P.R. Laws tit. 13, § 10042
(a) General rule. — Stockholders or partners of a corporation or partnership that is an exempted business (except as provided in subsections (h) and (i)(5) and (6) of § 10040 of this title), shall be subject to a ten percent (10%) tax on the distributions of dividends or profits from the industrial development income of the exempted business in lieu of any other tax, if any, levied by law. Except as provided in clause (4) of this subsection, the exempted business shall pay five percent (5%) of said income in advance, regardless of the year in which the distribution is made, and on the total amount of the industrial development income generated during the year. This five percent (5%) shall be paid in the manner provided in clause (1) of this subsection. Should the tax to be paid on the distributions of dividends or profits from the industrial development income be greater than the five percent (5%) paid in advance on the distributed income, the exempted business shall deduct and withhold at the source, and report and remit to the Secretary of the Treasury, the amount of the tax in excess of said five percent (5%), as established in the Internal Revenue Code of October 31, 1994. The exemptions provided by Sections 1026 and 1231 of the Internal Revenue Code of October 31, 1994, shall only be applicable to the distributions of industrial development income accrued during taxable years commencing prior to January 1, 1993. The exemption provided by Section 1022 of the Internal Revenue Code of October 31, 1994 shall be applicable to the distributions of dividends derived from the income described in said section.
(1) For the taxable years commencing after December 31, 1992, the exempted business shall make a yearly estimate of and report and remit to the Secretary of the Treasury, the tax to be paid in advance provided in this subsection through an estimated tax return. This return shall be in addition to the estimated tax return provided by the Puerto Rico Internal Revenue Code of October 31, 1994, as amended, but it shall be subject to the provisions of Section 1062 of said Code, except that the provisions of subsection (j)(4)(A) of said section shall not apply for the first taxable year commencing after December 31, 1992. This payment shall be remitted through a check separate from any other estimated tax return.
For the purposes of this clause, the tax estimate shall be made on the basis of the industrial development net income for each year after payment of the income tax established by law, plus the income received during the year on account of the investments described in § 10039(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 in § 10040 of this title to which it may have a right and which would have been estimated for that 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 not later than the fifteenth day of the fourth month following the closing of that particular tax year.
(3) Any excess in the payment of this tax shall be credited against the estimated tax provided 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 subsection (a) shall be deducted and withheld at source when the exempted business makes the distribution, and it is reported and remitted to the Secretary of the Treasury, as established in the 1994 Internal Revenue Code, as amended:
(A) An exempted business in which fifty percent (50%) or more of all its shares is 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 § 10039(e)(4) and (11), or 10040(m) of this title.
(E) An exempted business engaged in fish canning.
(5) Those individuals whose taxes are retained by the exempted business as provided by this subsection may credit one hundred percent (100%) of same against their taxes as determined by the 1994 Internal Revenue Code, as amended, excluding said dividends in the tax year in which the distribution is carried out as well as in future years to the degree in which it is not used in said year.
(6) Exempted businesses engaged in manufacturing which request and obtain a tax exemption decree under the provisions of the same during the first year it is in effect, or those which convert their decrees and establish their operations after the effective date of this act, may be totally or partially exempted by the Secretary of State from the tax levied by subsection (a) of this section, on the dividends distributed corresponding to the first five (5) years from their date of commencement of their operations.
Businesses exempted under the provisions of clauses (4) and (11) of subsection (e) of § 10039 of this title may also be totally or partially exempted from the tax levied by subsection (a) of this section on the distributed dividends corresponding to the first five (5) years, from the date they commence their operations.
The dispensation provided herein may be granted only when the Secretary of State determines, with the prior favorable recommendation of the agencies which render tax exemption reports, that the aforesaid is necessary and convenient for the industrial and economic development of the Commonwealth of Puerto Rico, in consideration of the special nature of the exempted business in particular, the technology involved, the substantial employment it provides, the total amount of the investment, or any other benefit or factor that in his/her judgment merits said determination, with the power to condition said dispensation as may be convenient and necessary in the best interests of the Commonwealth of Puerto Rico.
The benefit provided in this subsection shall be available only if the exempted businesses described herein establish their operations within twenty-four (24) months following the approval of this act. The Governor, with the prior recommendation of the Secretary and the Administrator, shall extend the above term for an additional period of not more than twelve (12) months when, in his/her judgment said extension is convenient and necessary in the best interests of the Commonwealth of Puerto Rico.
