There are four main business structures recognized; namely, sole proprietorship, partnership, corporation and limited liability company. Regardless of the structure chosen, any business operating in Puerto Rico has to register in the Merchant's Registry at the Puerto Rico Treasury Department ("PRTD"). Failure to do so may result in a fine. It would also have to register with the Bidders Registry ascribed to the General Services Administration if business is to be conducted with a governmental agency.
LLPs, Corporations and LLCs must meet certain filing requirements with the Puerto Rico Department of State. An annual fee of $150 ($110 for LLPs) is also payable to said agency.
Foreign entities may qualify to do business in Puerto Rico if applicable requirements are met.
Puerto Rico law also provides for the organization of nonprofit corporations and tax exempt status may be achieved for qualifying entities.
A. Income Tax
The basic principle under the Puerto Rico Internal Revenue Code of 2011, as amended ("Code"), is that any person -natural or legal- who has Puerto Rico source income is subject to tax upon said income, unless otherwise excluded or exempted. Income is a very ample concept and deductions may be taken only as provided by law.
Resident individuals are taxed on income from any source, whereas nonresident individuals are taxed only upon Puerto Rico source income and income effectively connected with the conduct of a trade or business in Puerto Rico. Income tax treatment for estates and trusts is essentially the same as for individuals.
Income tax rates applicable to ordinary or business income range from seven percent (7%) to thirty three percent (33%). Certain dividends, interests and long-term capital gains may be taxed at a special tax rate of 15%.
The benefit of progressive tax rates is reduced upon reaching certain income levels, by the application of the gradual adjustment. Alternative minimum tax may also apply.
Nevertheless, under Act No. 22 of 2012, as amended, capital gains attributable to securities acquired after relocation to Puerto Rico, dividend and interest income derived by certain nonresident individuals who move to Puerto Rico are fully exempt from Puerto Rico income taxes. In addition, their long term capital gains attributable to the increase in value of securities occurred prior to the individual’s relocation to Puerto Rico may be subject to a five percent (5%) income tax rate if recognized after 10 years of relocation and fifteen percent (15%) if recognized within 10 years of relocation. A tax incentives application must be submitted to the Department of Economic Development & Commerce of Puerto Rico. Similarly, certain tax incentives are available for people who are 16 to 26 years old, for whom the first $40,000 generated in gross income will be totally exempt from income tax.
Annual income tax filings are required, generally, on or before the fifteenth (15th) day of the fourth month following the close of the year.
As a general rule, corporations are subject to income tax at the entity level and their shareholders are taxed upon distributions. Ordinarily, LLCs are treated as corporations for income tax purposes. However, certain LLCs may elect to be considered partnerships and, thus, receive pass-through treatment. LLCs whose income is attributed to its members for purposes of the United States Internal Revenue Code of 1986, as amended, or foreign country income tax laws, are ineligible for income tax treatment as corporations and, hence, are considered partnerships. Nonetheless, said exception does not apply to LLCs that as of January 1, 2011 enjoyed tax benefits under certain tax incentives laws. Furthermore, the Code provides that partnerships existing as of January 1, 2011 may choose to keep to be treated as corporations.
Puerto Rico corporations and LLCs are subject to tax upon their worldwide income after the corresponding deductions, while foreign corporations and LLCs engaged in trade or business in Puerto Rico (resident corporations and LLCs) are taxed upon their net income from sources within Puerto Rico and their income effectively connected to a trade or business in Puerto Rico. Foreign corporations and LLCs not engaged in trade or business in Puerto Rico, in essence, are taxed upon the gross income derived from certain items, which constitute Puerto Rico source income, at different fixed tax rates depending on the specific income item.
