April and May of 2020, will be the following:

  • February- April 20, 2020;

  • March- May 20, 2020;

  • April- June 22, 2020; and

  • May- July 20, 2020.

 

Monthly Import Tax Return: The filing deadline of this tax form and its corresponding payment for March, April and May of 2020 will be the following:

  • March- May 10, 2020;

  • April- June 10, 2020; and

  • May- July 10, 2020.

 

Biweekly Payments of Sales and Use Tax: The Department of Treasury will not impose penalties for failing to comply with the Biweekly Sales and Use Tax payments for the months of March, April, May and June of 2020, provided that the total amount due for those months is paid on or before the due date of the Monthly Sales and Use Tax Return. 

 

B. Income Tax Returns

 

Income Tax Returns that were due on March 15, 2020: The filing deadline for the Income Tax Returns (or for requesting an extension) without the imposition of interests, surcharges or penalties will be on June 15, 2020.

 

Income Tax Returns that were due on April 15, 2020: The filing deadline for the Income Tax Returns (or for requesting an extension) without the imposition of interests, surcharges or penalties will be on July 15, 2020.

 

Income Tax Returns that were due on the 15th of May or June 2020: The filing deadline for the Income Tax Returns (or for requesting an extension) without the imposition of interests, surcharges or penalties will be on July 15, 2020.

 

C. Informative Declarations

 

Informative Declarations must be completed through SURI no later than May 15, 2020.

 

D. Guaranties and Sureties (“Bonds”) before the Department of Treasury

 

Any bond that is due between March 15 and April 30, 2020, is automatically extended to May 31, 2020.

 

E. Internal Revenue Licenses

 

All internal revenue licenses that are due to expire between March 15 and April 30, 2020, are automatically extended to May 31, 2020.

 

F. Estimate Payment Requirement for Corporations and Individuals

 

No penalties will be imposed for lack or insufficiency of payment of the first and second installment of the estimated taxes for 2020 (ordinarily due on April 15 and June 30, 2020). The amount that should have been deposited in the first and second installment needs to be submitted together with the last two terms (2) of the estimated tax of 2020 (due on November and January 15, 2021).

 

G. Withholding Income Tax for Services Rendered

 

Businesses are exempted from the obligation of withholding taxes from service providers for payments made between March 23 and June 30, 2020. Service providers are given the option to continue being subject to the retention made by the withholding agent business. Businesses, on the other hand, will be required to report the payments made to both service providers and to the Department of Treasury.

 

H. Sales and Use Tax Payment Requirement on Import and Purchase of Taxable Items for Resale

 

All merchants holding an active and valid “Reseller Certificate” (issued by the Department of Treasury) will be able to import and acquire taxable property without the corresponding SUT payment from April 6 until July 30, 2020.

Resellers will automatically receive through SURI, a “Temporary Exemption Certificate”. The certificate of exemption will allow the reseller to import and acquire taxable items without the payment of SUT. Merchants must submit their distributors the certificate of exemption at the time of the purchase. The certificate of exemption won’t exempt merchants from the SUT corresponding to items for personal use.

 

I. Application of Tax Refunds and Overpayments Against Other Taxes Administered by the Department of the Treasury

 

The Department of the Treasury will allow taxpayers with outstanding refunds, credits and overpayments to apply the same to any other taxes, including income tax, sales and use taxes, excise taxes, taxes on alcoholic beverages and payroll taxes. The Department of the Treasury is expected to issue special rules establishing the process and terms to submit the application for refunds, credits and overpayments payments.

 

J. 2019 Income Tax Payment Plans

 

Taxpayers will be able to benefit from a payment plan for their 2019 tax liability. This benefit will only be available for taxpayers who are up to date with all tax payments. If benefiting from an installment plan, the taxpayer will not be able to request a time extension for the 2019 tax for and must comply with the tax payments for 2019 no later than on March 2021. “ CRIM”-Administrative Order No. 2020-003- Term Extension for the filing of Personal Property Income Tax Form from 2019 in response to the State of Emergency Declared by Coronavirus (COVID-19)

 

The Administrative Order No. 2020-003, issued on March 26, 2020 by the Municipal Revenue Collection Center (by its Spanish acronyms “CRIM”), establishes the following:

 

A. Term Extension

 

The deadline was postponed to August 1st, 2020 for the filing of personal property income tax forms for fiscal year 2019.  An automatic extension will be available up to November 2nd, 2020. 

