The Governor of Puerto Rico, on 1 July 2019, signed into law House Bill 1635 into Act 60-2019, known as the Incentives Code of Puerto Rico (the 'Incentives Code'). The Incentives Code consolidates incentives granted for diverse purposes throughout decades, like manufacturing activities and exportation of services, with the aim of promoting economic development more effectively. It is divided into six subtitles, and tax incentives are codified in different chapters of Subtitle B.
A corporation engaged in specific eligible activities, like manufacturing or exportation of services, 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 the Incentives Code.
Tax rate incentives
Exempt entities may elect one of the following two scenarios:
- The Incentives Code introduces a general 4% CIT rate applicable to eligible income.
- Novel Pioneer Activities are eligible for a 1% CIT rate.
- Dividend distributions enjoy a 100% exemption.
- Any exempt business having operations in Vieques and Culebra may qualify for a 2% CIT rate during the first five years of operations as established in the Incentives Code. The remaining years covered by the Incentives Code may qualify for a 4% CIT rate.
- Exempt businesses eligible due to manufacturing activities will have the option of a general or two alternate fixed tax regimes:
- 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 1: 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.
- Alternate scenario 2 (effective 1 July 2022): 10.5% CIT rate that increases to 15% if the United States imposes a CIT of at least 15%; a WHT rate on royalty payments of 12% or 13%, depending on levels of average direct employment, industrial development income, and prior royalty payments made; and an exemption of Act No. 154 of 2010 sourcing rules for non-resident related entities.
Special deductions for exempt manufacturing businesses are available for capital investment in buildings, structure, and machinery and equipment.
The following credits are only available for exempt manufacturing businesses under the Incentives Code:
Credit for purchases of Puerto Rico manufactured product
Subject to certain limitations, the credit for purchases of products manufactured in Puerto Rico is 25%.
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).
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.
Tax credit management (TCM) system
Act No. 52 of 2022 established the creation of a TCM system that will be in charge for the registry, tracking, transfer, and claiming of all PR tax credits. Once the operational date is announced, the carryover period of all previously issued tax credits with indefinite expiration dates will be restricted to three years beginning on the operational date of the TCM system.
Property tax incentives
The Incentives Code allows for a 75% property tax exemption on personal and real property for exempt manufacturing businesses. Under the provisions of the Incentives Code, 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 exempt businesses due to export services, there is a 75% exemption from property taxes during the first 15 years of exempt operations.
Municipal license tax and other municipal tax incentives
Under the Incentives Code, the municipal license tax exemption is 50% for exempted manufacturing businesses. Exempt businesses operating in Vieques or Culebra are 100% exempt for the first five years and have a 50% exemption for the remaining period of exemption. Small or medium-exempt businesses are also 100% exempt for the first five years and have a 50% exemption for the remaining period of exemption.
For exempt businesses due to export services, there is a 50% exemption from municipal license tax during the first 15 years of exempt operations.
Puerto Rico was included in the designation of Qualified Opportunity Zones (QOZs). Puerto Rico was able to designate 100% of its low-income areas as QOZs. Thus, out of the nearly 8,700 QOZs, 863 are in Puerto Rico. The Puerto Rico provisions related to QOZs were included in the Incentives Code, with the purpose of creating the legal framework for investment in QOZs in Puerto Rico and to adopt tax rules for the benefit of investors in Puerto Rico. The benefits are the following:
- 15 years exemption period.
- Fixed CIT of 18.5% on eligible business net income.
- 5% WHT rate on royalties paid to a non-resident party in connection with eligible activities.
- Dividend distributions enjoy a 100% exemption.
- 25% exemption on municipal license tax.
- 25% exemption on personal and real property tax.
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.