The dispensation provided in this clause shall not be granted under any circumstance in the case of applications filed with the Office of Industrial Tax Exemption after December 31, 1992, or of applications under interagency consideration as provided in § 10047 of this title for that date, except in those cases covered under the provisions of clause (7) of this subsection.
For the purposes of this clause, it shall be an indispensable requirement that on or before ninety (90) days after the date prescribed for filing the income tax return, the exempted business maintains 25% of its industrial development income of each taxable year invested for a term of not less than five (5) years in eligible activities as designated under § 10039(j) of this title.
In the event the exempted business fails to comply with the condition of maintaining the investment for the term provided above, the total amount of the distribution affected by the noncompliance shall pay, and there shall be withheld, reported and remitted to the Secretary of the Treasury the ten percent (10%) tax corresponding to the disqualified distribution in accordance with subsection (a) of this section.
(7) In the case of an eligible business under clauses (4) and (11) of subsection (e) of § 10039 of this title, or a fish canning business, or an exempted business covered by § 10040(m) of this title, the Secretary of State shall determine that a total or partial dispensation from compliance with the provisions of subsection (a) of this section or § 10040(m)(3) of this title, with the prior favorable recommendation of the agencies that render tax exemption reports, and taking into consideration the nature of the particular exempted business, the number of employees involved, the total amount of the payroll, the investment in machinery and equipment, the location of the project and the current financial standing of the aforesaid exempted business, with the power to condition said dispensation as convenient and necessary in the best interests of the Commonwealth of Puerto Rico.
(8) The provisions of this subsection shall not apply to those exempted businesses whose decree of exemption specifically provides and establishes special regulations for the distribution and taxation of its industrial development income unless said exempted businesses voluntarily choose to abide by them. In those cases in which the special distribution regulations cover only a specific time period, the distributions of the industrial development income accrued after said time period shall be governed by the provisions of this subsection.
(b) Credit for certain distributions. — Any business that invests part of its industrial development income for a specific taxable year, during a fixed period of time in an eligible activity under § 10039(j) of this title, shall be entitled to a tax credit and the corresponding withholding at source provided in subsection (a) of this section, subject to the following terms and conditions:
(1) If the investment of industrial development income is made for a fixed term of between five (5) and ten (10) years, the investment shall receive a credit equal to ten percent (10%) of the tax and withholding at source provided in subsection (a) of this section for each year the investment is maintained, and the uninvested remainder shall pay the tax provided in said subsection.
(2) In case the investment maintained for the fixed period is equal to fifty percent (50%) or more of the industrial development income, except for the income described in § 10039(j) of this title, the entire amount of industrial development income shall receive the credit corresponding to the number of years the investment is maintained. The exempted business may distribute the remainder of the uninvested industrial development income at any time subject to the credit provided herein. At the end of the maintained investment period, it may also distribute the invested industrial development income at its discretion.
(3) In case fifty percent (50%) or more of the industrial development income is invested for a fixed term of not less than five (5) years in bonds or obligations of the Commonwealth of Puerto Rico or its instrumentalities or political subdivisions, or in securities guaranteed by said instrumentalities or by pension or retirement systems of the Commonwealth of Puerto Rico, or in mortgages secured by the Housing Bank on dwellings constructed after January 1, 1986, the amount invested shall be exempt from the payment of the tax provided in subsection (a) of this section. The remaining uninvested industrial development income shall receive a fifty percent (50%) credit against said tax.
(4) If the investment described in the preceding clause is made and maintained for over eight (8) years, the amount so invested, as well as the remainder of the industrial development income for the taxable year to which said investment corresponds shall be exempt from the tax provided in subsection (a). In the case of the investments described in this clause which have a maturity date extending to eight (8) years from the date of the investment, and which are redeemed, withdrawn or prepaid before said period, the exempted business shall be deemed to have complied with the investment period for the purposes of this chapter.
(5) If the industrial development income investment is made for a fixed period of five (5) years or more, the investment shall receive a credit equal to forty percent (40%) of the tax and withholding at the source provided in subsection (a) of this section upon termination of the period of the investment and the uninvested remainder shall pay the tax provided by said subsection.
