P.R. Laws tit. 13, § 10013
(a) Industrial development income. — Industrial development income shall be:
(1) The net income derived from the production of a manufactured product that gives rise to the exemption of an exempted business under clauses (1), (2) and (3) of subsection (d) of this section.
(2) The net income derived under clause (4) of subsection (d) of this section.
(3) The income derived from the operation of hotels under clauses (5) and (6) of subsection (d) of this section and the income derived from the operation of guesthouses which have been issued a certificate by the Tourist Development Company in accordance with subsection (6) of § 671e of Title 23.
In no case shall the income deriving, directly or indirectly, from the operation of casinos, gambling halls, or similar hotel activities, be considered a part of the industrial development income under clause (2) of this subsection and this clause. The Director of the Tax Exemption Office shall, in consultation with the Secretary of the Treasury, prepare such regulations as may be necessary for the enforcement of this provision. Such regulations shall be subject to the provisions of §§ 2101 et seq. of Title 3.
(4) The net income derived under clauses (6-a) and (6-b) of subsection (d) of this section, and the income derived from the sale of patents, royalties, or any other right to receive income resulting from the operation of laboratories under clauses (6-a) and (6-b) of subsection (d) of this section.
(5) The distribution of dividends or benefits of a corporation or partnership that is a member of an exempted business if made from the income obtained under clauses (1), (2), (3) and (4) of this subsection.
(6) The income derived from eligible interests, rents and dividends as defined in subsection (j) of this section.
(b) Property devoted to industrial development. — Means:
(1) Real property, including land and improvements, or any portion thereof, as well as additions thereto equivalent to not less than twenty-five percent (25%) of the total area of the main buildings devoted to industrial development, which has been constructed or installed after February 14, 1949, either by private persons or by any government department, political subdivision, agency or instrumentality, to be leased or otherwise placed at the disposal of an exempted business, if and while it is used for the development, organization, construction, establishment or operation of an exempted business. Provided, That whenever the land is owned by a person other than the person who owns, constructs or installs the improvements thereon, both land and improvements shall be property devoted to industrial development when leased or otherwise made available to an exempted business for the purposes above indicated. Provided, further, That the term “property devoted to industrial development” shall also cover real property including lands and improvements which meet the requirements of subsection (h) of this section. The tax exemption granted by this subtitle shall not be understood to cover that portion of the property devoted to the operation of casinos, gambling halls, or similar hotel activities. The Director of the Industrial Tax Exemption Office shall, in consultation with the Secretary of the Treasury, draw up such regulations as may be necessary for the enforcement of this provision. Such regulations shall be subject to the provisions of §§ 2101 et seq. of Title 3.
(2) All equipment or machinery belonging to private persons or a government department, political subdivision, agency or instrumentality, necessary or convenient to and installed or otherwise used under a contract of lease, use, usufruct or any other kind of contract, by an exempted business; provided whenever the supplier is a private person, such equipment or machinery is made available by a supplier normally engaged in making such machinery and equipment available under terms other than by sale. The tax exemption granted by this chapter shall not be understood to cover the equipment, machinery, and other personal property used in the operation of casinos, gambling halls, or similar hotel activities. The Director of the Industrial Tax Exemption Office shall, in consultation with the Secretary of the Treasury, draw up the necessary regulations for the enforcement of this provision. Such regulations shall be subject to the provisions of §§ 2101 et seq. of Title 3.
(3) Any motion picture studio or cinematographic studio with physical facilities and permanent personnel fit for the production of feature films which is available for use by an exempted film producing business under a lease, use, or usufruct contract, or any other kind of contract covering utilization by the said exempted film producing business of all or part of the physical facilities and personnel services of said cinematographic studio, including, among others, utilization of land, buildings, outdoors scenography, stages, cameras, sound equipment, laboratories, production personnel (including but without limitation, assistant directors, unit managers and production managers), department for the preparation of plots, stories, narratives and/or scripts, cast distributing and talent scouting department, music department, camera technicians and personnel, laboratory technicians and laboratory personnel, sound technicians and personnel, stage technicians and personnel, wardrobe technicians and personnel, and any other physical facilities and personnel usually utilized in film production. Provided, That although the income derived from the lease of the property and services of a cinematographic studio as described above is income from property devoted to industrial development, this shall not affect the taxable condition of the salaries of the employees of a cinematographic studio.
(c) Exempted business. — An exempted business is a business established or proposed to be established in Puerto Rico by a person or groups of natural or [juridical] persons under common name or not or any other “person” as said term is defined in clause (1) of subsection (a) of § 411 of Act June 29, 1954, No. 91, as amended, and which is an eligible business and has been declared exempt by the Governor of Puerto Rico. Provided, That for the purposes of the aforesaid subsection (b) of this section, an exempted business is also that which has been declared exempt by the Governor of Puerto Rico under Act No. 184 of the Legislature of Puerto Rico, approved May 13, 1948, as amended, and §§ 10001—10011 of this title. Provided, further, That for the purposes of § 10012(t) and § 10019(e)(3) of this title, an exempted business is a business that was exempt under Act No. 184 of May 13, 1948, as amended, or §§ 10001—10011, or which is or was exempt under this chapter.
