A domestic corporation is taxable in Puerto Rico on its worldwide income. A foreign corporation engaged in trade or business in Puerto Rico is taxed at the regular corporate tax rates on income from Puerto Rico sources that is effectively connected income and at a 29% withholding tax (WHT) rate on its Puerto Rico-source gross income not effectively connected with that business.
The current CIT rate is comprised of a 20% normal tax and a graduated surtax (computed on the 'surtax net income'). For taxable years commenced after 31 December 2018, the normal tax would be 18.5%.
The 'surtax net income' is basically the net taxable income subject to regular tax less a surtax deduction in the amount of 25,000 United States dollars (USD). The graduated surtax rates are as follows:
- 5% for surtax net income up to USD 75,000.
- USD 3,750 plus 15% of surtax net income from USD 75,001 to USD 125,000.
- USD 11,250 plus 16% of surtax net income from USD 125,001 to USD 175,000.
- USD 19,250 plus 17% of surtax net income from USD 175,001 to USD 225,000.
- USD 27,750 plus 18% of surtax net income from USD 225,001 to USD 275,000.
- USD 36,750 plus 19% of surtax net income in excess of USD 275,000 for a maximum nominal tax rate of nearly 39%. For taxable years commenced after 31 December 2018, the maximum nominal tax rate will be 37.5%.
The determination of the applicable surtax rate is made on a consolidated basis for controlled groups and related companies, so the net taxable income of all the entities subject to tax in Puerto Rico within said groups has to be combined for the determination of the applicable surtax rate.
Alternative minimum tax (AMT)
The AMT includes various AMT adjustments in order to calculate the tentative minimum tax. Such minimum tax is subject to a 30% flat rate. For taxable years commenced after 31 December 2018, the minimum tax would be subject to an 18.5% flat rate, or 23% in the case of taxpayers required to submit financial statements.
For taxable years commenced after 31 December 2018, a corporation is not allowed to claim the same deductions it claimed for regular income tax purposes. Instead, a corporation is allowed to claim a limited amount of deductions such as wages, rents, utilities, marketing, depreciation, insurance, health plan contributions, charitable donations, bad-debts, and certain taxes. In this regard, some of these expenses must be reported in informative returns to be deductible for AMT purposes.
Notwithstanding, also for taxable years commencing after 31 December 2018, if the corporation submits audited financial statements, an agreed upon procedure, or a compliance attestation report issued by a PR CPA certifying the expenses as ordinary and necessary with its income tax return, the corporation may claim the same deductions it claims for regular income tax for purposes of computing its income subject to AMT, subject to AMT limitations on depreciation and net operating losses (NOLs), among others. In determining the alternative minimum net income, the NOL is limited to 80% (70% for prior periods) of the alternative minimum net income. Also, the amount of the tax credit available with respect to the AMT paid in prior years that may be claimed against the current year regular tax is limited to 25% of the current net regular tax over the AMT for such taxable year. The AMT credit can be carried forward indefinitely.
Tax on deemed dividends
A 10% tax is imposed on certain corporation on the deemed dividend amount attributable to a foreign owner. A foreign owner is defined as any non-resident person (or entity not engaged in a trade or business in Puerto Rico) who directly owns 50% or more of the corporation's stocks. The deemed dividend amount is computed using the lesser of the average value of the total foreign assets or the accumulated earnings and profits of the corporation.
Tax on improper accumulation of income
A surtax of 50% is imposed on corporations that improperly accumulate earnings to prevent the imposition of tax on shareholders or partners rather than paying the earnings out as dividends. The tax is not imposed on accumulated earnings and profits but is imposed on the net income for the year computed without taking capital loss carryover or NOL carryover deductions, and reduced by the following items: Puerto Rico income taxes paid or accrued, disallowed net capital losses, and charitable contributions in excess of the deductible amount. The net income does not include industrial income exempted from income taxes under Industrial Incentives Acts. However, an exempt business can be subject to the penalty tax on non-exempt income.