(6) If fifty percent (50%) or more of the industrial development income is invested for a fixed period of five (5) years or more, the total amount of the industrial development income for said year shall receive a credit of forty percent (40%) of the tax and withholding at the source provided in subsection (a) of this section. The exempted business may distribute the remaining portion of the uninvested industrial development income at any time, subject to the credit herein provided. Upon termination of the period of the investment maintained, it may also distribute the invested industrial development income at its discretion.
(7) In case the twenty-five percent (25%) or more of the industrial development income is invested, and said investment is made for a fixed period of not less than eight (8) years, the total amount of the industrial development income for said year shall receive a credit of twenty percent (20%) of the tax and withholding at the source provided in subsection (a) of this section. The exempted business may distribute the remainder of the uninvested industrial development income at any time, subject to the credit herein provided. Upon termination of the period of the investment maintained, it may also distribute the invested industrial development income at its discretion.
(8) In case the fifty percent (50%) or more of the industrial development income for a particular tax year is invested for a fixed period of not less than eight (8) years, the total amount of the industrial development income for said year shall receive a credit of fifty percent (50%) of the tax provided in subsection (a) of this section. The remainder of the uninvested industrial development income for said year may be distributed at any time, subject to the credit herein provided. Upon termination of the period of the investment maintained, the exempted business may also distribute the invested industrial development income at its discretion.
(9) If the investment of the industrial development income is made in the capital of a tourist business exempted under §§ 6001 et seq. of Title 23, known as the “Puerto Rico Tourist Development Act of 1993”, and this investment is an eligible investment pursuant to § 6001(n) of Title 23, it shall be understood that said investment is made for a fixed term of ten (10) years in an amount equal to the original investment, regardless of any reduction in the base of said investment by virtue of the tax credits taken by the exempted business pursuant to § 6013 of Title 23. If said investment is redeemed or withdrawn before the term of ten (10) years for causes beyond the control of the investment exempted business, the exempted business shall reinvest, on or before ninety (90) days counted from the date of the redemption or withdrawal, the amount received in exchange of the said investment, up to the limit of the total original investment, in eligible activities described in § 10039(j) of this title, for the remainder of the original investment period. The exempted business may distribute at any time, subject to the applicable credit, an amount of the industrial development income equal to the amount of the tax credits taken by the exempted business pursuant to § 6013 of Title 23. When the investment period is over, it may also distribute the remainder of the original investment not recovered through the tax credits, subject to the applicable credit.
(10) The investments made by the exempted business to qualify accrued industrial development income for taxable years commencing prior to January 1, 1993, shall be governed by the provisions of clauses (1) to (4) and (9) of this subsection.
For the purposes of clauses (6) and (8) of this subsection, the exempted business may invest up to fifty percent (50%) of the required investment, in property, physical facilities and equipment with a useful life, for the purpose of depreciation, of ten (10) years or more, provided they are acquired after December 31, 1992, and/or in the acquisition of tangible property used in Puerto Rico by the exempted business, provided the same is acquired after December 31, 1995.
The investments made by the exempted business to qualify the industrial development income generated in tax years commencing after December 31, 1992, shall be governed by the provisions of clauses (5) through (9) of this subsection.
Except as provided in clauses (4) and (9) of this subsection, in case that the investments described in each one of said clauses should be redeemed, withdrawn or prepaid before the fixed term specified in each of said clauses, the exempted business shall reinvest the principal of said investment on or before ninety (90) days have elapsed from the date of the redemption, withdrawal or prepayment, in eligible activities described in § 10039(j) of this title for the remainder of the period of the original investment.
(11) The investments required by this subsection which consist of industrial development income accrued during the taxable years commencing prior to January 1, 1993, shall be made no later than thirty (30) days after the distribution of said industrial development income for which the reduced withheld tax provided in this subsection is chosen. The investments that consist of industrial development income accrued during taxable years that commence after December 31, 1992, may be carried out at any time, but no later than ninety (90) days after the date prescribed by law to file the corresponding income tax return for each taxable year, including any extension granted for the filing thereof. The investments made in compliance with the requirements of a clause of this subsection shall not be used to meet the investment requirements of any other paragraph of this subsection or any other provision of law.
For the purposes of this subsection, the term “industrial development income” shall be the net industrial development income for each year, after taxes.