[The Governor may in any case refuse any application, notwithstanding the eligibility of the product or property under any of the preceding provisions, if, from the facts submitted to his consideration in the proceedings provided by this subtitle, and after the applicant has been afforded the opportunity to make a thorough presentation of questions in dispute, he shall find that the application is in conflict with the public interest of the Commonwealth of Puerto Rico on any of the following grounds:
(1) That the establishment of the industrial unit for which exemption is sought would substantially and adversely affect the employees of an enterprise under related control operating in any state of the United States, or
(2) that the applicant has not been organized in good faith in view of the type and the reputation of the persons constituting same, the plans and methods for raising funds, the plans and methods of distribution and sale of the product or products to be manufactured, the nature and intended use of such product or products, and any other factors which reasonably indicate a likelihood that the grant of exemption would be misused to the prejudice of the interests of the people of the Commonwealth of Puerto Rico or of any state of the United States of America, and that, consequently, the public interest of the Commonwealth of Puerto Rico would be adversely affected by such grant.]
(d) Eligible business. — Means:
(1) Any industrial unit having as its object the production on a commercial scale in Puerto Rico of any manufactured product which was not produced on a commercial scale in Puerto Rico on January 2, 1947, and for which there were on that date in Puerto Rico no production facilities capable of the production of that manufactured product on a commercial scale.
(2) Any industrial unit established on or after January 1, 1954, having as its objective the production on a commercial scale in Puerto Rico of any designated article, and which, in the judgment of the Governor of Puerto Rico of [sic]:
(A) Is established in good faith and with a permanent character.
(B) Produces, or will produce, on a sustained basis, within a reasonable period of time, a substantial amount of one or more designated articles additional to the amount of the same articles theretofore produced by other industrial units in operation in Puerto Rico. Provided, That in determining the amount of the production in Puerto Rico of such articles, the Governor shall use the average production in Puerto Rico of such articles for the three calendar years immediately preceding the calendar year 1948.
(3) Any industrial unit established prior to January 1, 1954, engaged in the production of a designated article in Puerto Rico on a commercial scale, provided, that:
(A) Tax exemption has been granted to a new industrial unit under §§ 10001—10011 of this title to produce the same designated article, and
(B) the new industrial unit has begun production on a commercial scale.
(4) Any property devoted to industrial development, including any addition thereto equivalent to at least twenty-five percent (25%) of the total area of the main buildings devoted to industrial development.
(5) Any tourist hotel operated in Puerto Rico under conditions of sanitation and efficiency acceptable to the Governor of Puerto Rico.
(6) Any commercial hotel and any guesthouse which has been issued a certificate by the Tourist Development Company in accordance with subsection (6) of § 671e of Title 23, operated in Puerto Rico under conditions of sanitation and efficiency acceptable to the Governor of Puerto Rico.
(6-a) The operation of laboratories (except laboratories for clinical or soil tests and analyses) engaged in activities of scientific and/or industrial research, of experimentation, of chemical, physical and electronic tests to develop new products or industrial processes or to improve same, when said laboratories meet the following requirements:
(A) The value of the equipment and machinery used in its operation shall not be less than twenty-five thousand (25,000.00) dollars.
(B) At least two of its full-time employees shall be versed in natural sciences and/or engineering and duly authorized by law to practice his profession in Puerto Rico.
(C) The laboratory has been established after July 1, 1974.
(6-b) The breeding of experimental animals to be used in laboratories for scientific and medical research, provided the business is located in one of the islands adjacent to the Commonwealth of Puerto Rico which forms a part thereof and is constituted into a municipality.
(7) The Governor of Puerto Rico may, in the exercise of sound discretion, refuse the tax exemption in any of the cases enumerated in clauses (1), (2) and (3) of this subsection if, in his judgment, the commodity produced or to be produced by the applicant will, because of its use or other factors, displace, or, with a substantial advantage by reason of the tax exemption, compete with, commodities produced by industries established in Puerto Rico. Provided, however, That notwithstanding the foregoing, the Governor may grant the tax exemption when, in his judgment, the eligible petitioning industry is of a substantial benefit to the general economy of Puerto Rico on the score of anticipated substantial increases in production to supply markets outside Puerto Rico, or to supply an existing demand in Puerto Rico which has not been previously supplied in substantial quantities, and in view of the investment, technology and new jobs involved. In granting tax exemption to an industry under such circumstances, the Governor may, on petition of an interested party filed prior to the final finding herein provided, grant said exemption to those other existing industries which manufacture such similar commodities which, in his judgment, will stand substantially affected by the substitution or competition to which this clause refers.
