P.R. Laws tit. 13, § 10039
For purposes of this chapter, the following terms, phrases and words shall have the meaning expressed below:
(a) Industrial development income. — Shall be:
(1) The net income of an exempted business derived from the operations declared exempt by this chapter.
(2) The income from certain investment activities eligible under subsection (j) of this section.
(3) The net income from the sale of patents, royalties or any other right to receive income related to activities or intangible assets resulting from the operations declared exempt by this chapter.
(4) The income obtained by the exempted business as a result of the foreign currency exchange at a given moment and that is attributable to the sale of its exempted products in foreign countries.
(5) The income resulting from the distribution of dividends or profits by a corporation or partnership that is a constituent of an exempted business and that is attributable to industrial development income derived by said exempted business.
(6) The income obtained from business interruption insurance, provided there is no reduction in the employment level of the exempted business as a result of the event that gave rise to the collection of such income.
(b) Property devoted to industrial development. — Shall mean:
(1) Real property, including land and improvements or portions thereof, as well as any addition equivalent to not less than twenty-five percent (25%) of the area of the main plant, devoted to the operation of an industry or an agroindustrial business, as defined by regulations under this chapter, that is made available to and used or owned by an exempted business in its development, organization, construction, establishment or operation.
(2) An accumulation of machinery and equipment necessary or convenient for an exempted business in the activity for which the exemption is granted which is owned, installed or otherwise used under contract by said exempted business.
Nothing provided in this subsection shall apply to contracts denominated as financing leases.
(c) Exempted business. — Shall mean a business established or to be established in Puerto Rico by a natural or juridical person or combination thereof, whether organized under a common name or not, which has been granted tax exemption under the provisions of this chapter or under former acts, but excluding hotels, inns (paradores) and other special facilities that are exempted businesses under former acts.
(d) Eligible business. — Shall mean:
(1) Any industrial unit having as its objective the production of a manufactured product on a commercial scale which was not in production in Puerto Rico before January 1, 1947, or if it was, which has not been produced on a commercial scale during the three (3) calendar years preceding the date of the application for tax exemption for said manufactured product.
(2) Any bona fide industrial unit of a permanent nature established for the production of an article designated under this chapter, provided that it produces a substantial amount of the same on a sustained basis within a reasonable period of time as recommended by the Administrator.
(3) Any industrial unit that would normally be deemed an eligible business under the preceding clauses, but that due to foreign competition caused by low production costs and other factors is not financially able to carry out the complete manufacturing operation in Puerto Rico, since it requires some processing or finishing of the product outside of Puerto Rico. For the purposes of this subsection, the Secretary of State may determine that said industrial unit is an eligible business in view of the nature of the facilities, the investment, the number of jobs to be created in Puerto Rico, the total payroll and any other special factors that so justify it.
(4) Any service unit that has as its objective the production on a commercial scale in Puerto Rico of any type of service designated for foreign markets provided that within a reasonable period of time it produces in a continuous manner a substantial quantity of such services as recommended by the Administrator. In the case of service units that have been in operation in Puerto Rico prior to filing their application, the exemption shall only be granted on the income obtained as a result of the increase over the average annual production of such services during the three (3) taxable years preceding the date of filing of the application.
For the purposes of determining the above, the production of any predecessor business shall be taken into account. For these purposes, a “predecessor business” shall include any business related to the applicant business even though it was not previously exempt and regardless of whether it was operating under another corporate name or under other ownership.
(5) Property devoted to industrial development.
(6) The breeding of animals for experimental use in laboratories for scientific and medical research, and similar uses.
(7) Scientific or industrial research and development laboratories for developing new products or industrial processes, or for their improvement.
(8) The filming and production of short and feature-length films, provided that the Secretary of State does so determine, on the recommendation of the agencies which issue reports on tax exemption, that the activities related to said filming and production will benefit the economy in general. The Secretary of State shall establish the terms and conditions in the decree, such as limiting the period and percentage of exemption, the taxes to be covered and the employment requirements that are necessary and convenient pursuant to the purposes of this chapter.
