P.R. Laws tit. 13, § 10643
(a) Fixed income tax rate. — Tax-exempt businesses that hold a decree under this chapter shall be subject to a fixed income tax rate on their net industrial development income during the entire corresponding period of exemption as provided for in this section, as of the date of starting operations, determined under § 10650 of this title, in lieu of any other income tax, if any, as provided for in the Puerto Rico Internal Revenue Code or in any other law.
(1) In general. — The tax-exempt businesses that hold a decree under this chapter shall be subject to a fixed income tax rate of four percent (4%) on their net industrial development income, excluding the income derived from the investments described in § 10642(j) of this title. Provided, That the tax-exempt businesses whose royalty payments for the use or privilege to use intangible property in Puerto Rico, made to nonresident persons not engaged in industry or business in Puerto Rico, that are subject to the rate of the taxes withheld at the source as provided for in subsection (b)(4) of this section, shall be subject to a fixed income tax rate of eight percent (8%) on their net industrial development income, excluding the income derived from the investments described in § 10640(j) of this title.
(2) Existing businesses. — Tax-exempt businesses that have had operations exempted under §§ 10101 et seq. of this title, and which have enjoyed a fixed income tax rate not greater than four percent (4%), but of not less than two percent (2%), may enjoy a fixed rate on their net industrial development income under this chapter that is equal to the rate levied under said preceding decree, provided the Secretary of Development, with the previous favorable recommendation of the Secretary of the Treasury and the Executive Director, determines that said rate serves to benefit the best economic and social interests of Puerto Rico. The Secretary of Development shall require, save in exceptional cases, that the tax-exempt business maintain an employment level equal to or greater than eighty percent (80%) of its average employment for the three (3) taxable years preceding the date of applying for an exemption under this chapter, or he/she may require that a minimal tax payment be made equal to the average paid in this period. Any exception to these requirements shall have the approval of the Secretary of the Treasury. In order to determine that which constitutes the best interests of Puerto Rico, an analysis should be made of factors such as: the special nature of the business exempted under this chapter, the technology used, the substantial employment that the same provides, the location of said business, the potential impact of the contracting of local providers, the convenience of having local supplies of the product, or any other benefit or factor which warrants such a determination.
(3) Novel pioneering activity. — The provisions of clauses (1) and (2) of this subsection notwithstanding, the fixed income tax rate shall be one percent (1%), provided the Secretary of Development, with the previous favorable recommendation of the Secretary of the Treasury and the Executive Director and his/her Board of Directors, determines that the business exempted under this chapter shall carry out an economic activity that has not been produced or carried out or conducted in Puerto Rico before the twelve (12) months that end on the date of applying for exemption on the novel pioneering activity, and that the same has special characteristics, attributes or qualities that would have an impact that would benefit the socioeconomic development of Puerto Rico, including a profile of the jobs to be created for the aforementioned novel pioneering activity.
(A) Determination of novel pioneering activity. — To determine whether an activity constitutes a novel pioneering economic activity, the Executive Director shall consider the impact that said activity would have on the economy of Puerto Rico, based on priority factors, in particular:
(i) The degree or level of use and integration of research and development activities to be conducted in Puerto Rico;
(ii) the tax impact that the novel pioneering activity might generate in Puerto Rico;
(iii) the nature of the activity;
(iv) the investment of capital to be made in the plant, machinery and equipment;
(v) the singularity of the novel pioneering activity in Puerto Rico for the international market;
(vi) the technological improvements that shall be a part of the operations, and
(vii) any other factor which warrants that the activity be recognized as a novel pioneering activity, seeing as the activity shall serve the best economic and social interests of Puerto Rico.
(B) Economic activities created or developed in Puerto Rico as intangible property. — The provisions of clauses (1), (2) and (3) of this subsection notwithstanding, the fixed income tax rate shall be zero percent (0%) in the case of novel pioneering activities for which the intangible property has been created or developed in Puerto Rico, including but not limited to activities leading to the commercial viability of the product.
(C) Duration of period. — The fixed rate that applies by virtue of this clause shall be granted for the term of the decree. The tax-exempt business to which the benefit provided for in this clause has been granted, shall render reports every two (2) years as of the date of effectiveness of its decree, to the Executive Director, with a copy to the Secretary of Development and the Secretary of the Treasury, attesting that said business has substantially complied with the standards set forth in the decree. The Executive Director shall provide, through regulations, the information to be contained in said reports and shall have the power to conduct investigations and audits as required to ascertain that the tax-exempt business has substantially complied with the standards set forth in the decree.
