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.
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
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
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.