(c) Payment of the tax in case of noncompliance. — In case the exempted business fails to comply with the condition of maintaining the investment for the term required to obtain the withholding reduction provided in subsection (b) of this section, the total amount of the distribution affected by the noncompliance shall pay, and there shall be withheld, reported and remitted to the Secretary of the Treasury, the ten percent (10%) tax corresponding to the disqualified distribution in accordance with §§ 8006 et seq. of this title, known as the “Puerto Rico Internal Code of 1994”, as amended. To the extent that the exempted business has complied with some of the terms or investment percentages prescribed in subsection (b), or chooses to comply with other terms or investment percentages of the aforementioned subsection, the corresponding tax under said subsection (b) of this section, if any, shall be paid, and shall be withheld, reported and remitted to the Secretary of the Treasury.
(d) Special credit for certain investments. — Any exempted business, including those covered by former acts, which invests and maintains [the investment of] all or part of its industrial development income in the following activities may credit said investment against the tax and withholding at the source provided in subsection (a) of this section, subject to the terms and conditions pertaining to said activities:
(1) If the investment is made prior to January 1, 1993, for the acquisition, construction or expansion of real property devoted or to be devoted to industrial development, it may credit five percent (5%) of the resulting investment in excess of the investment made by the exempted business in such property after January 1, 1986, up to fifty (50%) of said tax, which credit may be carried over to subsequent tax years. Those investments in real property made for the purpose of obtaining the exemption provided in subsection (a)(6) of this section may not be used for the purpose of this clause, nor §§ 36 and 231(a)(2)(c) of Act June 29, 1954, No. 91.
(2) If the exempted business purchases products manufactured in Puerto Rico, including components and accessories, it may claim a credit equal to ten percent (10%) of the purchase of said products during the taxable year in which said credit is claimed, reduced by the average of the purchases of said products during the preceding three (3) years, or such part of said period as may be applicable, up to fifty percent (50%) of said tax; [said] credit shall be granted solely for the purchase of products manufactured by businesses not related to the exempted business, so that, for the purposes of the computation previously mentioned, such purchases shall be excluded from the total purchases by the exempted business of products manufactured in Puerto Rico. In case the exempted business purchases products transformed into articles for commerce made from recycled materials or from recyclable raw materials to which a tax exemption decree has been granted under § 10039(e) of this title, the credit granted thereby shall be equal to fifteen percent (15%) of the total purchases of said products during the previous year.
(3) If the exempted business incurs expenses in Puerto Rico directly related to the research and development of new products or industrial processes or to their improvement, it may credit twenty-five (25%) of the increase for said expenses in excess of their yearly average for the three (3) taxable years of the exempted business immediately preceding the close of the taxable year in which the credit is claimed or such portion of said period as may be applicable up to fifty percent (50%) of said tax.
The credits provided in this subsection cannot be claimed concurrently but may be carried over to future years.
(e) [Application] of exempt distributions. — The distribution of dividends or profits made by an exempted business, even after its exemption has expired, shall be deemed as having been made from its industrial development income if, at the date of the distribution, it does not exceed the undistributed balance of its accrued industrial development income, unless the exempted business, at the time of the statement, chooses to distribute the dividend or profit of other earnings or profits totally or partially. The amount, year of accrual and nature of the distribution made of the industrial development income shall be that designated by the exempted business through a notice sent together with the payment thereof to its stockholders and to the Secretary of the Treasury by means of an informative statement.
In cases of corporations or partnerships which on the date of commencement of their operations as exempted businesses have accrued earnings or profits, the distributions of dividends or profits made as of said date shall be deemed as having been made from the undistributed balance of said earnings or profits, but once the latter is exhausted by virtue of such distributions, the provisions of the preceding paragraph shall be applied.
(f) Option for certain distributions. — Any business exempted under this chapter, or under prior industrial incentive acts, which has accrued industrial development income corresponding to those taxable years which commenced prior to January 1, 1993, and have not qualified their industrial development income for said years for tax rates under eight percent (8%) in distribution, shall have the option in lieu of the tax on dividends levied by the act under which it enjoys an exemption of paying a tax of eight percent (8%) on the industrial development income accrued to that date which the business chooses to be deemed as having been distributed, and, at any time after paying the tax provided herein, it may distribute said income without having to pay any additional tax whatsoever. The option may be exercised, and the payment made, by means of a notice to the Secretary of the Treasury to such effect, which shall be submitted on or before December 31, 1993. Said notice shall include the following information:
(1) The name, address and account number of the exempted business.
