A corporation organised or created under the laws of Puerto Rico is a domestic corporation. A domestic corporation is a resident corporation even if it does not conduct business operations in Puerto Rico. A corporation created elsewhere is considered a foreign corporation.
Permanent establishment (PE)
The Puerto Rico Tax Code does not provide specific guidance on PE. Facts and circumstances need to be analysed in order to determine if a corporation has created a PE in Puerto Rico or not. However, having an office or fixed place of business in Puerto Rico may deem the corporation to be engaged in a trade or business in Puerto Rico (i.e. having a PE).
Sourcing rules pursuant to Act No. 154
Act No. 154's source rules are segregated into two parts. The first part treats a non-Puerto Rico resident manufacturing entity as having an office or fixed place of business in Puerto Rico merely as a result of engaging in transactions above a certain threshold with a related Puerto Rico entity. The second part treats a portion of the income earned by a non-Puerto Rico resident entity as Puerto Rico-source income.
Act No. 154's source rule applies where a non-Puerto Rico resident purchases goods and services from a related company that manufactures personal property or performs services in Puerto Rico that account for 10% or more of the total gross receipts of the seller from sales of such property or services in Puerto Rico, or at least 10% of the purchase cost of personal property and services acquired by the purchaser, for the taxable year or any of the three prior taxable years.
Where Act No. 154's source rule applies, a portion of the income of the non-Puerto Rico resident purchaser from the sale outside of Puerto Rico of personal property manufactured or produced in whole or part in Puerto Rico by the related Puerto Rico seller will be treated as Puerto Rico-source income that is effectively connected with the conduct of a Puerto Rico trade or business. The portion of the non-Puerto Rico resident’s income that is treated as Puerto Rico source is determined under an equally weighted, four-factor (i.e. purchases, sales, property, and payroll) formulary apportionment method. Where the purchaser fails to provide adequate documentation regarding the formulary apportionment factors, 50% of the income of the non-Puerto Rico resident purchaser from the sale outside of Puerto Rico of personal property manufactured or produced in whole or part in Puerto Rico by the related Puerto Rico seller will be treated as sourced where the property is manufactured or produced (i.e. Puerto Rico). The source rule also will apply to agency and commissionaire arrangements, in addition to buy-sell transactions involving related parties. In addition, the source rule contains an anti-abuse provision that disregards a transaction, for purposes of the source rule, where one of the principal purposes of the transaction is avoidance of the source rule.
As of 30 June 2022, the related Puerto Rico manufacturing entity can request an amendment to their tax grant to make an election to be taxed at an alternate fixed tax rate (alternate rate) of 10.5% in exchange for an exemption of the Act 154 sourcing rules for the non-Puerto Rico resident. The alternate rate changes permanently to 15% if the United States ever amends their tax laws to impose a CIT of at least 15%.
Other benefits obtained through the alternate rate election are income and royalties exemptions, which vary depending primarily on if a grantee meets certain thresholds of direct employment and industrial development income.