P.R. Laws tit. 7, § 1251
(a) Recovery of investment in the fund’s proprietary interests. —
(1) That distribution, (which is not a distribution in liquidation, subject to § 1252 of this title), made by the fund or the designated entity to the investors in said fund or designated entity shall not be subject to the tax levied by §§ 8401 et seq. of Title 13, and the amount of said distribution shall reduce the adjusted base that the investor has in the investment in the fund or the designated entity’s proprietary interests up to the distribution date. This adjusted base shall never be reduced to less than zero.
Notwithstanding the above, the distribution made by the fund or the designated entity shall be subject to the withholding provided in subsection (d) of this section, as provided therein.
(2) The total of the tax withheld on that part of the distribution made by the fund or the designated entity corresponding to a recovery of investment in proprietary interests in said fund or designated entity, shall be taken as a credit against the tax levied by §§ 8401 et seq. of Title 13.
(3) In the event the fund or the designated entity makes an exempt distribution to an investor who is an exempt person or who is not bound to file an income tax return for having complied with his/her tax liability through withholding at the source, the investor’s adjusted base in his/her investment in proprietary interests in the fund or the designated entity, shall be reduced by the total of the distribution after subtracting his/her corresponding portion of the tax withheld by the exempt business on the distribution of industrial development income, pursuant to § 1250(c) of this title.
(b) Levying of the tax. —
(1) In case of an investor who is not an exempt person, a ten percent (10%) tax on the total or partial sum from any investment capital fund or the designated entity distribution that exceeds an investor’s adjusted base in the investment in proprietary interests in the fund or the designated entity in question, except a distribution in liquidation, shall be levied, collected and paid in lieu of any other taxes levied by law.
Notwithstanding the above, that part of a fund or a designated entity’s distribution consisting of an exempt distribution, as said term is defined in § 1242 of this title, shall not be subject to the tax levied by this clause.
(2) An investor who is an exempt person shall not be subject to the tax levied by clause (1) of this subsection, unless the distribution of the fund or the designated entity constitutes non related commercial income for said investor under §§ 8690—8697 of Title 13.
(c) Credit for taxes withheld from the fund. — Every individual, resident or nonresident in Puerto Rico, who is a stockholder or investor of a fund or a designated entity, shall be entitled to a credit against his/her determined tax liability for the year in which the fund or the designated entity receives an industrial development income distribution pursuant to that which is established by § 10042(a)(5) of Title 13. Said credit shall be equal to that portion of the tax on the industrial development income distribution attributable to said investor, which the exempt business withholds from the fund or the designated entity under the Incentives Act, §§ 10038 et seq. of Title 13.
(d) Obligation to deduct and withhold at source and to pay or deposit the tax levied by this section. —
(1) Obligation to deduct and withhold. — Any person acting in any capacity whatsoever who has the control, receivership, custody, disposition or payment of any distribution of a fund or a designated entity (including distributions in liquidation), shall deduct and withhold a sum equal to ten percent (10%) of the total sum of each fund or designated entity’s distribution in excess of the fund or the designated entity’s proprietary interest’s internal base with regard to which the distribution is made. That part of any distribution which is deemed as an exempt distribution shall be exempted from the withholding at the source, regardless of it being in excess of the internal base of the proprietary interest in the fund or designated entity with regard to which the distribution is made.
(2) Releases. — The fund or the designated entity shall be released from its obligation to deduct and withhold at source, the payment of the distribution corresponding to the investors who hold a release of said withholding issued by the Secretary. When the investor is a domestic or federal government entity, the release required herein shall be automatic and its presentation shall not be needed.
(3) Obligation to pay or deposit taxes deducted or withheld. — Every person bound to deduct and withhold any tax pursuant to the provisions of this chapter shall pay the total tax thus deducted and withheld in the Puerto Rico Internal Revenue Offices, in the Department of the Treasury’s Income Tax Bureau or deposit it in any of the banking institutions designated as depositaries of public funds authorized by the Secretary to receive such taxes. The tax shall be paid or deposited on or before the fifteenth (15) day of the month following that in which the distribution took place.
(4) If the total of any tax to be deducted or withheld pursuant to this subsection (d) or any part thereof, is not paid on or before the date fixed for payment, the total amount of the unpaid tax shall be appraised, collected and paid in the same manner as any other tax levied by § 8412 of Title 13 and said act’s provisions concerning interests, surcharges and penalties that would apply in the case of non payment of the tax levied by § 8412 of Title 13, shall apply.