(9) Any industrial unit established after the approval of this act that has as its principal objective the production of energy on a commercial scale for consumption in Puerto Rico using local renewable resources, such as vegetation and other forms of biomass, solid waste, direct solar and wind energy, subject to the condition that the Office of Energy shall previously approve such unit. In case of units that sell energy to the Electric Power Authority or replace substantial amounts of energy purchased from it, the prior approval of the Authority shall also be required.
(10) A business engaged in the insurance and/or reinsurance of risks related to exempt businesses.
(11) Partial recycling activities that include the collection, separation, grinding, compacting and storing of recyclable materials, as defined in § 1320(ñ) of Title 12, that do not involve a transformation of said materials or the manufacturing of new products, taking in account the stages or degrees of complexity of the process to be performed. Provided, That the Governor may grant up to ninety percent (90%) tax exemption upon the recommendation of the Solid Waste Authority and the other agencies concerned with tax exemption applications.
(e) Designated articles. — This term includes the following manufacturing operations:
(1) Articles of straw, reed and fibers, as well as ceramics and artificial flowers.
(2) Sporting goods and fishing tackle.
(3) Bedsprings, mattresses and rugs.
(4) Leather or imitation leather goods, as well as leather tanning and finishing.
(5) Bodies or chassis for trailers.
(6) Candles, soaps and paints of all kinds.
(7) Food products that are substantially processed, which would have been eligible for tax exemption under former laws or which had not been produced on a commercial scale in Puerto Rico before January 1, 1978.
(8) Products derived from slaughtering operations including, among others, the products of the slaughtering of poultry and rabbits, and packing-house products that use the products derived from slaughtering operations as raw material.
(9) Cigars and cigarettes.
(10) Perfumes, cosmetics and other toilet products.
(11) Wearing apparel, provided the cutting is done in Puerto Rico, unless the Secretary of State exempts it from this requirement for just cause; hosiery, gloves and footwear.
(12) Edible oils and fats.
(13) Polishing and other processing of precious and semi-precious stones.
(14) Glass products and metal containers.
(15) Paperboard, paper pulp and boxes, cardboard containers and other receptacles, except corrugated cardboard, boxes, containers and receptacles produced from the same.
(16) Animal food.
(17) The publishing of books provided they are printed in Puerto Rico, as well as the printing and binding of books. When the facilities are also used to produce other types of printing, such as brochures, magazines, periodicals, forms and cards, among others, the industrial unit shall be eligible for exemption only on the net income of the business derived from the publication, printing and binding of books.
(18) Distilled spirits for export and shipment to the United States if deemed as products of Puerto Rico under applicable federal laws. The applicable period shall be fifteen (15) years, regardless of the area in which the industrial unit is located. If they were produced in Puerto Rico before 1975, the following shall be eligible for tax exemption:
(A) The income obtained as a result of the increment over the average annual production in proof gallons, for the five (5) years of the business ending on June 30, 1974;
(B) the real and personal property acquired after June 30, 1975, which are used to obtain such increment, and
(C) the license fees, excises and other municipal taxes, applicable to the volume of business resulting from such increment.
(19) Production of sand derived from industrial processes by crushing stone which meets the standards of applicable specifications.
(20) Commercial fishing operations to supply raw material to the canneries or packing-houses established in Puerto Rico, and as raw materials for the production of other products in Puerto Rico.
(21) All types of furniture, as well as articles of wood which are carved, manufactured or lathed, including souvenirs, decorations, balustrades and other articles of wood for decorative or functional use.
(22) Processing, dubbing and editing of short or feature-length films.
(23) Planting and cultivation through the process of hydroponics, as well as the intensive cultivation of mollusks, crustacea, fish or other aquatic organisms through the process of aquaculture provided that these operations are undertaken under standards and procedures approved by the Department of Agriculture of the Commonwealth of Puerto Rico or by the Corporation for the Development and Administration of Marine, Lacustrine and Fluvial Resources, as the case may be.