 

B. Interests, Penalties and Surcharges

 

No interests, surcharges or penalties will be imposed upon payments made in full, that should be included with the tax form filing or the request for extension, provided that the payments be made on the due date established by the Administrative Order. All taxpayers that submit the total payment when filing the tax form or request for extension are entitled to a 5% discount.

 

C. Application for Extension

 

Requests for extensions must be filed before August 1st, 2020. 

 

As the times we are facing place us under a constantly changing scenario, more detailed information regarding these measures are expected from the Government of Puerto Rico.  We will keep you informed of future developments.

 

Should your company have any questions or interest with respect to these tax reliefs, you may contact the attorneys at Vidal, Nieves & Bauzá, LLC, a corporate law firm with a special emphasis in energy and environmental matters, corporate, tax, transactional, real estate and insurance practices.

COVID-19 and Act No. 22 Bona Fide

Residents of Puerto Rico

Vol. 24 - March 2020

Puerto Rico and the United States have, with limited exceptions, either mandated or recommended people remain at home and maintain social distancing in order to attempt to slow down the number of persons infected with the Coronavirus (COVID-19). The rapid spread of the virus may require even more stringent measures, including domestic travel restrictions between the States in the mainland and the territory of Puerto Rico to further prevent contagions.  Bona fide residents of Puerto Rico should pay close attention to potential travel restrictions as they may affect each resident´s “bona fide” resident status.  

 

“Bona Fide” Residents of Puerto Rico must comply with a Physical Presence requirement.   

Potential future travel restrictions may affect the ability of a bona fide resident to be physically present in Puerto Rico for the necessary days under the law.  The US Internal Revenue Code and its regulations state that an individual will be considered a “bona fide resident” of a U.S. territory (in our case, Puerto Rico) if the individual meets a “physical presence test,” and does not have a “tax home,” or “closer connection” to a jurisdiction outside of Puerto Rico.   

 

The law considers the scenario of a major disaster in a US Territory providing that an individual is considered present (in a U.S. territory) on any day that the individual is outside the territory because the individual leaves or is unable to return to the territory during any 14-day period within which a major disaster occurs in the territory.  In this case only presidential declarations of a major disaster will be considered.

 

To illustrate this scenario, in the past the IRS decided to extend the 14-day period to a total of 117 days in response to a presidential disaster declaration following the Hurricane Irma and Maria devastation in Puerto Rico (IRS Notice 2017-56).  In addition, IRS Notice 2017-56 provided relief to individuals who otherwise may have lost their “bona fide resident” status as a result of the unexpected and prolonged dislocation resulting from Hurricanes Irma and Maria.  As of today, no presidential declaration of major disaster has been issued for Puerto Rico due to the Coronavirus pandemic.

 

The law also provides for a temporary absence from Puerto Rico to receive qualified medical treatment in the United States.  Any day a bona fide resident who is temporarily present in the United States in order to receive, or to accompany a parent, spouse, or child who is receiving, certain qualified medical treatment (generally provided by or under the supervision of a physician for an illness) is considered present in Puerto Rico.  The medical treatment generally involves inpatient care that requires an overnight stay in a hospital, hospice, and/or residential medical care facility.

 

Bona fide residents must prepare, obtain and maintain documentation supporting the claim that such medical treatment meets the criteria to be considered the equivalent of days of presence within Puerto Rico.

 

The local and federal mandate or recommendation to stay at home to reduce the spread of COVID-19 has the potential of affecting the ability of a bona fide resident of Puerto Rico to meet the “physical presence test.”   It is important that bona fide residents keep appropriate travel and medical treatment documentation during this Coronavirus pandemic in order to avoid future issues with their bona fide resident status.

 

Should you have any questions  or interest with respect to the physical presence requirement of Act No. 22, as amended, you may contact the attorneys at Vidal, Nieves & Bauzá, LLC, a corporate law firm with special emphasis in energy and environmental matters, corporate, tax, transactional, real estate and insurance practices.

PR Tax Filing Extensions and Moratoriums

due to COVID-19

Vol. 23 - March 2020

The Government of Puerto Rico issued several filing extensions, moratoriums and exemptions to tax requirements for business owners due to the COVID-19 outbreak.  The following is a summary of recent tax pronouncements related to the COVID-19 emergency.  Additional Puerto Rico tax pronouncements are expected as new developments on the COVID-19 virus arise.