(8) In the case of an application filed under clause (1) of this subsection, if the Governor determines that a former exemption for the same product, granted under § 2(b) of Act No. 184, approved May 13, 1948, as amended, or § 10002(d)(1) of this title, or clause (1) of this subsection, was granted under circumstances likely to give rise later to a sustancial question as to whether or not the product should have been considered as a new product within the provisions of said sections in view of a further consideration of all available data with respect to production and production facilities and the nature of the differences on wich the former exemption was granted, any grant [of] exemption on such a petition shall be effective for a term wich shall expire not later than the latest termination date of any exemption in force with respect to the same product, granted under Act. No. 184, approved May 13, 1948, as amended, or §§ 10001—10011 of this title, and shall include the same tax exemption privileges as are provide in such grant in force and in the act under which the latter was made. Provided, however, That nothing herein provided shall prevent the Governor for finding that the application is eligible on other grounds.
(9) The Governor of Puerto Rico may, from time to time, designate, from among the products eligible to tax exemption, those whose exemption shall be limited to the production for exportation, whenever he determines, upon consultation with the Department of Commerce and with the agencies reporting on the applications for tax exemption, the existence of the following factors:
(A) That the production of the factories in Puerto Rico manufacturing the article of commerce produced or to be produced by the applicant meets the local demand existing as of the date of the application for tax exemption and that is foreseeable within a period of five (5) years, and
(B) that there exists in Puerto Rico active competition in the production for the local sale of the article of commerce concerned.
Articles of commerce different and requiring a separate determination shall be considered those which, although similar in name, appearance and use, differ from one another in such factors as grade, size, price or other factors affecting the market of the product and, consequently, its demand. Provided, That whenever the above mentioned conditions shall cease to exist, that is, when local production shall no longer meet the local demand for the article of commerce concerned, or there is no local active competition in its production, the Governor may, after consultation with the Department of Commerce and the agencies reporting on the applications for tax exemption, cease to impose the said limitation on the grants of tax exemption for the article of commerce concerned, and he may also, after consultation with the said agencies, resume such designation whenever the said conditions reappear. The said designations shall apply to the applications for tax exemption filed after the designation has taken effect.
(e) Designated articles. — Includes any of the following articles or businesses:
(1) Articles of straw, reed and other fibers.
(2) Artificial flowers.
(3) Balls for baseball and other sports.
(4) Bedsprings and mattresses.
(5) Articles made from leather or imitation leather.
(6) Bodies for motor vehicles and trailers.
(7) Candles.
(8) Candy.
(9) Canned, concentrated, preserved or otherwise substantially processed food products, and extracts thereof, so long as each particular industrial unit engaged in such production meets quality standards prescribed by the Commonwealth of Puerto Rico Department of Agriculture. In the event that such standards are not otherwise promulgated by law or regulations, adequate provision therefor shall be made in the decree of tax exemption. The production of crystallized or liquid sugar, molasses and the processing of roasted and ground coffee is excluded from this classification as a designated article.
(10) Ceramic products, including among others, bricks, roof tiles, sanitary ware, tiles and other clay products.
(11) Cigars.
(12) Cigarettes.
(13) Perfumes, cosmetics and other toilet preparations.
(14) Hosiery of all types and of all materials.
(15) Biscuits, crackers and pretzels.
(16) Edible oils and fats.
(17) Fishing tackle, including, but not limited to, nets, seines, lines and harnesses.
(18) Furniture, but not the mere assembly thereof.
(19) Polishing or other processing of diamonds and other precious and semi-precious stones.
(20) Glassware and glass products.
(21) Gloves.
(22) Paper boards and paper pulp.
(23) Rugs, hand woven and machine made.
(24) Shoes and slippers.
(25) Soaps of all kinds and for all uses.
(26) Nutritious pastas (spaghetti, macaroni and the like).
(27) Leather tannings and finishing.
(28) Tin containers and other tinware.
(29) Water and oil paints.
(30) Animal feed in general.
(31) Men’s, women’s and children’s wearing apparel, including but not limited to, dresses, coats, pants, suits, overcoats, sport coats, slacks, shirts of all kinds, skirts, blouses, pajamas, and underwear of all kinds, provided the cutting of material therefor is done in Puerto Rico.
Provided, That the Governor may relieve the exempted business from complying with this condition, whenever he may determine that, in view of the nature of the operations, the labor involved, and the financial difficulties to be confronted by the business, it suits the best interests of the Commonwealth that it be relieved from such condition.
(32) Products of slaughtering operations, including, among others, the products of the slaughtering of fowl and rabbits, and the products of packing houses that use the products of slaughtering operations as raw material as long as each unit engaged in one or more of such operations meets the quality standards prescribed by the Department of Agriculture of the Commonwealth of Puerto Rico. In case such standards have not been prescribed by law or the regulations, adequate provisions therefor shall be included in the tax exemption decree.