(24) Transformed products derived from recycled materials that have been recovered in Puerto Rico, subject to the condition that they contribute to the objective of encouraging the recycling industry in Puerto Rico, upon the endorsement of the Solid Waste Authority and the other agencies concerned with tax exemption applications. By way of exception, in the event that the recyclable materials available in Puerto Rico are not sufficient to satisfy the demand of said products required for the manufacturing operation, the Governor, upon the recommendation of the Solid Waste Authority and the other agencies concerned, may authorize the applicant industrial unit to import recyclable materials to be able [to] fill its needs, as if they had been recovered in Puerto Rico. The Solid Waste Authority shall establish regulations for such purposes which shall include a process of registration and certification with regard to the availability of recyclable materials in Puerto Rico.
(f) Production on a commercial scale. — Shall mean production for sale in the market during the normal course of business in quantities and for prices that justify the operation of an industrial or service unit as a going concern.
(g) Manufactured product. — Shall include products transformed from raw material into articles of trade, designated articles and any product with regard to which substantial industrial operations are undertaken in Puerto Rico which, in the judgment of the Secretary of State, merit treatment as a manufactured product under this chapter, due to their nature and extent, the technology involved, the substantial employment provided or any other benefit that the operation represents for the welfare of the Commonwealth of Puerto Rico.
Subcontracting for the production in Puerto Rico of one or several products or subcontracting of all or part of the manufacturing process of products covered under the decree for a tax-exempted business, shall be permitted, and the industrial development income from the sale of those products manufactured in Puerto Rico by subcontracting shall be exempt under the terms and conditions of the decree of the exempted business, provided the Secretary of State previously determines that such subcontracting will be in the best interests of the Commonwealth, considering the factors set forth in the preceding paragraph.
(h) Industrial unit. — Shall mean:
(1) A plant, factory, machinery or combination of machinery and equipment capable of performing the major operations involved in the production of a manufactured product or of a designated article on a commercial scale, even though it uses certain other minor facilities in common with other industrial units such as sections of buildings, power plants, warehouses, material conveyors or other production facilities of lessor importance, or undertakes certain industrial operations outside of said industrial unit.
Subcontracting for production in Puerto Rico of one or several products, or subcontracting all or part of the manufacturing process of products covered under the decree of an exempted business, shall be deemed to be in accordance with the provisions of this subsection, provided the Secretary of State determines that such subcontracting shall result in the best interests of the Commonwealth, considering the terms and conditions established in its decree.
(2) An industrial unit may use other major production facilities in common with other industrial units when the Secretary of State determines that such use in common is necessary and convenient for the industrial and economic development of the Commonwealth of Puerto Rico, in view of the nature of the operations, the additional investment and the number of employees involved.
(3) Any exempted business which establishes an eligible business to manufacture an article which is separate or different from the one produced by said exempted business, with the machinery and equipment needed for an efficient operation in addition to that used in any other operation that has enjoyed or is enjoying exemption, with an accounting system that reasonably reflects the operations of said eligible business in accordance with generally accepted accounting standards and principles.
(i) Service unit. — Shall mean a bona fide office, business or establishment, including its equipment and machinery, with the capacity and expertise needed to render a service designated for markets outside of Puerto Rico on a commercial scale, if in the judgment of the Secretary of State, such designated service complies with the provisions and purposes of this chapter, considering the nature of the service, the knowledge and technology required, as well as the contribution the activity will make to the development of human resources in Puerto Rico and any other benefit that the service unit represents, for the welfare of the Commonwealth of Puerto Rico. It is further provided that no less than eighty percent (80%) of the employees, technicians and professionals of the service unit shall be residents of Puerto Rico.
It shall be understood that the service is rendered for markets outside of Puerto Rico even when the service is provided to another firm established in Puerto Rico, which is the one that ultimately exports the product subject to the designated service.
Service units for markets outside of Puerto Rico may operate in conjunction with the service rendered for the local market, provided it can show the income derived from sources outside Puerto Rico to the satisfaction of the Secretary of the Treasury such income derived from sources outside of Puerto Rico by means of accounting methods that can reasonably reflect said transactions.
Designated services shall include any of the following economic activities:
(1) Commercial and mercantile distribution.
(2) Investment banking and other financial services.
(3) Advertising and international public relations, excluding any income derived from contracts with the Commonwealth of Puerto Rico, its agencies, departments, instrumentalities and municipalities.