 

 

Income Tax Return and Income Tax Payments

 

On March 24, 2020, the Governor of Puerto Rico announced that the filing of the income tax return and income tax payments for individuals and businesses was extended from April 15, 2020 to July 15, 2020. The details of these extensions will be part of future pronouncements from the Puerto Rico Treasury Department.

 

Sale and Use Tax (SUT) Monthly Return and Payment  

 

The due date for the February 2020 monthly SUT return and payment of March 20, 2020 was extended to April 20, 2020.

 

Informative Returns and Other Puerto Rico Treasury Forms

 

All informative returns must be filed with the Puerto Rico Treasury Department and sent to the taxpayers no later than April 15, 2020.  This due date had been previously extended from the 28th of February to March 31, 2020. 

 

The Puerto Rico Treasury Department also postponed the deadline of any form and return due between March 15 to April 15, 2020, for an additional 30-day period. 

 

Municipal License Tax Return and Payment Extensions (Patente)

 

The Volume of Business Tax Return and its Time Extension Request could be filed by May 22, 2020.  The deadline for the municipal license tax return is five (5) days after April 15.  The municipalities are authorized to approve time extensions duly filed on May 22, 2020 for up six (6) months (December 23, 2020).

 

Payment Plans and Penalties

 

The Puerto Rico Treasury Department will not require taxpayers to make a payment to payment plans due between March 16 and April 30, 2020, neither will it impose penalties for lack of payments during that period.  In the case of payment plans that include automatic debit of payments, it is recommended that taxpayers postpone the payment date in March through the Department of the Treasury website known as SURI otherwise the system could automatically debit the payment. 

 

Administrative Hearings and Treasury Notifications

 

The Puerto Rico Treasury Department suspended all administrative hearings cited from March 16 to June 15, 2020.  No new date for those hearings has been announced yet.  

 

The expiration period of mathematical error notifications and other adjustments to an income tax return was extended for an additional term of 120 days.

 

Licenses and Bonds

 

All licenses and bonds that expire between March 15 and March 31, 2020, are considered automatically extended until April 30, 2020.

 

More details on this and other tax provisions related to the COVID-19 emergency are expected to be disclosed by the Puerto Rico Treasury Department in the following weeks.

Government of Puerto Rico Implements

Curfew and Closure of Businesses

to Combat COVID-19

Vol. 22 - March 2020

On March 15, 2020, Governor Wanda Vázquez Garced issued Administrative Bulletin No. OE-2020-23 (“Executive Order”) to implement a governmental and private sector operations closure in order to combat the effects of coronavirus (COVID-19) and to control the risk of infection in Puerto Rico. In view of the state of emergency declared under Administrative Bulletin No. OE-2020-020 of March 12, 2020, the Governor ordered a curfew commencing on March 15, 2020 at 9:00 pm whereby all citizens must remain quarantined in their homes until March 30, 2020.

 

Among the measures implemented by the Executive Order is the closure of governmental operations, except those engaged in the provision of essential services, and commercial businesses, except those engaged in the retail sale of food items, medications or medical equipment, pharmacies, supermarkets, gas stations, banks and financial institutions, among others covered by the Executive Order.

 

The curfew established by the Executive Order allows citizens to access public roads between 5:00 a.m. to 9:00 p.m. only when the circumstances listed in the Executive Order are met.  These include purchasing food, visiting hospitals and banks, going or coming from an exempted workplace, among others. The curfew does not apply to certain individuals such as health professionals, personnel working at utilities, call centers providing services to exempted businesses, airports, hospitals, pharmacies and companies engaged in wholesale food and product manufacturing, among others listed in the Executive Order.

 

Any person violating the Executive Order may be subject to 6 months in prison and/or a fine not to exceed $5,000, at the Court’s discretion.

 

On March 16, 2020, the Governor issued another Administrative Bulletin No. OE-2020-24 to make viable the acquisition of goods and services necessary to combat COVID-19 in the Island, such as products to disinfect and protect personal health, as well as the engagement of professional services, further detailed in such Administrative Bulletin.

 

On March 17, 2020, the Government of Puerto Rico clarified the scope of the Executive Order through Circular Letter 2020-02 issued by the Secretary of the Department of Economic Development and Commerce, in which it provides additional guidance to the industrial, commercial and business sectors regarding the extent and applicability of the Executive Order. Specifically, the Circular Letter 2020-02 includes a detailed list of exempt businesses and activities within the following areas: health, food, critical infrastructure, fuel, security, national security, goods and services, and the supply chain.

