A corporation engaged in specific eligible activities may apply for a reduced CIT rate, among other incentives, through the request of a Tax Exemption Grant to the Puerto Rico Office of Industrial Tax Exemption (OITE) under Act No. 73 of 28 May 2008 (Act No. 73).
A corporation engaged in eligible activities related to the exportation of services may apply for a reduced CIT rate, among other incentives, through the request of a Tax Exemption Grant to OITE under Act No. 20 of 17 January 2012 (Act No. 20), instead of through Act No. 73.
The Governor of Puerto Rico issued various administrative orders during taxable years 2017 and 2018 imposing limitations with respect to the utilisation of credits.
Tax rate incentives
Under Act No. 73
Exempt entities may elect one of the following two scenarios:
- General scenario: 4% CIT rate with a WHT rate on royalty payments of 12%. Under this scenario, the amount of WHT on the royalty payments is creditable against the 4% CIT.
- Alternate scenario: 8% CIT rate with a WHT rate on royalty payments of 2%. Under this scenario, the WHT on royalty payments is creditable against the 8% CIT.
Companies may elect one of these scenarios at the time of applying for the benefits under the Act. However, there are other possibilities:
- 4% fixed income tax rate on Incentive Development Income (IDI), excluding income from certain investments provided by Section 2(j).
- Pioneer industries are eligible for a 1% CIT rate.
- Activities for the development in Puerto Rico of intangible property are eligible for a 0% CIT rate.
- Any exempt business having operations at a municipality located in a ‘low or intermediate development zone’ may reduce its CIT rate by an additional 5%.
- Any exempt business having operations in Vieques and Culebra may be totally exempt from income taxes during the first ten years of operations as established in the Act. The remaining years covered by its tax decree may qualify for a 2% CIT rate.
Under Act No. 20
- 4% CIT on export services income or
- 3% CIT when more than 90% of the eligible business’s gross income is derived from export services and such services are considered strategic services, according to the criteria established in Act No. 20.
Special deductions under Act No. 73 are available for capital investment in buildings, structure, machinery and equipment, and the NOL carryforwards.
There are no special deductions allowed under Act No. 20.
The following credits are only available under Act No. 73. Please note that no credits are allowed under Act No. 20.
Credit for purchases of Puerto Rico manufactured product
Subject to certain limitations, the credit for purchases of products manufactured in Puerto Rico is 25% (35% in the case of recycled products).
Job creation credit
There is a credit for every incremental job applicable to exempt business starting operations after 1 July 2008. The amount of the credit (maximum of USD 5,000 per each employment) depends upon the location of the industrial development zone.
Research and development (R&D) investment credit
A 50% credit is granted for the eligible investment in R&D activities, including operational expenditures, clinical trials, infrastructure, renewable energy, or intellectual property (IP).
The ‘Electricity, Water and Sewer Services Subsidies and Overdue Payments Reform Act’ (Act No. 22) amends the ‘Economic Incentives Act for the Development of Puerto Rico’ (Act No. 73) in order to provide that existing businesses that hold a tax grant under Act No. 73 will not be allowed to claim R&D credits against an electric energy, water, and/or sewer services bill unless the PRTD certifies the availability of the credit.
Energy investment credit
A 50% credit is granted for the eligible investment in the acquisition of machinery and equipment for the creation of energy.
Energy cost credit
There is also a 3% credit (which could be increased up to 10% if certain employment requirements are met) for payments made to the Puerto Rico Power Authority during the corresponding taxable year. This credit is available for a ten-year period starting as of 1 July 2008. Additional credits (for the purpose of reducing the cost of energy) may be available to industrial units, subject to certain limitations. Act No. 22 of 2016 eliminates the energy credits to new applicants for tax grants under Act No. 73.
Technology transfer credit
A 12% credit (2% in the case of exempt businesses that opted for the alternate tax) is available for payments made to resident entities for the use or privilege of using intangible property in Puerto Rico.
Strategic projects investment credit
There is a 50% credit for eligible investment in strategic projects, including activities for the design, development, and construction of dams.
Industrial investment credit
There is a 50% credit, up to a maximum of USD 8 million, for cash invested in the purchase of 50% or more of the stock or operating assets of an exempt business that is in the process of shutting down operations, amounts used to start-up a small or medium-exempt business, or amounts used for a substantial expansion of an exempt business.
Property tax incentives
Similar to the previous incentives laws, Act No. 73 allows for a 90% property tax exemption on personal and real property. However, Act No. 73 introduced a methodology for the classification and assessment of real property owned by the exempt businesses. Under the provisions of Act No. 73, a taxpayer can self-assess one's real property tax responsibility (similar to the current personal property tax system) and remit the related tax liability due along with a real property tax return (to be issued by the MRCC) by 15 May of each year. The self-appraisal method is only applicable to real property that has not been appraised by the MRCC and is mainly limited to machinery and equipment classified as real property. Note that this method is not available for assets such as land, buildings, and building equipment.
For purposes of Act No. 20, there is a 100% exemption from property taxes during the first five years of operations in the case of eligible services as call centres, management services, and shared services. After said five-year period, a 90% exemption will apply during the term remaining under the Tax Exemption Grant.
Municipal license tax and other municipal tax incentives
Under Act No. 73, the municipal license tax exemption continues at 60% for exempted businesses. Exempt businesses operating in Vieques or Culebra are 90% exempt; small or medium-exempt businesses are 75% exempt; and central or regional corporate headquarters providing managerial services to affiliated companies are 100% exempt during the first five years after becoming eligible for the exemption.
There are no municipal tax exemptions under Act No. 20.
Foreign tax credit
Generally, in any year, a taxpayer can choose whether to take as a credit (subject to limitation) or as a deduction the foreign income and excess profit taxes paid or accrued during the taxable year to any foreign country or a US state. A foreign tax credit reduces the Puerto Rico income tax liability dollar for dollar, while a deduction reduces the Puerto Rico income tax liability at the marginal rate of the taxpayer. There are no carryforward provisions for foreign tax credit purposes.