(4) Economic, scientific or management and auditing consulting.
(5) Commercial art and graphic services.
(6) Insurance and reinsurance.
(7) News syndicates.
(8) Mail order sales.
(9) Assembly, bottling and packaging operations for export.
(10) Centers for electronic processing of information.
(11) Repair and general maintenance services of air and maritime vessels as well as any type of machinery and equipment, including electric, electronic and watch repair equipment.
(12) The production of engineering and architectural designs and plans and related services to be used in the construction of projects to be located outside of Puerto Rico.
(13) Photographic, dental, optical and ophthalmological laboratories.
(14) Prefabricated houses of any type of material.
(15) International trade centers mainly devoted to provid[ing], by means of rental fees, charges for services or any other type of agreement, space and services such as secretarial, translation, data processing, communications and marketing services and other consulting services to enterprises engaged in, or otherwise related to, the purchase and exporting of products or rendering of services for markets outside of Puerto Rico, including export and marketing companies, adjunct and commercial consulates and government agencies responsible for foreign trade and exchange and exhibition centers for products and services.
The Governor, from time to time, and with the prior favorable recommendation of the Administrator and the Secretary of the Treasury, through an Executive Order, may designate as service units other service industries which merit to be included under this chapter, when he/she determines that such a designation shall be in the best interests and the economic and social welfare of the Commonwealth considering the demand that may exist for such services outside of Puerto Rico, the total number of jobs to be created, the payroll and the investment that the service unit would represent in Puerto Rico, or any other additional factor that merits special consideration.
The designations thus provided shall be effective from the date of the Governor’s Executive Order and shall be forwarded to the Legislature to be ratified at the beginning of its next regular session. Said designations shall be deemed to have been ratified after thirty (30) days from their filing if the Legislature has not acted on them. In case they are disapproved, they shall cease to be effective on the date of said disapproval by the Legislature.
(j) Income from eligible activities. — Shall mean:
(1) The interest and dividends on eligible funds invested by the exempted business in:
(A) Obligations issued or guaranteed by the Commonwealth of Puerto Rico or any of its instrumentalities or political subdivisions, and loans or shares in loans granted or secured by them.
(B) Loans for financing the construction, acquisition or improvement of housing in Puerto Rico.
(C) Loans for the construction, expansion or acquisition of buildings or land and for the acquisition of machinery and equipment or for working capital used in exempted businesses. The borrower exempted business shall not qualify for the benefits of this subsection with respect to any investments it makes up to the amount of the unpaid balance of its loans for working capital.
(D) Loans for the acquisition of intangible property to be used by the exempted business in its operations in Puerto Rico.
(E) Obligations issued by the Puerto Rico Conservation Trust provided that when issuing said obligations the Secretary of the Treasury has not revoked his/her determination that the aforesaid is a non-profit trust pursuant to the terms and conditions established by the Commissioner.
(F) Capital liabilities or preferred stock as authorized by §§ 1 et seq. of Title 7, known as the Puerto Rico Banking Act, as well as capital liabilities issued by financial institutions, provided the amount of capital procured from the capital liabilities or preferred stock issued is invested in Puerto Rico pursuant to the terms and conditions established by the Commissioner.
(G) Obligations issued by any subsidiary of the Farm Credit Banks of Baltimore directly or indirectly engaged in financing agricultural loans with said funds, as well as to farms and farmers in Puerto Rico, 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, to the purchase of materials, to provide services to farm businesses and to the acquisition of loans or discounts of notes already granted.
(H) Loans for the financing of maritime and air operations directly connected with industry and commerce in Puerto Rico, including, but not understood as a limitation, the money used in the construction, acquisition and operation of all types of aircraft and maritime vessels or ships.
(I) Any other obligations or loans that the Commissioner may designate with the approval of the public sector members of the Financial Board and the Administrator.
(J) The Commissioner is hereby authorized to issue the necessary regulations for the administration of this subsection with the approval of the public sector members of the Financial Board and the Administrator.
(K) [Vacant.]
(L) Loans granted to special employee-owned corporations.