(2) The act and case number or numbers under which it enjoys a tax exemption.
(3) The total amount of the accrued industrial development income for each year for which the exempted business chooses to avail itself of the provisions of this subsection.
(4) The total amount of the dividend corresponding to each year.
(5) The tax determined.
(g) Sale or exchange of stock. —
(1) During the exemption period. — Profits or losses from the sale or exchange of stock of an exempted business during its exemption period shall be recognized in the same proportion as the industrial development income of such exempted business is taxable. Notwithstanding the above, a ten percent (10%) tax shall be imposed on the amount of any profit, if any, made on the sale or exchange of stock in an exempted business by an individual who is a resident of Puerto Rico who is required to pay taxes in any jurisdiction outside Puerto Rico.
(2) After the termination date of the exemption period. — Profits or losses in case said sale is made after the date of termination of the exemption shall be recognized as provided in clause (1) above, but only up to the total value of the stock on the corporation’s books at the date of termination of the exemption (reduced by the amount of the exempt distributions received on the same stock after such date) less the basis of said stock. The remaining profit or loss, if any, shall be recognized according to the provisions of the Income Tax Act in force on the date of the sale or exchange.
(3) Exempt exchanges. — Exchanges of stock that do not result in taxable events because they are corporate reorganizations shall be treated according to the provisions of the Income Tax Act in force on the date of the sale or exchange.
(h) Determination of base in the sale or exchange of stock. — The base of the stock on the sale or exchange shall be determined in accordance with the applicable provisions of the Income Tax Act in force at the time of the sale or exchange.
(i) Exempt distributions made by corporations or partnerships that make up an exempted business. — The distributions of industrial development income made by an exempted business to its stockholders or partners before or after the expiration of its decree, whether or not they in turn are corporations or partnerships that are or have been an exempted business, shall be subject to taxation only once, which shall be at the time when the exempted business that generated the industrial development income distributes it to its stockholders or participating partners.
(1) Such distributions shall retain their nature as industrial development income and their respective characteristics if they have complied with the terms and conditions provided in subsection (b) of this section. Subsequent distributions of industrial development income that have already been subject to taxation and that are made by any corporation or partnership shall be exempted from any additional taxation.
(2) In the case of exempted businesses organized as partnerships, joint ventures or similar entities, made up of several corporations, partnerships or combinations thereof, the constituents of such exempted businesses shall be deemed to be businesses that are or were exempt and, therefore, the only distributions of industrial development income that shall be taxable shall be those made by said constituents of said exempted businesses.
(3) The profits made on the sale, exchange, or other disposition of the stock of corporations or of participations in partnerships that are or have been exempted businesses, participations in joint ventures and similar entities made up of several corporations, partnerships, individuals or combinations thereof that are or have been exempted businesses, and stock in corporations or participations in partnerships that in some way are owners of the entities described above shall be subject to the provisions of subsection (f) of this section when the sale, exchange or other disposition is made, and all subsequent distributions of said profits whether as dividends or a distribution in liquidation shall be exempted from additional taxation.
(j) Bonuses, royalties, and license fees. — Notwithstanding any other provisions of law, in the case of payments made by exempted businesses to corporations, partnerships or nor resident persons for the use or right to use patents, copyrights, formulas, technical knowledge and other similar property in Puerto Rico, the exempted business shall deduct and withhold ten percent (10%) of such payments and shall report and remit them to the Secretary of the Treasury in accordance with the Puerto Rico Internal Revenue Code of 1994, as amended.
(k) The Secretary of the Treasury shall establish such regulations as may be necessary to implement the provisions of this section.
History —Jan. 24, 1987, No. 8, p. 949, § 4; Nov. 21, 1990, No. 6, p. 1443, § 2; Nov. 19, 1993, No. 94, § 2; Jan. 8, 1994, No. 7, § 2; Sept. 27, 1994, No. 110, § 3; Jan. 20, 1995, No. 14, § 2; Oct. 27, 1995, No. 218, § 4; Sept. 12, 1996, No. 212, § 3.