(4) Any business exempted under this chapter, which is located or whose operations are located in a municipality classified as a low industrial development zone or as a medium industrial development zone, pursuant to the provisions in § 10651 of this title, may reduce the fixed income tax rate established in preceding clauses by an additional point five percent (0.5%). In those cases in which a tax-exempt business that holds a decree granted under this chapter maintains operations in more than one industrial zone, said tax-exempt business shall enjoy the reduction provided for in this subsection in relation to the industrial development income attributable to its operations in the low industrial development zone exclusively.
(5) Any tax-exempt business that holds a decree granted under this chapter, which is located or whose operations are located in the special development zone constituted by the Municipalities of Vieques and Culebra, shall be totally exempted from the payment of income taxes on the industrial development income derived from said operations during the first ten (10) years of the corresponding period, as provided, and as of the date the operations start as determined under § 10650 of this title. The remainder of the exemption period of said tax-exempt business shall pay taxes at the fixed income tax rate of two percent (2%) in lieu of any other tax, if any.
(b) Royalties and license fees. — The provisions of the Puerto Rico Internal Revenue Code notwithstanding, in the case of payments that tax-exempt businesses that hold a decree under this chapter have made to corporations, partnerships or nonresident persons not engaged in industry or business in Puerto Rico, for the use or the privilege to use in Puerto Rico intangible property relative to the operation declared to be exempted under this chapter, subject to the consideration of said payments as totally derived from sources within Puerto Rico, the following rules shall be observed:
(1) Taxes on corporations, foreign partnerships or nonresident persons not engaged in industry or business in Puerto Rico—Levying of tax. — A twelve-percent (12%) tax shall be levied, collected and paid for each taxable year, in lieu of the tax that Sections 1221 and 1231 of the Puerto Rico Internal Revenue Code levy on the amount of said payments received or implicitly received by any corporation or foreign partnership not engaged in industry or business in Puerto Rico, derived exclusively from sources within Puerto Rico.
(2) Withholding taxes at the source in the case of corporations and foreign partnerships not engaged in industry of business in Puerto Rico. — Any tax-exempt business that is bound to make payments to nonresident persons for the use in Puerto Rico of intangible property relative to the operation exempted under this chapter, shall deduct and withhold at the source a tax equal to that which is levied in clause (1) or (3) of this subsection.
(3) Existing businesses. — In the case of persons who transfer technology or intangibles to tax-exempt businesses that have had operations exempted under §§ 10101 et seq. of this title, and which have been enjoying a rate lesser than twelve percent (12%), the Secretary of Development, with the previous favorable recommendation of the Secretary of the Treasury and the Executive Director, may authorize the levying of a rate equal to the rate levied under said approved decree, pursuant to §§ 10101 et seq. of this title, in lieu of the rate provided for in clause (1) of this subsection, provided he/she determines that said reduced tax serves to the benefit of the best economic and social interests of Puerto Rico. The Secretary of Development shall require, save in exceptional cases, that the tax-exempt business maintain an employment level equal to or greater than eighty percent (80%) of its average employment for the three (3) taxable years before the date of applying for an exemption under this chapter, and any exception to this employment requirement shall have the approval of the Secretary of the Treasury. In order to determine that which constitutes the best interests of Puerto Rico, an analysis should be made of factors such as: the special nature of the tax-exempt business, the technology used, the substantial employment that the business provides, the location of the business, the possible contracting of local providers, the convenience of having local supplies of the product, or any other benefit or factor which warrants such a determination.
(4) Alternate levy. — The Secretary of Development shall have the authority to allow tax-exempt businesses that make payments on income considered to be totally derived from sources within Puerto Rico, for being attributable to the use or privilege to use in Puerto Rico, manufacturing intangibles relative to the operation declared to be exempted, such as patents, copyrights, formulas, technical knowledge, and other similar property, to be submitted to the following treatment:
(A) A two-percent (2%) tax shall be levied, collected and paid for each taxable year, in lieu of the tax levied by Sections 1221 and 1231 of the Puerto Rico Internal Revenue Code, on the amount of such payments, received or implicitly received by any corporation or foreign partnership not engaged in industry or business in Puerto Rico, derived from sources within Puerto Rico.
(B) Any tax-exempt business subject to this clause that is bound to make payments to nonresident persons for the use in Puerto Rico of intangible property relative to the operation declared to be exempted, shall deduct and withhold at the source on said payments, a tax equal to that which is levied in paragraph (A) of this clause.
The alternate levy imposed by this clause (4) shall be established before the beginning of the term of effectiveness of the tax exemption decree, and shall be irrevocable during the effectiveness of said decree, and be documented as part of the terms and conditions agreed to in the decree. This alternate levy shall not apply to tax-exempt businesses described in clauses (2) and (3) of subsection (a) of this section.