(33) Any kind of plantings and cultivation through the process known as hydroponics, provided such operations are carried out under standards and in accordance with the practice established or approved by the Department of Agriculture of the Commonwealth of Puerto Rico.
Any kind of cultivation for the intensive production of mollusca, crustacea, fish or other aquatic organisms through the process known as aquiculture, both in salt and fresh water, provided such operations are carried out under standards and in accordance with the practices established or approved by the Department of Agriculture of the Commonwealth of Puerto Rico.
(34) The publication of books, provided that the printing thereof and the printing and/or paper-bound binding or any other kind of bookbinding is carried out in Puerto Rico. Provided, That when the facilities are also used to produce other types of printing, such as, among others, pamphlets, reviews, newspapers, forms and cards, the industrial unit shall be eligible for exemption only with respect to such part of the taxes set forth in §§ 10012 and 10014 of this title which correspond to the proportion existing between the gross income of the business derived from the printing and binding of books and its total gross income.
(35) Any product manufactured within Puerto Rico on a commercial scale on or before January 2, 1947, and/or for which there existed on said date production facilities in Puerto Rico capable of producing said manufactured product on a commercial scale, but that for the two calendar years immediately preceding the calendar year of 1971, said product had not been manufactured within Puerto Rico on a commercial scale. Provided that the Governor may determine, upon previous consultation with the Secretary of the Treasury and the Economic Development Administrator that the exemption granted for said product shall be in the interest of the Commonwealth of Puerto Rico in view of the nature of the facilities, of the investment, of the number of employees and of the total of the payroll involved in the manufacture of said product.
(36) All kinds of paper boxes, containers and receptacles, except corrugated paper boxes, containers and receptacles.
(37) Distilled spirits produced, rectified or otherwise processed, casked or bottled in Puerto Rico, for export and shipment to the United States if considered as products of Puerto Rico under applicable federal laws. Provided, That [eligibility] for tax exemption pursuant to this chapter shall be:
(A) The income obtained as a result of the increase over the average annual production in proof gallons for the last five (5) years of the business ending on June 30, 1974, and
(B) the real and personal property acquired after June 30, 1975, to be utilized and which are utilized to obtain said increase. The exemption on license fees, excises and other municipal taxes shall be limited to the volume of business resulting from such increase.
The tax exemption thus provided shall be for a fixed term of fifteen (15) years, irrespective of the zone in which the business is established. Provided, further, That if some distilled spirit in particular was not being produced in Puerto Rico during said period of five years prior to June 30, 1974, the production of such distilled spirits shall be eligible for the tax exemption provided by this chapter, if same is for export and shipment to the United States. Distilled spirits hereby designated shall be considered as a manufactured product under the provisions of this chapter.
(38) Beer produced, canned or bottled in Puerto Rico, for export and shipment to the United States if considered a product of Puerto Rico under applicable federal laws. Provided, That eligible for tax exemption pursuant to this chapter shall be:
(A) The income obtained as a result of the increase over the average annual production in proof gallons for the last five (5) years of the business ending on June 30, 1974, and
(B) the real and personal properties acquired on and after June 30, 1975, to be utilized and which are utilized to obtain said increase. The exemption on license fees, excises and other municipal taxes shall be limited to the volume of business resulting from such increase.
The exemption thus provided shall be for a fixed term of fifteen (15) years, irrespective of the zone in which the business is established. Provided, further, That if some particular beer was not being produced in Puerto Rico during said period of five (5) years prior to June 30, 1974, the production of such beer shall be eligible for the tax exemption provided by this chapter, if the same is for export and shipment to the United States. Beer hereby designated shall be considered as a manufactured product under the provisions of this chapter.
(f) Hotel. — Means any building or group of buildings, or any extension thereof that increases the number of rooms of the original project of the establishment by not less than thirty percent (30%), which hotel project or extension has been submitted to the Tourist Development Company and has been approved thereby, appropriately and in good faith devoted to the furnishing of accommodations for pay, primarily to transient guests, in which not less than fifteen (15) rooms are furnished for accommodation of such guests, and having one or more dining rooms where meals are served to the general public; provided such facilities are operated in Puerto Rico under conditions and standards of sanitation and efficiency acceptable to the Governor of Puerto Rico. Hotels are divided as follows:
(1) Tourist hotel. — Means a hotel operated primarily in the interest of the tourist trade and which shall have as an integral part thereof, within the limits of the hotel site, and in proportion to its maximum accommodation facilities, one or more of the following typical tourist attractions:
(A) Beach or lake development, swimming pool, or both, with adequate bathing or other water sport facilities, efficiently to serve its guests.
(B) Rural or semi-urban hotel location, including ample grounds around the hotel structure, and adequate facilities for horseback riding, hiking, game courts or other outdoor sports; and, Provided, [That] the hotel operation is devoted efficiently to serving its guests with such facilities.
