Additional Tax Advantages


Act. 273, Act. 185, Act. 74, Act. 98, Act. 29, Act. 73

Act 273

In September 25 of 2012, Puerto Rico enacted Act 273, also known as the "International Financial Center Regulatory Act". The Act provides for certain benefits to apply to businesses engaged in eligible financial activities in Puerto Rico.

International Financial Entities incentives include:

  • Fixed income tax rate of 4%
  • Not subject to taxation or withholding provisions for non-residents due to exclusion of 100% from interest, financing charges or partnership benefits not considered gross income from Puerto Rico sources.
  • Fixed income tax rate of 6% on dividends and other distributions of profits.
  • Tax exemption of 100% on real and personal property belonging to an IFE.
  • Tax exemption of 100% on municipal license taxes.
  • 7.5% of funds generated from IFE’s income taxes will be deposited in Special Fund for the Development of Services for Export and Promotion of Economic Development and Commerce, created by Act 20.

 

Eligibility:

  • Entity cannot be incorporated or organized under the laws of Puerto Rico.
  • Must employ at least four people.
  • Becomes an International Financial Entity (“IFE”) applying for a permit and license and obtaining a tax exemption decree with the Office of the Commissioner of Financial Institutions. Decree effective for 15 years, two extensions of 15 years each may be available.
  • Makes non-refundable payment of $5,000 complying with all requirements established in the Bank Secrecy Act, if applicable.
  • Amount of its authorized of capital stock, proposed and/or initial paid-in capital as the case may be, shall not be less than $5 million or higher amount as required by the Commissioner.
  • Follow list of permitted and prohibited transactions the IFE may engage in specified in its license.

 

Act 185

On November 12, 2014, Act 185 known as “Private Equity Funds Act” was enacted as part of the efforts to improve access to capital for entrepreneurs and businesses in different activity and development stages. The Act provides a structure for investors to deploy capital with limited personal liability and without double taxation, while enjoying certain tax benefits such as exemptions, deductions and fixed income tax rates. Qualifying funds are “Private Equity Funds” and “Puerto Rico Private Equity Funds” which investors have the right to select if qualified so long as notified to the Puerto Rico Treasury Department. Qualifying investors are partners of a partnership under the Act which have to be “Accredited Investors” as detailed by the Act.

Eligibility

  • Partnership or Limited Liability Company organized under laws of United States, foreign jurisdiction or the Commonwealth of Puerto Rico engaged in business of securities and financial instruments investment not offered in public stock exchange markets in U.S. or foreign country.
  • Office located in Puerto Rico
  • 80% of its paid-in capital invested in non-publicly traded securities and financial instruments
  • 20% remaining invested in one of the short-term instruments allowed by the Act
  • Within 4 years of organization, “Private Equity Fund” must maintain a min. of 15% of the paid-in capital invested in non-traded securities or financial instruments engage in active trade or business in Puerto Rico that makes 80% of its gross income during the last three years from sources within Puerto Rico.
  • “Puerto Rico Private Equity Fund” to maintain a min. of 60% of the paid-in capital invested in non-traded securities or financial instruments engage in active trade or business in Puerto Rico that makes 80% of its gross income during the last three years from sources within Puerto Rico.
  • Investors qualify as “Accredited Investors” under the Act.
  • Has “Registered Investment Advisor” as described by the Act.
  • Operates as a diversified investment fund.
  • Has minimum capital of $10 million within two years after first issuance of proprietary interests and an advisory board with at least one of its investors or limited partners as member.
  • If organized  outside of Puerto Rico, the fund has to derive at least 80% of its gross income from a Puerto Rico source and be engaged in trade or business in Puerto Rico.

