Tax Profile: Puerto Rico

Tax Profile: Puerto Rico

2/16/2015

Introduction

2012 brought about numerous tax incentives for foreign and U.S. investors and individuals who become residents of Puerto Rico. Additionally, there are tax incentives for Puerto Rico businesses that perform certain services for clients outside of Puerto Rico.


Individual Tax

  • Residents of Puerto Rico are subject to tax on their worldwide income.
  • Progressive rates are imposed up to 33% and an additional 5% surtax is imposed on the tax liability if net taxable income exceeds $500,000.
  • Self-employed individuals with income over $200,000 may be required to pay an additional special tax of 2%.
  • Capital gains are taxed at 10%.
  • No estate or inheritance tax if the property is located in Puerto Rico and the deceased was born in Puerto Rico.
  • Non-residents are taxed on their income from Puerto Rican sources.

 

Corporate Tax

  • Domestic corporations are taxed on their worldwide income, while non-resident corporations are taxed of their Puerto Rico source income and income that is effectively connected with a Puerto Rico trade of business.
  • Net income is taxed at a base 20% tax, plus a graduated surcharge of 5-19%.
  • Dividends paid to shareholders are taxed at 10%.
  • Capital gains are taxed at 15%.
  • Corporations are subject to alternative minimum tax.

 

Types of Entities

  • Special Partnerships (Sociedad Especial): After meeting certain requirements, this entity can qualify for pass through income and loss treatment, eliminating the double taxation that occurs with regular partnerships and corporations.

o   To qualify, 70% or more of the gross income must be from Puerto Rico sources AND 70% must be from one of the following qualifying activities:

§  Land development, tourism, building/structure leases, agriculture or film production.

  • Corporation of Individuals (N Corporation): Allows for the flow through of income or losses, similar to the Special Partnerships. Must meet the following criteria:

o   Owned by 75 or less individuals

o   90% of gross income is from active trade or business in Puerto Rico

  • Limited Liability Company: will be taxed similar to corporations, but they may elect to be treated as a partnership.

o   If it is treated as a flow through or disregarded entity for tax purposes by any other country, it must be treated the same in Puerto Rico.


Withholding Tax

  • Dividends paid to foreign corporations are subject to 10% tax.
  • Interest paid to related parties outside of Puerto Rico are taxed at 29%.
  • Royalties paid to non-residents are taxed at 29%.
  • A resident foreign corporation that derives less than 80% of its income from Puerto Rico activities is subject to branch profits tax at a rate of 10%, in lieu of the 10% withholding tax on dividends.
  • Puerto Rico sourced rental payments made to U.S. citizens are taxed at 20%.
  • Puerto Rico sourced rental payments made to nonresident aliens or foreign corporations are taxed at 29%.
  • Puerto Rico does not have a tax treaty with any country. Therefore, there are no reduced rates of withholding.

 

Other Taxes

  • The transfer of real property is subject to a stamp tax depending on the value of the property.
  • Social Security taxes are comprised of 6.2% from both the employer and employee.
  • Medicare tax rate is 2.9% (1.45% from both the employer and employee).
  • Sales and use tax is set at a standard rate of 7%.

 

Puerto Rico Act 22-2012 and 138-2012

  • Under these legislative provisions, there is a tax exemption for U.S. citizens who become Puerto Rico residents before December 31, 2035 (Exemption Period).

o   Interest and dividends received during the exemption period will be exempt from Puerto Rico taxation.

o   Long term capital gains may qualify for a full exemption or a reduced rate of 5%.

§  Any increase in value of securities after the citizen establishes residency in Puerto Rico will be exempt if the securities are disposed of before January 1, 2036.

§  Any increase in value of securities before establishing residency will be subject to 10% tax rate, a reduced 5% rate will apply if the gain is recognized during the exemption period AND after 10 years from the date of residency.

§  Any capital gains recognized after the exemption period will be subject to normal Puerto Rico personal income tax rates.

o   In order to be a resident of Puerto Rico, you must satisfy the following conditions:

§  Present for at least 183 days during the year.

§  Do not have a tax home outside Puerto Rico during the year.

§  Do not have a closer connection to the U.S. or another foreign country than Puerto Rico.

o   Must request a tax exemption decree from the Secretary of Economic Development and Commerce.