The corporate income tax rate is twenty percent (20%) plus surtax (a graduated rate from 5% to 19%, with a maximum tax rate of thirty nine percent (39%)). In order to compute the surtax, the Code allows a deduction in the amount of $25,000.00, which should be apportioned equally or pursuant to a plan agreed by all members of a controlled group of corporations. Domestic corporations may also be subject to an expatriation of profits tax. The Code imposes a 10% tax on any deemed dividend that it is considered to be received by a foreign owner of a corporation (those who own 50% or more), on all taxable years that begin after December 31, 2013. The deemed dividend amount is the lesser of the average value of the total Foreign Assets (calculated quarterly) possessed by the corporation, or the accumulated earnings and profits of the corporation at the end of the taxable year (excludes the earnings and profits from tax incentives such as, Industrial Development and Tourism Development, Bonafide Agricultural Business or International Banking Entities). The deemed dividend tax is included with the Corporate Income Tax return, and will be credited, subject to certain limitations, against the tax to be withheld and paid when the actual dividend is distributed. Foreign resident corporations may also be subject to a branch profits tax.
Corporate long-term capital gains tax rate is subject to a special rate of 20%. An alternative minimum tax of generally thirty (30%) or more may apply depending on the taxpayer's situation.
Generally, the corporate income tax return must be filed no later than the fifteenth (15th) day of the fourth (4th) month after the close of the taxable year. Audited financial statements must be attached to said return provided the gross income of the corporation, LLC or entities related group, as may be the case, exceeds $3,000,000.00
In certain cases, foreign corporations and LLCs related to entities doing business in Puerto Rico may be deemed to be engaged in trade or business in Puerto Rico and, thus, subject to tax upon some income treated as effectively connected with a trade or business in Puerto Rico.
3. Pass-Through Entities
Under the 2011 Code, partnerships are pass-through entities for income tax purposes under the Code. LLC's may also choose to be taxed as partnerships via election with the Puerto Rico Secretary of Treasury. To that effect, income and losses flow to the partners and double taxation is reduced. Hence, the partners must annually include in their income tax return their distributive share of the ordinary income generated by a partnership and the distributive share of certain items -income, losses or credits which must be taken into consideration separately, regardless of whether distributions were made. Partners pay taxes on their distributable share of partnership income at their applicable rates. The pass-through treatment does not apply to partnerships existing as of January 1, 2011 which opted for corporation income tax treatment or which chose to compute their income tax liability for taxable year 2011 and the next four taxable years using the 1994 Code.
The Code includes other alternatives which provide pass-through status, such as special partnerships, and corporation of individuals. A special partnership is a corporation, partnership or LLC that complies with certain requirements (i.e. seventy percent (70%) of its gross income has to be derived from specific business activities) and has an effective election made not later than December 31, 2010. The Code does not allow a special partnership election for a taxable year beginning after December 31, 2010. A corporation of individuals is similar to Internal Revenue Code of 1986, as amended.
B. Excise Taxes
Excise taxes are imposed upon the introduction into or the manufacturing in Puerto Rico of hydraulic cement; sugar; cigarettes; combustible fuels; crude oil, products partially manufactured from and end products derived from crude oil and any other mix of hydrocarbons; motorcycles, all terrain vehicles and vehicles. The introduction into Puerto Rico of certain plastic products not made in Puerto Rico is also taxable. Exemptions may apply depending on the person acquiring the taxable item or on the use of it. Wholesalers and retailers on certain items, as well as the owners/operators of specified coin-operated machines, are required to pay an annual license fee to conduct their businesses.
C. Sales and Use Tax
Every merchant wishing to engage in any business in Puerto Rico must register every commercial location with the Puerto Rico Treasury Department before the commencement of business. Currently, the sales and use tax is imposed at a combined eleven point five percent (11.5%), which is the sum of ten point five percent (10.5%) corresponding to the PRTD and one percent (1%) attributable to the municipality.
The Sales and Use Tax (SUT) is generally paid upon introduction of a taxable item into Puerto Rico regardless of whether the item will be an object of commerce in the ordinary course of business and upon services, with certain exceptions. A special four percent (4%) tax is imposed on designated professional services and services rendered to other merchants.
