P.R. Laws tit. 13, § 10027
(a) Persons qualifying for exempt distributions. — The distribution of dividends or profits by a corporation or partnership which is an exempted business, or by a corporation or partnership that is a partner of an exempted business, shall be exempt from income tax in the same total or partial proportion in which the industrial development income is exempted from taxes pursuant to § 10026 of this title if made from the industrial development income accumulated after the payment of the tax, if any, provided by this subtitle or by Act June 29, 1954, No. 91, provided such accumulated earnings have been placed, invested and maintained for the terms, in the percentages and in the activities provided in subsection (h)(1) of this section and paid to the following stockholders or partners:
(1) Persons residing in Puerto Rico; or
(2) persons not residing in Puerto Rico who in the country in which they reside are not under the obligation to pay any tax on such distributions; or
(3) persons not residing in Puerto Rico who, on account of the laws of the country where they reside cannot take, as a deduction from income or as credit against the tax payable in said country on the dividend distribution, the tax which would be imposed on them in Puerto Rico on the same, or
(4) persons not residing in Puerto Rico who, on account of the laws of the country where they reside, can only take a partial deduction from income or as a credit against the tax payable in said country on the distribution of dividends or profits, the tax which would be imposed on them in Puerto Rico on the same. The exemption provided in this subsection shall apply only to such portion of the income tax which may be imposed in Puerto Rico on the distribution of dividends or profits as may not be deductible from the income or creditable against the tax to be paid in said country on such distribution.
Any person desiring to avail himself of the provisions of the preceding clauses (3) and (4) of this subsection shall present to the Secretary of the Treasury a certified or authenticated copy, in Spanish or English, of the laws or regulations in force in the country where he resides, specifically indicating the provisions of such laws or regulations that are applicable to his case, with any other information or evidence showing that said person qualifies under the above clauses (3) and (4) of this subsection.
(b) Withholding at source on distributions paid to United States or foreign stockholding corporations. — Notwithstanding the provisions of subsection (a) of this section or by law, in the case of distributions covered under said subsection and which are paid to shareholding corporations organized under the laws of any state of the United States of America or under the laws of a foreign country, a tax equal to ten percent (10%) of said distribution shall be imposed upon, collected and be paid by said shareholding corporations, in lieu of any other tax imposed by law, if any. Except as provided in clause (4) of this subsection, the exempted business shall pay five percent (5%) on the amount of the industrial development income generated during the year in advance, regardless of the year in which the distribution is made. This five percent (5%) shall be paid as provided in clause (1) of this subsection. In the event that the tax to be paid on the industrial development income dividend or profit distributions is greater than the five percent (5%) paid in advance on the distributed income, the exempted business shall deduct and withhold at source, and report and remit to the Secretary, the amount of the tax in excess of said five percent (5%), as established in Act June 29, 1954, No. 91. The exemptions provided by §§ 26(a)(1)(B) and (C), and 231(a)(2)(A) and (B) of Act June 29, 1954, No. 91, as amended, shall apply only to those distributions of industrial development income accrued during those taxable years commencing prior to January 1, 1993. The alternate tax provided in § 231(a)(2)(D) of Act June 29, 1954, No. 91, as amended, shall apply to distributions of industrial development income accrued under this chapter pursuant to the provisions of said section. Provided, That what is established in § 231(a)(2)(D) of Act June 29, 1954, No. 91, shall apply to every foreign corporation. The exemption provided in § 22(b)(7) of Act June 29, 1954, No. 91, as amended, shall apply to distributions of dividends from the interest described in said section.
(1) For those tax years beginning after December 31, 1992, the exempted business shall make a yearly estimate, report and remittance to the Secretary of the tax to be paid in advance provided for in this subsection through an estimated tax return. This return shall be filed in addition to the estimated tax return provided for in Act June 29, 1954, No. 91, but it will be subject to the provisions of § 61 of Act June 29, 1954, No. 91, § 61, as amended, except that for the first tax year beginning after December 31, 1992, the provisions of subsection (j)(4)(A) of said section shall not apply. Said payment shall be remitted by means of a check separate from any other estimated tax.
For the purpose of this clause, the tax estimate shall be made on the basis of the net industrial development income for each year after payment of the income tax provided by law, plus the income received during the year on account of those investments described in § 10025(j) of this title, except for the interest on obligations issued by the Commonwealth of Puerto Rico, its instrumentalities or political subdivisions, and the payroll deduction provided for in § 10026 of this title to which it may have a right and which would have been estimated for the particular tax year, and any other adjustments needed to determine the industrial development income available for distribution.