(c) Income from investments. — A tax-exempt business that holds a decree granted under this chapter shall enjoy a total exemption on the income derived from eligible investments described in § 10642(j) of this title. The expiration, renegotiation or conversion of the decree or other incentives grant of the investing entity or the issuing entity, as the case may be, shall not prevent the income earned from the investment from being treated as eligible investment income under this chapter during the remaining period of the investment.
(d) Distribution, sale or exchange of stocks or assets. —
(1) The stockholders or partners of a corporation or partnership that is a tax-exempt business that holds a decree granted under this chapter shall not be subject to the payment of income taxes on dividend distributions or profits from the industrial development income of said tax-exempt business, or in the case of tax-exempt businesses other than domestic corporations, from dividends or profits from the income derived from sources without Puerto Rico by the tax-exempt business, pursuant to the Puerto Rico Internal Revenue Code.
Subsequent distributions of the industrial development income made by any corporation or partnership shall also be exempted from the payment of any taxes.
The proceeds made in the sale, exchange or other disposition of stocks from corporations or shares in partnerships that have been tax-exempt businesses, shares in joint ventures and similar entities constituted by various corporations, partnerships, individuals or combination thereof, which are or have been tax-exempt businesses, and stocks in corporations or shares in partnerships that are in any way the owners of the entities described above, shall be subject to the provisions of clause (3) of this subsection when conducting said sale, exchange or other disposition, and any subsequent distribution of said proceeds, be it as a dividend or as a distribution in liquidation, shall be exempted from the payment of additional taxes.
(2) Ascription of exempted distributions. — The distribution of dividends or profits made by a tax-exempt business that holds a decree granted under this chapter, even after its tax exemption decree has expired, shall be deemed to have been made from its industrial development income if, on the date of the distribution, the same does not exceed the undistributed balance of its accrued industrial development income, unless said tax-exempt business, when preparing the informative return, chooses to distribute the dividend or profit, totally or partially derived from other benefits or profits. The amount, the year of accrual, and the nature of the distribution of industrial development income thus made, shall be designated by said tax-exempt business through notice remitted together with the payment thereof to its stockholders or partners and to the Secretary of the Treasury, through an informative return not later than February 28 following the year of the distribution.
In the cases of corporations or partnerships that, on the date of the beginning of operations as tax-exempt businesses, have benefits or profits accrued, the distributions of dividends or profits made as of that date shall be deemed to have been made from the undistributed balance of such benefits and profits, but once the same is used in its entirety by virtue of such distributions, the provisions of the first clause shall apply.
(3) Sale or exchange of stocks or assets. —
(A) During the exemption period. — The proceeds from the sale or exchange of stocks, or an interest in a partnership, or substantially all assets of a tax-exempt business that holds a decree granted under this chapter, made during its exemption period and which would have been subject to income tax under the Puerto Rico Internal Revenue Code, shall be subject to a four-percent (4%) tax on the amount of the proceeds made, if any, in lieu of any other tax levied by said Code. Any loss in the sale or exchange of said stocks or assets shall be recognized pursuant to the provisions of the Puerto Rico Internal Revenue Code.
(B) After the date of expiration of the exemption period. — The proceeds, in the event that said sale or exchange is conducted after the date of expiration of the exemption, shall be subject to the tax provided for in paragraph (A) of this clause, but only up to the amount of the value of the stocks or substantially all the assets in the books of the corporation on the date of expiration of the exemption period, reduced by the amount of the exempted distributions received from said stocks after said date, minus the base of said stocks or substantially all assets. Any remainder of the proceeds or any loss, if any, shall be recognized pursuant to the provisions of the Puerto Rico Internal Revenue Code in effect on the date of the sale or exchange.
(C) Exempted exchanges. — The exchanges of stocks which do not result in taxable events for being exempted reorganizations shall be treated pursuant to the provisions of the Puerto Rico Internal Revenue Code in effect on the date of the exchange.
(D) Determination of bases in the sale or exchange of stocks. — In the sale or exchange, the base of the stocks, interest or assets of businesses exempted under this chapter shall be determined pursuant to the applicable provisions of the Puerto Rico Internal Revenue Code in effect at the time of the sale or exchange, increased by the amount of the industrial development income accrued under this chapter.
(E) For purposes of this clause, the term “substantially all assets” shall mean those assets of the tax-exempt business which represent not less than eighty percent (80%) of the value in the books of the tax-exempt business at the time of the sale.
(F) The Secretary of the Treasury shall establish regulations as necessary to render the provisions of this clause effective.
(4) Liquidation. —
(A) General rule. — No income taxes shall be levied or collected from the assignor or the assignee in relation to the total liquidation of a tax-exempt business that has obtained a decree under this chapter, on or before the expiration of its decree, provided the following requirements are met:
(i) Any property distributed in the liquidation was received by the assignee pursuant to a liquidation plan on or before the date of expiration of the decree, and
(ii) the distribution in liquidation by the assignor, whether all at once or from time to time, was made by the assignor in cancellation or to totally redeem its capital stock.