(2) Commercial hotel. — Means any hotel, as herein defined, which is not a tourist hotel.
(3) Extension. — The tax exemption to said hotel extension for the period of time determined by this chapter and which shall commence as may be resolved with respect to such extension pursuant to the provisions of § 10012 of this title shall be determined according to the following provisions:
(A) The industrial development income derived from the operation of such extension, for the purpose of its tax exemption under this chapter, shall be that amount which bears, with respect to the total net income of the operations of the hotel the object of the extension, the same proportion which the number of rooms in the extension bears to the total number of rooms in the hotel, including said extension. This paragraph shall not apply in computing said income for those years in which both the hotel or the original establishment already exempt and the extension are enjoying jointly the benefits of the tax exemption under this chapter.
(B) The properties attributable to the extension and subject to the tax exemption shall be determined by the Secretary of the Treasury, who shall assess same to that effect.
(C) The exemption from municipal license tax, fees, and other municipal imposts pertaining to the extension shall be determined on the basis of the proportion established in paragraph (A) of this clause.
(4) Hotel operations; exclusion. — The operation of a casino, gambling hall, or similar activity, in a hotel exempted under this subtitle, shall not be considered an integral part of the operations of the hotel under the exemption nor shall it be covered by the exemptions provided in § 10012 of this title.
(g) Manufactured product. — Means not only all products transformed from raw materials into articles of commerce finished by hand or machinery and agricultural products obtained through the process known as hydroponics and products obtained through the process of aquiculture, but any product with respect to which substantial industrial operations are undertaken in Puerto Rico which, in the judgment of the Governor, merit treatment as a manufactured product within the scope of this chapter because of its nature and extent, or the technology involved, the employment provided, other contribution made or to be made by the operation to the welfare of the Commonwealth of Puerto Rico, or any one or more of such factors. Provided, however, That the operation shall be carried out substantially as originally represented by the tax exemption petitioner, except as the tax exemption grant may be otherwise modified by the Governor in his discretion upon appropriate petition of the grantee. The Industrial Tax Exemption Office shall have authority to draft regulations governing the application of the foregoing definition, and such regulations shall, upon their approval by the Governor, have the force of law, and shall be published in one (1) or more newspapers of general circulation in Puerto Rico. The production obtained from mining operations shall not be considered a manufactured product unless beneficiated or otherwise substantially processed in Puerto Rico directly by the producer or by an independent enterprise.
(h) Industrial unit. —
(1) Means any plant, hydroponics or aquiculture establishment, factory, machine or machine ensemble having a capacity of performing the major functions involved in the production of a manufactured product on a commercial scale.
(2) A plant, factory, machine or machine ensemble may be considered as a separate industrial unit within the meaning of this chapter, even though it may use, in common with other industrial units, certain minor facilities such as, but without limitation, sections of buildings, power plants, warehouses, material conveyors or other minor production facilities.
(3) A plant, factory, machine or machine ensemble may be considered as a separate industrial unit within the scope of this chapter, even though it may use, in common with other industrial units, certain major facilities, provided the Governor of Puerto Rico authorizes the use of such facilities in common. The Governor may grant such authorization whenever he determines, after consulting with the Secretaries of the Treasury, Justice and Labor and the Economic Development Administrator, that such use in common is necessary or convenient for the development of the economy and welfare of the Commonwealth of Puerto Rico because:
(A) It will provide in either or both industrial units increased opportunities for work, and
(B) it will add substantially to the Commonwealth’s net income, and
(C) it will redound in a substantial investment in equipment, machinery and supplies, comparable to the investment in the original unit, less the value of the facilities to be used in common.
(4) In the cases referred to in clauses (2) and (3) of this subsection, the tax exemption enjoyed by the industrial unit which provides facilities to be used in common by other industrial units, shall not extend over longer periods than those prescribed in § 10012 of this title with respect to the facilities so being used in common.
Where the industrial unit providing facilities to be used in common by other industrial units pursuant to clauses (2) and (3) of this subsection does not enjoy tax exemption, but such exemption has been obtained by the unit or units using such facilities, the Governor of Puerto Rico may grant tax exemption with regard to such facilities pursuant to the provisions of this chapter. Provided, however, That the tax exemption in this case shall be limited to a part of the value of such facilities and of the compensation received for their use, in proportion to the use made of such facilities by the industrial unit or units enjoying tax exemption, the determinant factors of such use being, among others, space occupied, time and nature of use, and importance it bears on the industrial unit or units using such facilities.
