Puerto Rico

The Governor of Puerto Rico, on 16 April 2020, signed House Bill No. 2419 into law as Act No. 40-2020 (Act 40), which included several technical amendments to the Puerto Rico Internal Revenue Code of 2011, as amended (PR-IRC). In particular, Act 40 introduced a trading in commodities safe harbour for foreign corporations and non-resident individuals, increased the threshold for submitting audited financial statements with Puerto Rico income and personal property tax returns, and clarified the date on which a partnership classification election becomes effective for entities that convert into limited liability companies (LLCs) during the tax year.

Act 40 also expanded the definition of ‘merchant’ to include marketplace facilitators and marketplace sellers and imposes sales tax collection obligations on marketplace facilitators with respect to sales of certain taxable property made by marketplace sellers delivered or dispatched by mail to persons in Puerto Rico. Regarding the effective date of the marketplace rules, Act 173-2020 made these rules effective on 1 January 2021.

Also, on 14 June 2020, the Governor of Puerto Rico signed House Bill No. 2468 into law as Act No. 57-2020, which allowed taxpayers to carry back net operating losses (NOLs) realised during the 2020 tax year due to the COVID-19 emergency to each of the two previous tax years, subject to certain limitations.

Additionally, on 30 June 2022, the Governor of Puerto Rico enacted Act No. 52-2022 (Act 52), which included amendments to manufacturing tax incentives laws and to the PR-IRC. The amendments to the tax incentive laws were primarily aimed to provide a framework to migrate the income and excise taxes imposed on non-resident foreign entities subject to Act 154-2010 effectively connected income source rules into an income-based tax regime applied through their related resident entities operating under manufacturing tax decrees. The new income-based tax regime was necessary to curtail the effect of the final foreign tax credit regulations released by the Federal Internal Revenue Service (IRS), which disallows credits for taxes paid to Puerto Rico under the Expanded ECI Rules brought by Act 154-2010 for tax years beginning on or after 1 January 2023.

Other amendments brought by Act 52 were:

• The introduction of disregarded entities and pass-through entities.
• The application of a 23% alternative minimum tax (AMT) rate for entities with gross receipts of 10 million United States dollars (USD) or more.
• The requirement to report foreign financial accounts.
• The imposition of sales and use tax (SUT) on digital products sourced to Puerto Rico.

Administrative Determination 22-10 (AD 22-10), issued on 21 November 2022, provided further guidance in regard to the concepts of disregarded entities and pass-through entities introduced to the PR-IRC by Act 52. AD 22-10 clarifies that the election to be treated as a disregarded entity is optional and will only be available for LLCs with a single individual owner who must be either a US citizen or a PR resident alien.

This optional election will be available for tax years started after 31 December 2021 for all eligible taxpayers except for certain Foreign LLCs. Foreign LLCs taxed as pass-through or disregarded entities under Federal law or a foreign country’s laws will be able to elect to be treated as a disregarded entity for Puerto Rico income tax purposes, regardless of if the single owner is an individual or not, for tax years started 31 December 2022. The election will be made on a revised Form 6045, which will be due on the due date of the income tax return (including extensions) of the tax year in which the election will be effective.

Entities electing to be treated as disregarded entities will not be exempted from the filing of other corporate tax returns, such as Withholding Returns, Sales and Use Tax Returns, Municipal Licenses, and Personal Property Tax returns, among other compliance.

AD 22-10 also confirmed that the election to be treated as a pass-through entity will be available to LLCs, partnerships, and corporations even when they possess a single owner. Existing entities that were treated as partnerships, special partnerships, or corporations of individuals in their last tax year will automatically be considered as having made an election to be treated as a pass-through entity effective 1 January 2022 and will not need to file an election with Form 6045.