 

The Executive Order gave rise to a number of Press Releases and/or Informative Bulletins issued by other governmental agencies addressing the measures implemented by the Executive Order. Below is a list and brief summary of the main Informative Bulletins published:

 

1) Press Release issued by the Transportation and Other Public Services Bureau on March 17, 2020 – detailing the transportation operations permitted during the COVID-19 emergency period.

 

2) Informative Bulletin of Internal Revenue No. 20-09 (“BI RI 20-09”) of the Puerto Rico Department of the Treasury – informing the continuance of operations of the SURI online platform and authorizing importers who engage in the manufacture or wholesale distribution of goods and food to unload merchandise received in the ports and transport such goods to their warehouses.

 

3) IRS Notice 2020-17 – providing a relief for taxpayers by extending deadlines for the payment of federal income tax from April 15 to July 15, 2020.

 

4) Administrative Determination No. 20-05 (“AD 20-05”) – extending deadline to file tax return from April 15 to May 15, 2020.

 

5) Circular Letter of Internal Revenue No. 20-20 (“CC RE 20-20”) of the Puerto Rico Department of the Treasury – moratorium of payment for individuals with payment plans.

 

6) The Puerto Rico Aqueducts and Sewage Authority has also issued a moratorium on the payment of water bills and will not suspend service for lack of payment.

 

7) The Puerto Rico Electric Power Authority announced that it will not suspend service for lack of payment.

 

8) Administrative Determination No. 20-08 (“AD 20-08”) – extending the payment of the sales and use tax of prepared foods.

 

The following legislative bills are also undergoing the legislative scrutiny, among others:

 

1) PS 1538 - To establish the “Special Act on Emergency Measures for a Coronavirus Pandemic (COVID-19)”, in order to adopt and mandate emergency measures in Puerto Rico, in the public and private spectrum, due to the state of emergency due to the pandemic coronavirus; establish the insurance coverages for tests to detect coronavirus free of charge for the patient; have free, current or at the time available treatment, medication and vaccine coverage for people diagnosed with coronavirus; establish measures to preserve the health and safety of the elderly in elderly homes or in state-subsidized housing projects; provide automatic moratoriums on loans, according to the provisions, terms and exclusions established by the Law; establish protections for tenants and moratoriums against eviction and collection actions by lessors, according to the terms and provisions of the Law; among other purposes.

 

2) PS 1539 – To provide that no electricity, water or telecommunications services will be disconnected, ceased, or canceled, without the consent of the client, until thirty (30) days after the termination of an emergency situation in the area that covers the corresponding emergency declaration issued by the Governor.

 

Vidal, Nieves & Bauzá, LLC and its attorneys continue to operate business as usual on a remote basis. Should your company have any questions  or interest with respect to the Executive Order OE 2020-23, Informative Bulletins, Administrative Determinations, Circular Letters and legislative bills, you may contact the attorneys at Vidal, Nieves & Bauzá, LLC, a corporate law firm with a special emphasis in energy and environmental matters, corporate, tax, transactional, real estate and insurance practices.

DDEC Proposes Opportunity Zones Regulation.

Vol. 21 - February 2020

On January 30, 2020, the Secretary of the Department of Economic Development and Commerce (“DDEC”) announced the publication of the first draft of the proposed “Regulation To Implement the Provisions of the Sections 6070.54-6070.69 of Act 60-2019, also known as the Incentives Code of Puerto Rico” (“Proposed Regulation”). The Proposed Regulation implements the provisions of the Incentives Code of Puerto Rico regarding the Opportunity Zones ("OZs") and establishes the norms, requirements and criteria that will be used for the application and granting of decrees.

 

The implementation of the Proposed Regulation of the OZs will apply to any person who:

  1. Has established, or intends to establish, an eligible business on the Island, and

  2. Received a designation as a Priority Project in OZs by the Committee of Priority Projects in OZs, and

  3. Requests a decree under Section 6070.60 of Act 60-2019 before the Office of Incentives for Business in Puerto Rico.


The proposed regulation declares that the public policy of the Government of Puerto Rico regarding the Opportunity Zones is:

  1. To make Puerto Rico an investment destination for Opportunity Zone Funds that invest in Priority Projects in opportunity zones.

  2. Provide for the continuous formation of local and foreign capital for investment in Priority Projects in opportunity zones.