The base of the assignee on the property received in liquidation shall be equal to the adjusted base of said tax-exempt business on said property immediately before the liquidation. Furthermore, and for purposes of this section, a corporation or partnership participating in a partnership that is a tax-exempt business shall be deemed to be, in turn, a tax-exempt business.
(B) Liquidation by assignors with revoked decrees. — If the decree of the assignor were revoked prior to its expiration date pursuant to the provisions in § 10653 of this title in relation to allowable revocations, the surplus accrued over industrial development income on the date the revocation becomes effective, may be transferred to the assignee at any later time, subject to the provisions of paragraph (A) of this clause. In cases of mandatory revocations, the surplus accrued shall be subject to the payment of taxes pursuant to the Internal Revenue Code.
(C) Liquidations after the expiration of the decree. — After the decree of the assignor has expired, the assignor may transfer to the assignee the surplus accrued over industrial development income earned during the period of effectiveness of the decree, subject to the provisions of paragraph (A) of this clause.
(D) Liquidation of assignors with exempted and nonexempt activities. — In the event that the assignor carries out exempted and nonexempt activities, the assignor may transfer to the assignee the surplus over the industrial development income accrued under this chapter and the property devoted to industrial development under this chapter as part of its total liquidation, subject to the provisions in paragraph (A) of this clause. The accrued surplus over sources other than industrial development income and the property that is not devoted to industrial development, shall be distributed pursuant to the provisions of the Puerto Rico Internal Revenue Code.
(e) Payment of the tax. — In the absence of a provision establishing otherwise, the taxes withheld or payable shall be withheld or paid in the form and manner provided for in the Puerto Rico Internal Revenue Code for the payment of income taxes and withholdings in general.
(f) Businesses ineligible under preceding acts. — During the first four (4) years of effectiveness of this act, in the case of businesses that are eligible under § 10642(d)(1)(B) of this title, engaged in the production of manufactured products or in the rendering of services which have not been eligible for the granting of incentives under §§ 10101 et seq. of this title, or under preceding tax incentives laws, the fixed rates of income taxes provided for in this section shall be partially applicable to the industrial development income, as provided below:
(A) Twenty-five percent (25%) of the net industrial development income generated during the first taxable year of the tax-exempt business, shall be subject to the applicable fixed income tax rate as provided for in this section, and the remaining seventy-five percent (75%) of the net industrial development income shall be subject to the payment of taxes pursuant to the applicable rules and rates under the Puerto Rico Internal Revenue Code.
(B) Fifty percent (50%) of the net industrial development income generated during the second taxable year of the tax-exempt business, shall be subject to the applicable fixed income tax rate provide for in this section, and the remaining fifty percent (50%) of net industrial development income shall be subject to the payment of taxes pursuant to the applicable rules and rates under the Puerto Rico Internal Revenue Code.
(C) Seventy-five percent (75%) of the net industrial development income generated during the third taxable year of the tax-exempt business, shall be subject to the applicable fixed income tax rate provide for in this section, and the remaining twenty-five percent (25%) of net industrial development income shall be subject to the payment of taxes pursuant to the applicable rules and rates under the Puerto Rico Internal Revenue Code.
(D) For the fourth taxable year of the tax-exempt business, the total amount of net industrial development income shall be subject to the applicable fixed income tax rate, as provided for in this section.
(g) Limitation on benefits. —
(A) In the event that as of the date of applying for incentives, pursuant to the provisions of this chapter, an eligible business is engaged in the activity for which the benefits of this chapter are granted, the eligible business may enjoy a fixed tax rate on industrial development income as provided for in this section, only as pertains to the increase in the net income of said activity that the same generates over the average net income for the last three (3) taxable years preceding the date on which the application is submitted, which is hereby denominated “base period income”, for the purposes of this subsection.
(B) For purposes of determining the base period, the production and sale of any business preceding the applicant business, shall be taken into account. For these purposes, “preceding businesses” shall include any business related to the applicant business, even if not previously exempted, and without considering whether it was operating under another legal name or under other owners.
(C) The income attributable to the base period shall be subject to the income tax rates provided for in the Puerto Rico Internal Revenue Code.
(D) The base period income shall be adjusted, reducing said amount by twenty-five percent (25%) annually, until the same is reduced to zero (0) for the fourth taxable year in which the terms of the decree of business exempted under this chapter apply. For these purposes, those years for which the tax-exempt business has made a choice under § 10650(b) of this title, shall be taken into consideration.
History —May 28, 2008, No. 73, art. 1, § 3, eff. July 1, 2008.