(2) Any insufficiency in the payment of the tax paid in advance shall be covered by means of a separate check at the time the income tax return for the exempted business is filed for that particular tax year.
(3) Any excess in the tax payment shall be credited against the estimated tax as provided for in clause (1) of this subsection corresponding to the following tax year.
(4) In the case of the following exempted businesses, the tax provided in this subsection shall be deducted and withheld at source when the exempted business makes the distribution, and reported and remitted to the Secretary of the Treasury, as established in Act June 29, 1954, No. 91:
(A) An exempted business in which fifty percent (50%) or more of all its shares are held by individuals.
(B) An exempted business which generates a yearly net industrial development income of less than one million dollars ($1,000,000).
(C) An individual exempted business.
(D) A business exempted under §§ 10025(e)(5), (12), (20), (26), or 10026(n) of this title.
(5) The provisions of this subsection shall not apply to those exempted businesses whose exemption decree specifically provides and establishes special rules for the distribution and taxation of its industrial development income, unless said exempted businesses voluntarily choose to be governed by these provisions. In those cases in which special distribution rules cover only a specific time period, the distributions of industrial development income accrued after said period shall be governed by the provisions of this subsection.
(c) Alternate distribution rule for certain stockholders. — That part of any industrial development income and/or property that the exempted business chooses not to distribute or pay under the provisions of § 10029 of this title, or as a distribution under subsection (a) of this section, may be distributed, at the option of the exempted business, as a distribution of industrial development capital assets under this subsection, without considering or reducing the capital assets base of the shareholder or partner. As a result of said selection, a tax equal to ten percent (10%) of said distributions shall be imposed on and collected from the persons listed in subsection (a) of this section, and who shall pay it in lieu of any other tax imposed by law, if any. The exemptions provided in §§ 26(a)(1)(B) and (C) and 231(a)(2)(A) and (B) of Act June 29, 1954, No. 91, as amended, shall only be applicable to the distributions of industrial development income accrued during the taxable years commencing prior to January 1, 1993. The alternate tax provided in § 231(a)(2)(D) of Act June 29, 1954, No. 91, as amended, shall apply to distributions of industrial development income accrued under this chapter pursuant to the provisions of said section. Provided, That what is established in § 231(a)(2)(D) of Act June 29, 1954, No. 91, as amended, shall apply to every foreign corporation. The exemption provided for in §§ 22(b)(7) of Act June 29, 1954, No. 91, as amended, shall apply to the distributions of dividends from the interest described in said section.
The exempted businesses which avail themselves of the provisions of this subsection shall be subject to the provisions of subsection (b) of this section in reference to the advanced payment of the tax on dividend distributions.
The total amount of the tax in excess of the amount paid in advance shall be deducted and retained at source and informed and remitted to the Secretary as established in Act June 29, 1954, No. 91.
The exempted business shall notify the Secretary in writing by means of an information return as to its choice for the distribution of dividends or profits from its net industrial development income under the provisions of this subsection, as well as to the nature and the total amount of said distribution, the year of accrual of the net industrial development income to be distributed and the type of dividend. This notice shall be issued jointly with the tax retention provided for in the preceding paragraph.
In case the exempted business fails to comply with the notice requirement established in the preceding paragraph as to its choice for the distribution of dividends pursuant to this subsection, the dividend distribution effected shall be subject to a tax of fifteen percent (15%) of the total amount of the amount distributed even when it has complied with the requirements established in this section and/or subsection (h)(1) of this section. This tax shall be subject to the interest, surcharges and penalties determined pursuant to the provisions of Act June 29, 1954, No. 91, as amended, set from the date in which the exempted business should have issued the notice required by this subsection.
(d) [Attribution] of exempt distribution. — Any distribution of dividends or profits made by a corporation or partnership which is or has been an exempted business shall be considered as made from industrial development income, provided that on the date of distribution, the latter does not exceed the undistributed balance of its earnings or profits accumulated from its industrial development income, unless at the time of the declaration, the corporation or partnership shall choose to distribute the dividend or profit, in whole or in part, from other earnings or profits. The amount, year of accumulation and nature of the dividend or profit made from the industrial development income shall be that designated as such by the corporation or partnership in a written notice served together with payment thereof on its stockholders or partners and on the Secretary of the Treasury through an informative statement. The Secretary of the Treasury shall prepare the regulations needed to carry out this provision.
In the cases of corporations or partnerships which on the date of commencing of operations of their exempted business have accumulated earnings or profits, the distributions of dividends or profits made as of said date shall be considered as made from the undistributed balance of said earnings or profits, but after the latter is exhausted as a result of such distributions, the provisions of the preceding paragraph shall be applicable.