(M) Corporate shares or stock 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”, which constitute an eligible investment according to subsection (n) of the Section of said act.
(N) Corporate shares or stock in partnerships established as Investment Capital Funds, under §§ 1241 et seq. of Title 7, known as the “Investment Capital Fund Act of Puerto Rico”, provided the Fund invests at least twenty percent (20%) of the total of the contributions received in tourist activities.
(O) Notes, promissory notes, bonds or any other evidence of indebtedness issued by the Puerto Rico Science, Technology and Research Trust established through public deed granted by the Secretary of Economic Development and Commerce and the President of the University of Puerto Rico as trustors.
(2) Interest on eligible funds deposited or invested by the exempted business in institutions engaged in the banking business, savings and loan associations, savings banks, securities brokerage houses and other similar institutions doing business in Puerto Rico which the Commissioner, with the approval of the members of the public sector of the Financial Board and of the Administrator, determines that are eligible to receive such funds. The regulations on eligible institutions shall take into consideration the following factors, among others:
(A) That the eligible funds be invested by the institutions that receive them in Puerto Rico or in a country of the Caribbean Basin qualified under § 936(d)(4) of the Federal Internal Revenue Code of 1986.
(B) That the above-mentioned funds be channeled to activities that promote production, income and employment in the Commonwealth of Puerto Rico such as commercial, industrial, agricultural or construction loans or for the conservation of natural resources.
The regulations issued under the equivalent provisions of former acts shall remain in effect until the new regulations provided herein are approved.
If the Commissioner determines that an institution is no longer eligible to receive such funds, such determination shall not prevent the interest earned on such funds invested prior to the loss of eligibility of the institution from continuing to be treated as eligible interest under this chapter until the maturity of said investment.
(3) Except as provided for in § 10041 of this title, the income from the investments which qualify under this subsection and the regulations issued thereunder, as well as the securities attesting to such investments, shall be totally exempt from income tax and from the payment of municipal property, patent, and excise taxes. The expiration of the exemption or extension period of the borrower or the lender, under this chapter, prior to the maturity date of the loan, or even when the tax exemption period of the borrower has not yet begun, shall not prevent the interest paid by the borrower or accrued by the lender from being treated as eligible income funds under this chapter.
(4) For the purposes of this subsection, the term “eligible funds” shall include the funds generated by the industrial or service activity covered by its exemption decree hereunder (including the extension under § 10040(j) of this title and the taxable years covered by the option under § 10040(f) of this title) or under former acts, in addition to the income received or accrued on such funds while they have been invested in Puerto Rico or abroad prior to October 1, 1976.
(k) Predecessor exempted business. — Shall mean:
(1) Any business that is or was exempted under this chapter or under former acts to carry out an economic activity substantially similar to that specified in the decree of a successor business, and
(2) is or was owned to the extent of twenty-five percent (25%) or more of its outstanding stock, or any other proprietary interest, by the successor business, or by any of the stockholders or proprietors of the successor business who hold twenty-five percent (25%) or more of the shares or other proprietary interest of the successor business. This last requirement shall not apply when referring to a predecessor exempted business in § 10045(a)(4) of this title.
(A) The ownership of stock or other proprietary interest shall be determined according to the rules concerning the ownership of stock of corporations or of shares in partnerships under the Income Tax Act of 1954.
(B) Should any of the stockholders or proprietors of a successor business affected by said rules be able to prove, to the satisfaction of the Secretary of the Treasury, that the capital invested or to be invested in the successor business is not derived directly or indirectly from their spouses, direct line ascendants or descendants, or from their siblings, but is derived from their own private resources, such rules shall not apply to them.
(l) Successor business. — Shall mean any business that obtains a decree under this chapter to conduct an economic activity substantially similar to that specified in the decree of a predecessor exempted business.
(m) Industrial tax exemption grant. — Shall have the same meaning as “exemption decree”, “tax exemption” or just “exemption” or “decree”, and may be used interchangeably as suitable for purposes of illustrating what the text provides.
(n) Extraordinary circumstances. — Shall mean any cause of an exceptional nature such as strikes, wars, action of the government or of the elements, fire and others, or any other cause beyond the control of the successor business or the predecessor exempted business.