  3. Establish the tax, legal and regulatory framework that encourages, streamlines and encourages investment in Priority Projects in opportunity zones.


The DDEC will be receiving written comments with regards to the Proposed Regulation from the general public until Monday, March 2, 2020. Should your company have any questions or interest with respect to the Proposed Regulation, you may contact the attorneys at Vidal, Nieves & Bauzá, LLC, a corporate law firm with a special emphasis in energy and environmental matters, corporate, tax, transactional, real estate and insurance practices.

IN FULL FORCE THE
PUERTO RICO INCENTIVES CODE

Vol. 20 - January 2020

As Puerto Rico welcomed the New Year 2020, the government ushered on January 1st the implementation of Law No. 60 of
2019 known as the Puerto Rico Incentives Code (IC) in its entirety, as only parts of the law had become effective on July 2019 when it was approved. On January, 1st 2020 all the provisions of IC became effective, and would therefore group and govern all Puerto Rico cash and tax incentives previously found in countless laws and governmental programs. The IC is Puerto Rico’s first catalog of tax and monetary benefits for different economic sectors. The following are the general tax benefits included in the law:

  • A 4% fixed income tax rate.

  • A 0% income tax rate to dividend payments.

  • A 75% exemption on the payment of property taxes.

  • A 50% exemption in municipal license taxes.

 

The IC places the agriculture industry and Opportunity Zones projects in a different category granting these industries (and others as well) certain specific tax benefits as they fit in an exempted category of the general tax benefits. The following are answers to some common questions about the IC and its benefits. Who can benefit from IC? The IC benefits: 1) certain professionals (see the categories below); 2) new and existing entities; 3) international insurers and financial entities; 4) Small and Medium-sized Enterprises (“SME” or "PYMES", by its Spanish acronysm for Pequeñas y Medianas Empresas ) and; 5) businesses in the municipalities of Vieques and Culebra provided that applicants for each of these categories fulfill specific requirements in the law. The IC recognizes a new tax benefit to SMEs in Puerto Rico, as well as to businesses that would establish operations in Vieques and Culebra.

 

Which businesses are considered SMEs under the IC?

 

To be considered an SME, the business must have an average of 3 million dollars in volume of business during the last 3 years. PYMES will enjoy a special income tax rate of 2% and a 100% exemption from municipal and property taxes during the first 2 years of operations. After the initial 2 years, these companies will enjoy an income tax rate of 4% and a 75% and 50% exemption from property and municipal license taxes, respectively.

Can individuals benefit from IC?

 

Yes, individuals who are professionals like some doctors, scientists, young entrepreneurs and individual resident investors (formerly Law No. 22 of 2012) will benefit from the incentives under the Code.

 

Difficult Recruitment Professionals

 

The IC creates a new tax benefit for individuals who fall under the “Difficult Recruitment Professionals” category. This type of professionals are individuals who reside in Puerto Rico with specialize knowledge in the operation of a business that currently benefits from the Code or under any of the previous incentive laws. The individuals under this category will not pay income taxes for the first $ 100,000.00 of their salary in a year.

 

What are the industries or business sectors with tax benefits under the IC?

 

An abundant amount of businesses and a diversity of business sectors will now enjoy tax benefits under the IC including but not limited to manufacturing activities, renewable energy, technology including blockchain, agriculture, creative industries such as the film industry, tourism, export services, among others.

 

Are there any incentives for the construction industry?

 

Yes, the IC includes significant tax benefits for construction projects some of which were part of Law No. 21 of 2019 known as Puerto Rico Opportunity Zones legislation in the Priority Project category.

 

Priority Projects within the Opportunity Zones legislation, are construction projects of new and existing residential, commercial and industrial real property.

 

Some of the benefits for projects under the Opportunity Zones provisions of the IC are the following:

  • A fixed income tax rate of 18.5%.

  • A 0% tax rate on income in dividends received.

  • A 25% exemption in the payment of property taxes, municipal license and construction taxes.

  • A tax credit of up to 25% of the investment in the project.

  • The total or partial deferral of the payment of income tax on capital gains.

  • Cash incentives.

  • An expedited process for permits, among other benefits.

 

Should you or your company be interested in learning about the benefits of the Incentives Code and how they may be of application to you, please contact the attorneys at Vidal, Nieves & Bauzá, LLC. a is a corporate law firm with a special emphasis in energy and environmental matters, corporate, tax, transactional, real estate and insurance practices.