(e) Sale or exchange of stock of the exempted business during its exemption period. — No profit or loss whatsoever shall be recognized if the shares of a corporation which is an exempted business are sold or exchanged after the date of commencement of operations of the exempted business and on or before the termination date of the tax exemption granted to the exempted business, provided the seller is not required to pay any tax on such sale or exchange in any jurisdiction outside of Puerto Rico.
Profits or losses shall be recognized in the event the sale or exchange takes place after the termination date of the exempted business’ exemption. The profits in that case shall be the surplus of the amount received over the base established by subsection (f) of this section, and the loss shall be the excess of said base over the amount converted, but shall be recognized up to the limit provided by the Income Tax Act in force on the date the transaction takes place.
(f) Determination of base on the sale or exchange of stock of the exempted business. — To determine the profit or loss to be recognized under the provisions of subsection (e) of this section, the greater of the following bases shall be used:
(1) The book value in the corporation’s books of such shares on the date the exemption terminates, less the amount of any tax exempt distributions received on said shares after said date, or
(2) the cost of said shares, less the amount of any tax exempt distributions received on same before and after the date the exemption terminates.
(g) Exempted distributions by corporations or partnerships. — In those cases in which one or more corporations or partnerships, and these in turn, directly or indirectly (through other intermediate corporations or partnerships), own shares and/or are participants in corporations or partnerships that are or were exempted businesses, the distributions (such as dividends, as distribution of profits or as distribution in liquidation) made by the corporation or partnership that is or has been an exempted business, which come from industrial development income, shall be subject to the payment of income taxes (if any were applicable) only once, which shall be when said distributions are received by the stockholders or partners of the corporation or partnership which is or has been an exempted business and which has generated said industrial development income.
Said distributions shall retain their nature as industrial development income, and their respective characteristics of having met the reinvestment requirements under subsection (h) of this section. All subsequent distributions made by any corporation or partnership, from industrial development income distributed by that corporation or partnership which is or has been an exempted business, shall not be subject to the payment of any income taxes whatsoever. Provided, That in the cases of exempted business organized as partnerships, joint ventures, or similar entities formed by two or more corporations, partnerships or a combination thereof, the member corporations or partnerships shall be deemed to be businesses which are or were exempted, and therefore, the only distributions of industrial development income that shall be subject to the payment of income taxes, if any, are those made by said member corporations or partnerships. Provided, further, That the profits earned in the sale, or exchange, or other disposition of:
(1) Corporate stocks or shares in partnerships which are or have been exempted businesses;
(2) shares in joint ventures and similar entities made up of two or more corporations, partnerships, individuals, or a combination thereof, which are or have been exempted businesses, and
(3) corporate stocks or shares in partnerships which directly or indirectly (through intermediate corporations or partnerships) are owners of the entities described in clauses (1) and (2) of this subsection shall be subject to the provisions of subsection (e) of this section when said sale, exchange, or other disposition is made, and all subsequent distributions of said profits, whether as dividends or as distribution in liquidation, shall not be subject to the payment of any income taxes whatsoever.
(h) Credit for certain distributions. —
(1) Notwithstanding the provisions of subsections (b) or (c) of this section, in the case of distributions covered under said subsections (b) or (c) of this section, they may be distributed subject to a credit equal to fifty percent (50%) of the tax and the corresponding withholding at source provided in said subsections (b) and (c) of this section, provided the exempted business meets all of the following provisions:
(A) At any time from the beginning of the taxable year, but no later than ninety (90) days after the date of filing the corresponding income tax return for each taxable year, the exempted business shall place, invest and maintain, for a fixed term of not less than five (5) years, at least fifty percent (50%) of its net industrial development income for each year after taxes as provided by law, in an activity covered by the provisions of § 10025(j) of this title, or in the payment of the balance of the principal of a debt incurred by the exempted business for the acquisition of property to be devoted to industrial development and/or in the acquisition of property devoted to industrial development. At the end of the investment period of said accrued earnings, as provided in this subsection, the exempted business shall continue to accrue them according to law, or distribute them at later dates subject to the credit provided in this subsection. However, when the investment is made in obligations of the Commonwealth of Puerto Rico, or any of its instrumentalities or political subdivisions, with a maturity date of not less than five (5) years from the date of investment, and such obligation is redeemed, withdrawn or prepaid by the government entity before five (5) years from the date of the investment, the exempted business shall then distribute the proceeds received on any date, subject to the credit provided in this subsection. When the investment is in corporate shares or stocks in partnerships that own or operate tourist businesses exempted under §§ 6001 et seq. of Title 23, known as the “Puerto Rico Tourist Development Act of 1993”, and said investment constitutes an eligible investment according to subsection (n) of § 2 of said Act, it shall be understood that the investment is made for a fixed term of five (5) years for the purpose of the credit provided in this paragraph and if said share or stock is withdrawn or redeemed for causes beyond the control of the investor before said term of five (5) years, it shall be understood that the term of the investment had been met, provided the exempted business reinvests in eligible investments under § 10025(j) of this title, a sum equal to the amount received in exchange for the eligible investment, up to the limit of total of the original investment, on or before ninety (90) days counted from the date of redemption or withdrawal for the remainder of the original investment period.
