EFTA01122204.pdf

DEPARTMENT OF 355 FD Roosevelt Ave. BCONOMIC PRIDCO Hatot M. 00918 PUERTO RICO DEVELOPMENT AND Nor NOS. S Box 362350 )(Es IEITER San Juan, 00936-2350 COMMERCE Tel 787.758.4747 QOVZRNMEN* New Tax Incentives Legislations in Puerto Rico I. Overview services and the establishment of new businesses in Puerto Rico. On January 17, 2012, the Legislative Assembly of Puerto Rico approved new II. Individual Investors Act legislation to promote the economic development of Puerto Rico: (1) Act No. 22, A. Applicability also known as the Act to Promote the Relocation of Individual Investors to Puerto The Individual Investors Act applies to any Rico (the "Individual Investors Act) and (ii) individual investor that becomes a Puerto Act No. 20, also known as the Act to Promote Rico resident on or before the taxable year the Exportation of Services (the "Export ending on December 31, 2035 (hereinafter Services Act"). referred to as "Resident Individual Investor"), provided that such individual was not a The Individual Investors Act seeks to attract resident of Puerto Rico at any time during the new residents to Puerto Rico by providing a I5-year period preceding the effective date of total exemption from Puerto Rico income the Individual Investors Act. taxes on all passive income realized or accrued after such individuals become bona A Puerto Rico resident is an individual who is fide residents of Puerto Rico. This relocation domiciled in Puerto Rico. Physical presence should result in new local investments in real in Puerto Rico for a period of 183 days during estate, services and other consumption the taxable year will create a presumption of products, and in capital injections to the residence in Puerto Rico for tax purposes. Puerto Rico banking sector, all of which will accelerate the economy of Puerto Rico. B. Special Tax Rule under the US Code for Puerto Rico Ilona Fide The purpose of the Export Services Act is to Residents establish and develop in Puerto Rico an international export services center. This act Pursuant to Section 933 of the Internal seeks to encourage local service providers to Revenue Code of the United States of 1986 expand their services to persons outside of (the "US Code"), income derived from Puerto Rico, promote the development of new sources within Puerto Rico by individuals businesses in Puerto Rico and stimulate the who are a bona fide residents of Pueno Rico inbound transfer of foreign service providers during the entire taxable year is not included to Puerto Rico. The act also creates a special in gross income and is exempt from taxation fund for the continuous development of new under the US Code. (the "Section 933 tax incentives that will promote export Exclusion"). Puerto Rico Industrial Development Corporation 1 EFTA01122204 The term bona fide resident of Puerto Rico I) CG for investment appreciation that means a person who: (I) is present for at least accrued prior to becoming a Puerto 183 days during the taxable year in Puerto Rico resident (the "Non-PR Gain") Rico, (2) does not have a tax home outside of will be taxed at: (i) 10%, if such Puerto Rico during the taxable year; and (3) gain is recognized within 10 years does not have a closer connection to the after the date residence is United States or a foreign country than to established in Puerto Rico and prior Puerto Rico. to January 1, 2036, and (ii) 5%, if such gain is recognized after said C. Tax Exemption on Interest and 10-year period but prior to January Dividend Income I, 2036. Any taxes paid in Puerto Rico with respect to any Non-PR Under the Individual Investors Act, Resident Gain may be used as a tax credit in Individual Investors will enjoy a 100% tax another jurisdiction that taxes that exemption from Puerto Rico income taxes same Non-PR Gain. As such, the on interest and dividend income derived Resident Individual Investor will not during the Tax Exemption Period (as defined pay any additional taxes on the Non- below). PR Gain. Pursuant to the Section 933 Exclusion, 2) A similar rule applies under the US interests and dividends received by Resident Code with respect to United States Individual Investors that qualify as Puerto Investors, regardless of the Section Rico source income will not be subject to 933 Exclusion, since any Non-PR federal income taxation under the US Code. Gain recognized within said 10-year period by investors formerly subject Resident Individual Investors may be able to to the United States taxing reduce the tax rate applied on interest and jurisdiction (the "United States dividend income coming from sources Investor") will be taxed in outside of Puerto Rico (including the source accordance to the applicable country taxation) to 0% or 10%, respectively, provisions of the US Code. The by investing through certain Puerto Rico United States Investor may elect to investment vehicles. apportion to Puerto Rico any part of the CG related to investment D. Tax Exemption on Capital Gains appreciation that accrued after becoming a Puerto Rico resident All short- and long-term capital gains ("M") and, therefore, be entitled to the derived by Resident Individual Investors for Section 933 Exclusion for such investment appreciation accruing after portion. becoming a Puerto Rico resident will be 100% exempted from Puerto Rico income 3) The United State Investor qualifying taxes, if such gain is recognized prior to as a Resident Individual Investor January I, 2036. which recognizes a Non-PR Gain after 10 years of becoming a bona On the other hand, CG derived by Resident fide Puerto Rico resident would not Individual Investors will be subject to be subject to federal income taxation preferential income tax rates in certain on any portion of the Non-PR Gain circumstances, as follows: and to a 5% tax in Puerto Rico. As stated before, any part of a CG attributable