The SUT Exemption and Goverment Contractors

Vol. 19 - December 2019

On November 26, 2019, the Puerto Rico Treasury (“Treasury”) issued Circular Letter of the Internal Revenue Area No. 19-13 (“Circular Letter 19-13”). Circular Letter 19-13, in summary: 1) establishes additional guidelines related to the SUT exemption applicable to persons whooperate or act on behalf of theGovernment of Puerto Rico (i.e. Government Agent), pursuant to Section 4030.08 of the Puerto Rico Internal Revenue Code of 2011, as amended (“Code”) and Article 4030.08-1 of the Regulations; 2) expands the requirements for Government Agents; and 3) establishes the procedure for obtaining an exemption certificate from the Puerto Rico Treasury, among others.

According to the Treasury’s new guidelines, a Government Agent must meet this requirements to be exempted from SUT:

 

1) Must be registered in the Treasury’s Merchant’s Registry and SURI platform.
 

2) Be up to date in all filing and payment requirements of the Code.
 

3) The entity was created with the exclusive purpose of acting on behalf of the Government.

 

Circular Letter 19-13 illustrates this requirement with the following examples:

Example #4: Entity “C” is a private entity created for the sole and exclusive purpose of providing health services to a particular group of people who would otherwise receive their health services directly from governmental agency "D." "C" requests from the Department to be certified as a Government agent. To the extent that "C" was created exclusively to act on behalf of "D," "C" may claim the exemption granted to the Government.

 

Example #1: Company “A” has a contract with the Department of Transportation and Public Works to resurface the roads in Puerto Rico. At the same time, Company “A” has other agreements with other government entities and with private entities in Puerto Rico. In this example, Company A does not meet the requirement of having been created exclusively to act in an official capacity as an agent of the Department of Transportation and Public Works, and therefore cannot be considered a Government Agent for purposes of the SUT under Section 4030.08 of the Code. (Translation ours)
 

4) Obtain a certification issued by a Government entity stating that in effect, the entity works as its agent. This certification must also include a description of the services, a list of the articles and transactions that will be subject to the exemption, and the terms of the agency appointment.
 

5) Have an agreement with a government entity, which establishes the agency relationship.
 

6) Obtain an exemption certificate from the Puerto Rico Treasury. It appears that the Puerto Rico Treasury will not only require that an entity be created exclusively with the purpose being an agent of the Government for the SUT exemption, but will also require that the entity does not have agreements with more than one governmental agency.

 

In light of the above, we urge government contractors that operate, or could operate, as a government agent to review the applicability of the Circular Letter 19-13 requirements, and make those adjustments as per the letter. Circular Letter 19-13 became effective on November 26, 2019.
 

Should you or your company have any questions with respect to the Circular Letter 19-13 and/or with the procedure for obtaining an exemption certificate, 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

Vol. 18 - August 2019

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 is Closer to Becoming Law

Vol. 17 - January 2019

On October 22, 2019, 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.

•Modifies the selection and terms of the Board of Directors of the Puerto Rico Electric Power Authority("PREPA")such that it consists of 7 members, 5 of which would be appointed by the governor and legislative leaders, 1 by the public interest and another by the governor without legislative consult.

 

•Modifies the responsibility of the members of the Board ofDirectors of PREPA and its officers by eliminating the criminal liability for continuous violations, and eliminates the monetary penalties for such violations.

 

•Sets a cap on the cost per kilowatt hour that cannot exceed 20 cents, which will take effect 5 years after the Bill becomes law.

 

•The prohibition of the burning of wasteas a source to generate energy would be implemented after the Bill becomes law.

 

•"To eliminate the use of coal before January 1, 2018", the Bill incorporates language regarding theEnergyBureau'sevaluation of the convenience ofsubstituting theexisting generation capacity basedon coal with other sources that comply with thepublic policy on energy by extending contracts and /or renewing existing permits based on the newgeneration source.

 

Given that the Senate didnot concur with the aforementioned amendments to the Bill, a Conference Committee will be assignedto evaluate the Bill before it reaches the governor's consideration.

 

Should your company be interested in learning more about the amendments to Senate Bill No. 1121, you may contact the attorneys at Vidal, Nieves & Bauzá, LLC, 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

Vol. 16 - October 2018

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.

JLL | VNB I Real Estate Investment Guide Puerto Rico 2020

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San Juan, PR 00936-6219

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