(B) The remaining fifty percent (50%) of the net income for each year after the payment of the other taxes provided by law may be distributed subject to the credit provided in this subsection during the following years, at an annual rate not greater than ten percent (10%) of the total of such income for each of the following years. The amounts that are available annually may be accumulated according to the law and distributed on subsequent dates subject to the credit provided in this subsection.
(C) Notwithstanding the provisions of the paragraph (B) of this clause, the Secretary of the Treasury, the President of the Government Development Bank for Puerto Rico and the Economic Development Administrator shall form a Special Regulating Board for Exempted Distributions presided over by the Secretary of the Treasury, which may authorize the distribution of an amount greater than the ten percent (10%) provided by said paragraph (B), and up to fifty percent (50%) of the net income of each year, after paying the other taxes provided by law, subject to the credit provided by this subsection and under the terms and conditions established by the Board. The Special Regulating Board for Exempted Distributions shall adopt a regulation for the implementation of the accelerated repatriation of industrial development income. This regulation shall provide the grounds on which repatriations shall be allowed, from time to time, with the understanding that any of the Board’s decisions shall apply to all firms operating under this chapter.
To carry out the provisions of this paragraph, the Special Regulating Board for Exempted Distributions shall take into consideration those factors that affect or may affect the social and economic development of Puerto Rico, such as the availability of money in the general economy, the amount of eligible funds accumulated, the use being given to the eligible funds, the economic and industrial needs of Puerto Rico, the prevailing cost in the market for the money available to finance different lines or activities, or any other factors which may affect the public policy of keeping a balance between the economic, industrial, social and fiscal development of the People of Puerto Rico.
(2) In case the exempted business does not comply with its obligation to maintain fifty percent (50%) of such net income invested in accordance with the provisions of clause (1)(A) of this subsection, or distributes income in excess of the provisions of clause (1)(B) of this subsection, any distribution of such income which is affected by such noncompliance in any taxable year shall be subject to the tax and the corresponding [“withholding at source”] provided in subsections (b) and (c) of this section, from the date of the disqualified payment or any unqualified distribution, according to the provisions of Act June 29, 1954, No. 91.
(3) Once any amount of industrial development income of the exempted business qualifies for distribution under the provisions of this subsection, any distribution of industrial development income shall be considered to be made first out of such income accumulated for distribution subject to the credit provided in this subsection, unless the exempted business files a sworn statement indicating its choice to have the distribution made wholly or partially out of other earnings or profits, as provided in subsection (d) of this section, together with the withholding of the tax applicable at the time of reporting and remitting the same to the Secretary of the Treasury, as established in Act June 29, 1954, No. 91.
(4) The credit granted by this subsection cannot be used to reduce the current payment of the income tax of the industrial development income and of the tax withheld at source below an effective rate of five percent (5%) on the industrial development income before the withholding and payment of said taxes. In any case that the credit granted by this subsection could cause a tax payment below the effective rate of five percent (5%) on the industrial development income before the withholding and payment of said taxes, said credit shall be limited to that amount or percentage which yields an effective rate of no less than five percent (5%).
(5) [Exception]. — The credit that is granted under this clause shall be one hundred percent (100%) in those cases in which the distributions of dividends originate from the net earnings from industrial development each year, invested in the eligible activities described in § 10025(j)(1)(C) of this title concerning loans established for the construction, acquisition and improvement of housing in Puerto Rico, whose construction was begun after December 31, 1984 and before July 1, 1988.
(6) The Secretary of the Treasury shall prepare the regulations needed to carry out the provisions of this subsection.
History —June 2, 1978, No. 26, p. 55, § 4; July 20, 1979, No. 176, p. 460, § 3; Sept. 11, 1979, No. 2, p. 991; June 18, 1980, No. 150, p. 675, § 3; May 30, 1984, No. 37, p. 98, § 1; May 10, 1985, No. 6, p. 26; Nov. 19, 1993, No. 94, § 3; Jan. 8, 1994, No. 7, § 3; Sept. 27, 1994, No. 110, § 5.