to the period of Puerto Puerto Rico Industrial Development Corporation 2 EFTA01122205  Rico residence would qualify for 0% public relations; (iii) economic, United States federal income environmental, technological, scientific, taxation and 0% Puerto Rico income management, marketing, human resources, taxation, if recognized prior to information and audit consulting; (iv) January I, 2036. advisory services on matters relating to any trade or business; (v) commercial arts and Any CG for investment appreciation not graphic services; (vi) production of described above will be taxed in accordance construction drawings, architectural and with the applicable provisions of the Puerto engineering services and project management; Rico Internal Revenue Code of 2011, under (vii) professional services such as legal, tax which CG derived by Puerto Rico residents is and accounting; (viii) corporate headquarters; subject to a 10% preferential income tax rate. (ix) electronic data processing centers; (x) development of computer programs; (xi) In light of the above, Resident Individual voice and data telecommunications between Investors may be able to reduce the tax rate persons located outside of Puerto Rico; (xii) applied on CG in their former domicile to 0%, call centers; (xiii) shared services centers 5% or a maximum 10%. ("shared services") including but not limited to, accounting, finance, taxes, auditing, E. Tax Exemption Period marketing, engineering, quality control, human resources, communications, electronic The tax exemption granted under the data processing and other centralized Individuals Investors Act will expire on management services; (xiv) storage and December 31, 2035 (the "Tax Exemption distributions centers ("hubs"); (xv) Period"). educational and training services; (xvi) hospital and laboratory services; (xvii) F. Tax Exemption Decree investment banking and other financial services; and (xviii) any other service that the To enjoy the benefits granted under the Government of Puerto Rico later determines Individual Investors Act the individual must that must be treated as an eligible service request and obtain a tax exemption decree (collectively, the "Eligible Service"). under said act (the "Tax Exemption Decree"). Such decree will constitute a contract with the An Eligible Service must also qualify as Puerto Rico Government not subject to either a service for exportation or a promoter subsequent legislative changes guaranteeing service. Services for exportation are services the benefits during the Tax Exemption Period. performed for non-resident individuals and/or foreign entities that have no nexus with Puerto Rico (that is the Eligible Service is not, III. Export Services Act and will not be, related to the conduct of a trade, business or other activity in Puerto A. Applicability Rico). The Export Services Act applies with respect Promoter services are services rendered to to any entity with a bona fide office or non-residents individuals and/or foreign establishment located in Puerto Rico that is or entities related to the establishment of a new may be engaged in an eligible service (the business in Puerto Rico, as defined by the "Eligible Business"). Export Services Act. The term eligible service includes: (i) research and development: (ii) advertising and Puerto Rico Industrial Development Corporation 3 EFTA01122206  B. Tax Exemption Decree (xii) and (xiii) of Section above. After said 5-year period, a To enjoy the benefits granted under the 90% exemption will apply during Export Services Act the services provider the term remaining under the Tax must request and obtain a tax exemption Exemption Decree. decree under said act (the "Tax Exemption Decree"). Such decree will have term of 20 D. Export Services Income years, renewable for 10 additional years, provided certain conditions are satisfied. The term Export Services Income means net income derived by an Eligible Business The Tax Exemption Decree will constitute a subject to the following: contract with the Puerto Rico Government not subject to subsequent legislative changes. I) In the case of new Puerto Rico businesses, all net income derived from an Eligible Service. C. Tax Incentives 2) In the case of existing Puerto Rico Service providers operating under a Tax businesses, only that portion of net Exemption Decree will enjoy the following income derived from an Eligible tax incentives during the term of such decree: Service that exceeds the average net income generated by such business 1) 4% flat income tax rate on Export during the three taxable years Services Income (as defined below). preceding the date a request for a This rate may be reduced to 3% Tax Exemption Decree is filed by when more than 90% of the Eligible such business. Business's gross income is derived from export services and such 3) In the case of service promoters, services are considered strategic only the net income derived from services, according to the criteria Eligible Services performed within established in the Export Services the 12-month period ending on the Act. day preceding the day the new business takes any of the following 2) 100% tax-exempt distributions from actions: earnings and profits derived from the Export Services Income. a. Begins construction of the facilities to be used in Puerto 3) 60% exemption on municipal license Rico; taxes on Export Services Income. b. Commences operations in Puerto 4) 100% exemption from property Rico; or taxes during the first five years of operations in the case of eligible c. Executes a contract to acquire or services described in items (viii), lease facilities in Puerto Rico. .VFited before the Stale EleCICCIIIS Commission of Puerto Rico - Number GEE-SA.12-4573 Puerto Rico Industrial Development Corporation 4 EFTA01122207  5 Puerto Rico Industrial Development Corporation EFTA01122208