(5) A substantial expansion of an existing industrial unit may be considered, in the discretion of the Governor of Puerto Rico, as a separate industrial unit and within the meaning of this chapter, and entitled to the exemptions provided under § 10012 of this title, in those cases in which the existing industrial unit and the expansion thereof are so interrelated and integrated among themselves, including common use of facilities of minor or major importance, which would not qualify under the definition of industrial unit according to clauses (1), (2) and (3) of this subsection. Provided, That said expansion shall be considered as a separate industrial unit only when the Governor, after consultation with the Secretaries of the Treasury, Justice and Labor, and the Economic Development Administrator, determines that such expansion is necessary and convenient for the economic development and welfare of the Commonwealth of Puerto Rico, based on the existence of the following factors:
(A) The investment in the original unit exceeds two million five hundred thousand (2,500,000) dollars and the expansion involves an additional minimum investment equivalent to one million (1,000,000) dollars, it being understood that the additional investment shall not cover investment to replace existing property, unless the replacement be to increase the capacity thereof, in which case the difference between the investment in the original property and the investment in the new property shall be considered as the additional investment, and
(B) such expansion will provide greater employment opportunities and will result in a substantial contribution to the net income of the Commonwealth of Puerto Rico.
The industrial development income corresponding to the original industrial unit and that corresponding to each expansion, when the original industrial unit and the expansion or expansions are so interrelated and integrated among themselves as provided in this clause of this subsection, shall be determined for any taxable year by applying one of the following formula:
(A) Investment formula. — Multiplying the total industrial development income of all industrial units that are so interrelated and integrated among themselves, including the original unit and the expansions, by a fraction whose denominator shall be the investment of the original industrial unit used in the production of such industrial development income, plus the investment of all the expansions used in the production of such industrial development income, and whose numerator shall be the investment of each industrial unit in question, i.e., original unit or expansions, as the case may be, used in the production of said industrial development income.
If one or more, but less than the total of the said industrial units so interrelated and integrated among themselves, as provided in this clause, including the original industrial unit and expansions, ceases to be exempt, the industrial development income corresponding to each of said exempt industrial units, i.e., original or expansion, and the income corresponding to each of said non-exempt industrial units, i.e., original or expansion, shall be determined for any taxable year by multiplying the total income of all industrial units that are so interrelated and integrated among themselves as provided in this clause, including the income of the original industrial unit and expansions, exempt and non-exempt, by a fraction whose denominator shall be the investment in said original industrial unit used in the production of such income which is or previously was industrial development income, plus the investment of all said expansions used in the production of such income which is or previously was industrial development income, as the case may be, and whose numerator shall be the investment of each such industrial unit in question, i.e., original unit or expansions, exempt or non-exempt, as the case may be, which is or was used in the production of said industrial development income.
(B) Adjusted income formula. — If the applicant should so request, the Governor of Puerto Rico may, in the exercise of his discretion, authorize that the development income corresponding to the original unit and that corresponding to each expansion or expansions so interrelated or integrated among themselves as provided in this subsection, be determined for any taxable year by multiplying the total industrial development income, including that of the original unit and that of the expansions by a fraction to be determined as follows:
(i) In the case of the first expansion, the denominator of the fraction shall be the adjusted income (as defined below) after the first expansion, and the numerator shall be:
(I) For the original unit, the adjusted income prior to the first expansion. Provided, That in no case shall the fraction so obtained be less than one-third, and
(II) for the first expansion, the difference between the adjusted income prior to the first expansion and the adjusted income after the first expansion. Provided, That in no case shall the fraction so obtained be greater than two-thirds.
(ii) If a second expansion should qualify for exemption under this paragraph, the denominator of the fraction shall be the adjusted income after the second expansion, and the numerator shall be:
(I) For the second expansion, the difference between the adjusted income before the second expansion and the adjusted income after the second expansion, and
(II) for the first expansion, the adjusted income before the second expansion multiplied by the fraction previously determined under paragraph (A) or paragraph (B)(i)(II) both of this clause, depending on which formula was applied in the case of the first expansion.
(III) For the original unit, the adjusted income before the second expansion multiplied by the fraction previously determined under paragraph (A) or paragraph (B)(i)(I) both of this clause, depending on which formula was applied in the case of the first expansion.
(iii) In case a third or subsequent expansion should qualify for the exemption under this paragraph, the fraction to determine the industrial development income corresponding to such expansion, to former expansions and to the original unit shall be determined in the manner provided in subparagraph (ii) of this paragraph.
(iv) For the purposes of this subsection, the term “adjusted income” shall mean the net income obtained by a unit or units during a representative period of operations which shall comprise a minimum of six (6) consecutive months within the eighteen (18) months preceding or within the twenty-four (24) months following the commencement of operations of the expansion to be considered as a separate industrial unit, adjusted by the decreases and increases had in the sale prices and production costs as a result of variation in the direct and indirect costs and other factors arising between the period selected prior to commencement of operations and that selected after commencement of operations.
If the exemption should terminate for one or more, but not for all of the said industrial units interrelated and integrated among themselves as herein provided, the income corresponding to each such industrial unit, exempt or non-exempt, original unit or expansions, shall be determined for any taxable year by multiplying the total income of all industrial units interrelated or integrated among themselves as herein provided, including the income of the original industrial unit and of the expansions, by the fraction determined under subparagraphs (i), (ii) and (iii) of paragraph (B), whichever is applicable.