(5) Tax liability. — Every person bound to deduct and withhold any tax pursuant to this chapter shall only be liable to the Secretary for the payment of that tax.
(6) Tax return. — Every person bound to deduct and withhold any tax pursuant to the provisions of this chapter shall file a return with regard to it on or before the fifteenth (15) day of the month of April of the year following the one to which the tax corresponds. The return shall be filed with the Secretary and shall include that information and shall be filed in that form which said official establishes by regulations.
(7) Failure to withhold. — If the withholding agent fails to withhold the sum required by clause (1) of this subsection, the sum that should have been deducted and withheld shall be collected from the withholding agent, following the same procedure that would be used under the Internal Revenue Code if it was a tax levied by § 8412 of Title 13. This collection shall not be in order if the receiver of the distribution pays the tax.
(8) Penalty. — In the case of any person who fails to deposit the deducted and withheld taxes within the term established by this chapter, there shall be imposed on said person a progressive surcharge of two percent (2%) of the total of the insufficiency if the omission is for thirty (30)-days or less, an additional two percent (2%) for each additional period of thirty (30)-days or less, or fraction thereof, and an additional two percent (2%) for each additional thirty (30)-day period or fraction thereof, while the omission subsists, but the total surcharge imposed shall not exceed twenty-four percent (24%). For the purposes of this clause the term “insufficiency”, means the excess of the total tax which should have been deposited on the amount thereof, if any, deposited on or before the date established therefor. The omission shall not be deemed to continue after the date on which the tax is paid.
(e) Tax not deductible from net income. — When computing the net income for the purposes of any income tax levied by §§ 8401 et seq. of Title 13, the tax deducted, withheld and paid pursuant to this section, shall not be allowed as a deduction, neither for the withholding agent nor for the person who receives the fund’s distribution.
(f) Liability of the withholding agent. —
(1) Any person acting in any capacity whatsoever, who has control, receivership, custody disposition or payment of the fund or designated entity’s distribution, shall see to it that the special tax provided in subsection (d)(1) of this section with respect to any distribution is deducted and withheld at the source and paid to the Secretary within the date established by law.
(2) If the special tax imposed by subsection (d)(1) of this section with respect to any distribution of a fund or designated entity or any part thereof is not withheld or deposited with the Secretary within the term established by this chapter, said distribution shall not be deemed as a distribution subject to the payment of the special tax imposed by subsection (b) of this section, and shall be subject to the tax imposed by §§ 8401 et seq. of Title 13. If it is shown to the Secretary’s satisfaction that the failure to pay was due to a reasonable cause and not voluntarily neglect, the investor shall be entitled to pay taxes on the distribution based on the special tax.
(3) The fact that a distribution is not deemed to be subject to payment of the tax imposed by subsection (b) of this section, due to the provisions of the subsection (f) it shall not have the effect of releasing or exonerating the withholding agent in any way whatsoever from the obligations and responsibilities provided herein.
(g) Option with regard to taxation of distributions. — The provisions regarding the special tax imposed by this section shall apply to every distribution referred to in subsection (a), except when the investor in the fund or in a designated entity chooses that they do not apply to him/her. Once the option is made it shall be final and irrevocable.
The option shall be exercised pursuant to the regulations promulgated by the Secretary who must allow the taxpayer to include said distribution as regular income and receive a credit for the tax withheld under this subsection as provided by regulations. Whenever the tax payer chooses that the provisions regarding the special tax levied by this section do not apply to him/her, it shall not have the effect of releasing or exonerating the withholding agent in any way from his/her obligation of carrying out the corresponding withholding under the provisions of subsection (d) of this section.
(h) Distributions by designated entities which are exempt businesses under the Incentives Act. — Notwithstanding the provisions stated above, when the designated entity making the distribution is, in turn, an exempt business under the Incentives Act, any distribution made thereby (except a distribution in liquidation) derived from the industrial development income derived from its exempt operation, shall be subject to the provisions of § 10042 of Title 13, Incentives Act, and not to the provisions of subsections (a) through (g) of this section.
History —Oct. 6, 1987, No. 3, p. 840, § 11, renumbered as § 12 and amended on July 11, 1996, No. 70, § 12.