Merchants may be required, if applicable, to file all or any of the following monthly returns: Form SC 2915F, Form SC 2970, Form SC 2915 D, or Form SC 2915 A. All merchants with a green certificate are required to file a Form 2915F every month, except for: merchants that solely and exclusively sell personal tangible property or other goods; and have not received services from a person that is not a PR resident for which the self-imposed special rate of 4% would be applicable. Merchants who are required to file Form SC 2915F, must also file, if applicable, the Declaration of Imports (Form SC 2970), the Tax on Imports Monthly Return (Form SC 2915 D), or the Monthly Sales and Use Tax Return (Form SC 2915 A).
D. Property Taxes
Property taxes are imposed upon personal property and real property. The property tax rate may differ among the municipalities. The personal property tax rates are around eight percent (8%) whereas real property tax rates are around ten percent (10%).
The personal property tax return must be submitted annually on or before May 15. Audited financial statements must be submitted along with the declaration, provided the volume of business is equal or greater than $3,000,000.00. Taxpayers having a personal property tax liability in excess of $1,000 must pay estimated tax. The due dates are August 15, November 15, February 15 and May 15.
E. Municipal License (Patente) Tax
All businesses, as a general rule, are subject to municipal license tax on the volume of business transacted in each municipality in Puerto Rico. The applicable municipal license tax depends on the municipality, but it may not exceed zero point five percent (0.5%) for general businesses and one point five percent (1.5%) for financial businesses. Certain exemptions may apply.
The annual volume of business declaration must be filed on or before five working days after April 15. Audited financial statements must be submitted along with the declaration, provided the volume of business is equal or greater than $3,000,000.00. Otherwise, a stamped copy of the income tax return must be attached.
F. Municipal Construction Excise Taxes
The municipalities have the power to impose construction excise taxes on constructions projects carried out within their boundaries. The construction excise tax rate may differ among the municipalities and it is imposed on the cost of the project. Exemptions based on the owner or purpose of the construction project may apply. A construction permit issued by the Permit Management Office or the Municipality Permit Office, as may be the case, can also be required.
G. Payroll Taxes
In Puerto Rico, employers are required to comply with the following payroll taxes: Puerto Rico Income Tax Withholding; Puerto Rico State Unemployment Tax (SUTA); Federal Unemployment Insurance Taxes (FUTA); Federal Insurance Contributions Act (FICA); Insurance for Non-Occupational Disability; Workmen's Accident Compensation Insurance; and Chauffeur's Insurance.
H. Tax Incentives Acts
Puerto Rico legislation offers an array of fiscal incentives for companies who decide to do business in the Island. The business sectors that may enjoy government incentives include: manufacturing, a wide array of exported services, recycling, business headquarters, construction of certain low income housing, agricultural businesses, software development, film projects, tourist projects, among others. Incentives may be in the form of special tax rates (e.g., a flat 4% income tax rate for export services and manufacturing businesses and a 90% income tax exemption for tourist businesses), tax exemptions, and credits for income taxes which may or may not be transferable or marketable.
These incentives, along with relocation of business owners to Puerto Rico pursuant to Act No. 22-2012, may constitute a powerful planning tool for individuals and businesses who are willing to do business in the Island and commit to a minimum employment requirement.
The discussion presented herein reflects a summary of the various required matters for doing business and related general tax implications under the laws of Puerto Rico. With respect to the latter, the business could also have other obligations such as withholding on payments for certain services rendered and on certain payments to nonresidents of Puerto Rico, or obtaining a specific license to practice within a particular industry, among others, which discussion is beyond the scope of this document. The purpose of this document is to provide general information and, therefore, it does not cover all the legal issues or matters that may arise with respect to any particular business. To that effect, this document should not be construed as a legal opinion or advice. Our comments are based on the applicable Puerto Rico and federal law and regulations provisions in effect as of June 30, 2016.