If one or more, but less than the total of said industrial units, according to this clause, including the original unit and expansions, should cease to be exempt from any tax mentioned in subsection (c) of § 10012 of this title, the basis upon which said taxes are imposed shall be allotted or prorated among said industrial units in proportion to the allotment or proration made among them of the total income of all exempt and non-exempt industrial units, and taxes shall be payable in accordance with such allotment or proration.
(i) Production on a commercial scale. — Means production for sale in the market in the normal course of business in quantities and at prices which justify the operation of an industrial unit as a going business.
(j) Eligible interest, rents and dividends. — Means:
(1) The interest on eligible funds invested by the exempted business in:
(A) Obligations of the Commonwealth of Puerto Rico, or any of its instrumentalities or political subdivisions.
(B) Mortgage loans made by the Housing Bank of Puerto Rico or on mortgages insured by said Bank.
(C) Loans secured by mortgages constituted for financing the construction and/or acquisition of housing in Puerto Rico.
(D) Loans in amounts not less than twenty-five thousand dollars ($25,000) for the construction, expansion, or acquisition of buildings and/or industrial lands, and for the acquisition of machinery and equipment and/or working capital used in exempted manufacturing projects or exempted hotel operations.
(E) Loans used in the financing of maritime operations, directly related to the commerce and the industry of Puerto Rico, including, but without it being understood as a limitation, the money used in the construction, acquisition and operation of all kinds of maritime vessels.
(F) Capital notes authorized by § 2—204 of Title 7.
(G)
(i) Loans granted by the Government Development Bank for Puerto Rico and/or Puerto Rico Industrial Development Company, Commercial Development Company and the Farm Credit Corporation, as well as participations in such loans.
(ii) Loans, participation certificates or obligations of originating companies directly secured by said loans made to small businesses operating in Puerto Rico, engaged in the manufacturing industry, commerce and/or any type of services which are secured by any agency or instrumentality of the Commonwealth of Puerto Rico, or the Government of the United States of America.
(iii) For the purposes of this chapter “small business” is deemed any business qualifying as such under the applicable provisions of the federal act known as the Small Business Act of 1958, as amended.
Under this chapter, the following shall qualify as “originating company”:
(I) Any institution approved by the Small Business Administration (S.B.A.) to grant loans to minority groups. These originating companies are created under § 301-d (MESBIC) of the federal act known as the Small Business Act of 1958, as amended.
(II) Any institutions authorized by the Small Business Administration (S.B.A.) or the Farmers Home Administration (FmHA) to grant loans and which is an investment and/or mortgage originator.
Provided, That the interest derived from the loans qualifying under paragraphs (C), (D), (E) and (F) of this clause, as well as securities which evidence such loans, shall be tax exempt when derived from investments made after October 26, 1973, and shall not be subject to property tax or license fees, excise or taxes imposed by municipalities. Provided, further, That the fact a loan is repaid before its due date will not affect the tax exemption herein provided for. Provided, further, That the expiration of the period of industrial tax exemption of the lender or borrower before the due date of the loan, shall not prevent the interest paid by the borrower and/or derived by the lender from being treated as “eligible interest” under this chapter.
(H) Obligations issued by the Puerto Rico Conservation Trust, as created and operated under Public Document Number 5 of January 23, 1970, executed before Notary Luis F. Sánchez Vilella.
(I) Obligations issued by any subsidiary of the Farm Credit Banks of Baltimore directly or indirectly engaged in financing loans to farms and farmers in Puerto Rico with said funds: including loans to rural residents to finance rural housing, loans to cooperatives owned and controlled by farmers and engaged in marketing or distributing farm produce, the purchase of materials, or to provide services to farm businesses, and the acquisition of loans or discounts of notes previously granted.
(2) Income derived from buildings leased or rented to the Government of the Commonwealth of Puerto Rico for public hospitals, nursing or convalescent homes and related facilities to said hospitals and nursing or convalescent homes, such as nurses homes, cafeterias, laundry services, physical and vocational rehabilitation centers; for public schools and related educational physical facilities, such as libraries, bookstores, residences for professors and students and multiple services such as cafeterias, meeting and recreation centers.
(3) The interest on eligible funds deposited by the exempted business in institutions engaged in the banking business, savings and loan associations, savings banks, and other institutions of a similar nature doing business in Puerto Rico that the Secretary of the Treasury may determine through regulation issued to that effect are eligible to receive such funds.
In issuing the regulations on eligible institutions the Secretary of the Treasury shall take into consideration, among others, the following factors:
(A) That the funds not be reinvested outside Puerto Rico by the institutions receiving them.
(B) That the funds received in deposit by the aforesaid institutions not be channeled to consumer loans and be invested in activities directly tending to increase production, income and employment in the Island, such as loans to commercial, industrial, agricultural and construction enterprises.