(o) Business engaged in the liability insurance or reinsurance related to exempted businesses. — Shall mean:
(1) An entity which avails itself of the provisions of this chapter to provide liability insurance or reinsurance arising from, or related to liability for damages caused by products or articles produced or manufactured totally or partially by exempted businesses, including those arising from, or related to the research, development, formulation, manufacture, processing, production or labeling of products or articles or for liability due to environmental damages arising from the aforementioned activities, whose coverage is not available in the insurance market in Puerto Rico, or whose cost in said market is relatively onerous. However, the entity, including any entity classified for federal tax purposes as a partnership or a trust, shall be included in the definition of a “business engaged in liability insurance or reinsurance relative to exempted businesses” as provided by this subsection, only if the premiums received for said insurance or reinsurance (except for premiums attributable to risks reinsured by an insurer who is not an affiliated taxpayer) are not claimed as deductions for federal income tax purposes for a taxable year by any affiliated taxpayer (which is not an eligible corporation and has opted to use the tax credit provided by § 936 of the Federal Internal Revenue Code for said taxable year with regard to the income from activities carried out in the Commonwealth of Puerto Rico for which the insurance or reinsurance premiums are paid to said entity). For the purposes of this subsection, an “affiliated taxpayer” shall mean, with regard to the entity which avails itself of the provisions of this chapter, a person from the United States (as defined in § 957(c) of the United States Internal Revenue Code) who owns shares or any other interest in the entity (as provided in §§ 267(b), 318 or 958(a) of the United States Internal Revenue Code, without taking into consideration the percentages referred to therein). The Secretary of the Treasury shall provide those regulations that are necessary or appropriate to carry out the purposes of this subsection.
(A) When considering any request for exemption under this subsection, factors such as the jobs and investments that would be generated by the risk insurance and/or reinsurance business or any other benefit of greater interest to the Commonwealth of Puerto Rico shall be considered. Insurance and/or reinsurance business employees shall be residents of Puerto Rico and will carry out the functions listed in clause (2) of this subsection in Puerto Rico.
(B) The insurance and/or reinsurance business shall have a minimum capital of twenty-five million dollars ($25,000,000) and it shall consist of eligible funds as defined under subsection (j)(4) of this section.
(2) The business engaged in the insurance and/or reinsurance of risks may be operated by an independent entity, by an affiliate of any other exempted business, or by a conglomerate of affiliates of exempted businesses, provided the facilities used by the business of insurance and/or reinsurance of exempted operations to be insured are kept separate and the following functions are carried out in Puerto Rico: actuarial accounting of the insurance operations as well as of the investment; legal services, except litigation; approval or rejection of insurance applications and emission of insurance policies; final approval of every type of claims payments and conservation of documents and files related to the functions mentioned herein. The collections made shall be kept in banking institutions located in Puerto Rico. The Board created in subsection (5) of item (p) of this section may exempt such a business from any of these requirements when the circumstances so merit. The facilities, equipment and personnel to be used in the risks insurance and/or reinsurance activity shall not be covered under the exempted business decree of the insurance.
(p) Definitions of other terms. — For purposes of this chapter, “Governor” means the Governor of the Commonwealth of Puerto Rico; “Administrator” means the Economic Development Administrator; “Director” means the Director of the Office of Industrial Tax Exemption and “Commissioner” means the Commissioner of Financial Institutions created by §§ 2001 et seq. of Title 7.
The other terms used in this chapter, unless otherwise [specified], shall have the same meaning they have in the Income Tax Act in force, and its regulations.
History —Jan. 24, 1987, No. 8, p. 949, § 2; Oct. 9, 1987, No. 7, p. 951; Aug. 10, 1988, No. 158, p. 680, § 1; June 26, 1992, No. 15, § 16; Nov. 19, 1993, No. 95, § 3; Sept. 27, 1994, No. 110, § 1; Jan. 20, 1995, No. 14, § 1; Oct. 27, 1995, No. 218, § 1; Sept. 12, 1996, No. 212, § 1; Aug. 18, 2004, No. 214, § 12.