In any case in which the Secretary of the Treasury determines that an institution has ceased to be eligible to receive these funds, such determination shall not preclude that the interest accrued on eligible funds deposited prior to the loss of eligibility of the institution continue to be treated as “eligible funds” under this chapter. The Secretary of the Treasury shall have power to penalize the institution for noncompliance with the regulations prescribed.
For the purpose of this subsection, “eligible funds” are those funds of an exempted business in which the majority interest is directly or indirectly held by foreign corporations and/or non-residents of Puerto Rico, which funds are derived from and have been generated by the activity which gave rise to its tax exemption under this chapter, in addition to the interest, revenue or income which may have been received or accrued on said exempted funds during the time they have been invested in Puerto Rico or abroad, and the interest or other income described in this subsection.
Provided, That for the purposes of this clause, eligible funds shall only be those in excess of the average balance of funds which the exempted business may have kept in time deposit in the banking and savings institutions in Puerto Rico during the three (3) years preceding October 31, 1974.
(4) The dividends derived from eligible funds invested in preferred shares of banking institutions organized under the laws of Puerto Rico.
(5) Except as provided for in § 10040 of this title, income obtained from the investments which qualify under this subsection, as well as the securities attesting to such investments, shall be exempt from income tax and from the payment of municipal property, patent, and excise taxes as provided for in § 10011 of this title.
(k) Guesthouse. — The term “guesthouse” shall mean any building, part of a building or group of buildings principally operated in the interest of tourism and any extension thereto which increases by fifty percent (50%) or more the number of rooms if the guesthouse, as defined, has less than fifteen (15) rooms, and by thirty percent (30%) or more the number of rooms if the guesthouse has more than fifteen (15) rooms and up to the maximum authorized by regulation to be promulgated by the Tourist Development Company in accordance with § 671g of Title 23. The guesthouse shall have as a minimum seven (7) lodging facilities, to be rented mainly to transit guests, and any other facilities and services to be determined by said regulation. Provided, That the guesthouse shall have the necessary rooms to be used as the dwelling of the owners or managers thereof. The guesthouse project or its extension must be submitted for the approval of, and shall be approved by, the Tourist Development Company in order to qualify under the provisions of this chapter.
The guesthouse may be established in an urban zone or in a rural zone.
The tax exemption of any enlargement of the guesthouses for the periods of time fixed in this chapter, and which shall begin as decided in connection with each one of such enlargements in accordance with the provisions of § 10012 of this title, shall be determined in accordance with the following provisions:
(1) The industrial development income derived from the operation of such enlargement for purposes of its tax exemption under this chapter shall be such amount that maintains with respect to the total net income of the operations of the guesthouse, the object of the enlargement, the proportion existing between the number of rooms in the enlargement and the total number of rooms in the guesthouse, including said enlargement. This paragraph shall not be applied to estimate said income during those years where both the guesthouse or original establishment already exempt, as well as the enlargement, are jointly covered by the tax exemption under this chapter.
(2) The properties attributable to the enlargement and subject to tax exemption shall be determined by the Secretary of the Treasury, who shall determine its appraisal for such purposes.
(3) The municipal business license, fees and other municipal taxes corresponding to the enlargement shall be determined on the basis of the proportion fixed in clause (1) of this subsection.
(l) Definitions of other terms. — The other terms employed herein, unless otherwise specifically provided, shall have the same meaning as in a similar context in the tax laws in force in Puerto Rico and the regulations issued thereunder.
History —June 13, 1963, No. 57, p. 86, § 2; June 26, 1964, No. 99, p. 313, §§ 2, 3; June 26, 1964, No. 100, p. 317; June 28, 1966, No. 129, p. 405, §§ 1, 2; June 28, 1968, No. 155, p. 489, § 1; Apr. 21, 1970, No. 18, p. 38; June 8, 1972, No. 9, p. 364, §§ 2-5; June 15, 1972, No. 19, p. 400, §§ 4-6; June 8, 1973, No. 128, p. 516, §§ 3, 4; Oct. 26, 1973, No. 3, p. 856, § 2; May 10, 1974, No. 29, Part 1, p. 167, §§ 1, 2; July 23, 1974, No. 178, Part 2, p. 39, § 2; July 23, 1974, No. 237, Part 2, p. 223; Nov. 14, 1974, No. 5, Part 2, p. 723, § 2; May 16, 1975, No. 18, p. 32; June 30, 1975, No. 91, p. 282, § 2; July 1, 1975, No. 144, p. 432; May 27, 1976, No. 57, § 2; June 24, 1977, No. 107, p. 271, § 2; June 27, 1977, No. 120, p. 307, §§ 3, 4; July 20, 1979, No. 166, p. 425, § 2; June 1, 1984, No. 43, p. 112, § 2; Nov. 19, 1993, No. 95, § 1.