 

Incentives

  • Eligible Funds enjoy 0% tax on interest and dividends income or capital gains, 100% exemption from municipal license taxes as well as personal and real property taxes.
  • Accredited investors pay 10% income tax on interest and dividends generated through the fund by investors.
  • Accredited investors pay 0% on income tax of capital gains realized through the fund by investors from PR sources.
  • Accredited investors pay 5% income tax on capital gains realized by the fund’s investors from sale of their proprietary interests in the fund.
  • Accredited investors granted 100% exemption from municipal license taxes related to distributions to investors.
  • For investors residents of Puerto Rico fund’s net losses may be deducted to the extent losses derive from entity with at least 80% Puerto Rico sourced income.
  • “Private Equity Fund” entitled to 30% tax deduction on initial investment
  • “Puerto Rico Private Equity Fund” entitled to 60% income tax deduction on initial investment
  • General partners, registered investment advisors and private equity firms are granted 5% income tax on interest and dividends generated from the above mentioned as well as 2.5% income tax on capital gains realized by the above mentioned from the fund.

 

Act 29

Known as the “Public-Private Partnership Act” enacted on June 8, 2009, provides legal framework to promote the use of such partnerships (“PPPs”), as a strategy for development. It authorizes government entities to enter into these partnerships with private firms to produce public facilities that comply with list of qualifying projects detailed in the Act. Partnership contracts have 50 years’ duration but can be extended up to 25 additional years, subject to Legislative approval.

Eligibility

  • Must participate in the request for proposal designed by the Authority for such PPP and comply with requirements established on it by the Authority.
  • Person authorized to do business in Puerto Rico.
  • Needs available corporate, equity capital, securities or other financial resources necessary for proper operation.
  • Good reputation, experience, managerial and technical capacities to develop and administer.
  • Certification that no member of the PPP is a passive economic agent of the PPP nor has been convicted of corruption or crimes listed in Act 458.

 

Incentives

  • Small scale projects (with estimated $55 million budget) enjoy expedited process of evaluation.
  • Exemption of 100% in real and personal property taxes
  • Exemptions and/or payment agreements on municipal license fees, excise or municipal taxes.
  • Fixed income tax rate of 10% over net income derived from operations in the partnership contract.
  • Fixed income tax rate of 20% over net income derived from operations of “special partnerships”.

 

Act 74

The Tourism Development Act as it is better known, facilitates and promotes World-class tourism initiatives. Benefits will remain valid 10 years from opening of the project with possible 10-year extension under the Act.

Eligibility  

  • Guesthouses, hotels, hostels, condo-hotels, timeshares, vacation clubs.
  • Theme parks, golf courses managed by or associated with hotel that is an exempt business, marina or port facility.
  • Natural resources used as entertainment
  • Other recreationally used facilities that encourage tourism
  • Must be fully financed project by private capital investments, a world-class hotel with at least 4-star rating and have a variety of commercial or recreational establishments.

 

Incentives

  • Tax credits can equal lesser than 10% of total project cost or 50% investors’ cash
  • Municipal construction excise tax exemption of 100%
  • Imported goods and sales tax exemption of 100%
  • Municipal licenses exemption of 100%
  • Income tax 90% exemption
  • Property tax 90% exemption

 

Act 98

Creates the basis for the International Insurance Center (“IIC”) which provides a competitive environment for international insurers and reinsurers to cover risks outside of Puerto Rico under secure but flexible regulatory system with attractive tax benefits such as long-term status that will guarantee benefits for initial period of 15 years and possible two added periods of 15 years.

Benefits

  • Alternative risk management strategies as captive or associated captive insurers
  • Insurers or reinsurers’ vehicle to enter Latin America or U.S. markets
  • Special purpose vehicles
  • Vehicle for integrated insurance plans
  • Corporate reorganization using integrational insurers holding companies
  • Segregated assets plans to serve high net worth individual markets
  • Securitization programs

 

Incentives

  • Premium taxes 100% exemption
  • Exemptions of 100% on dividends and other profit distributions made by the International Insurer and International Insurer Holding Company.
  • Municipal franchise and real and personal property taxes exemption.
  • Exemption from withholding taxes on payments of dividends and other profit distributions made to third parties, and from filling tax returns with the Puerto Rico Internal Revenue Service.
  • Isolation of proceeds and benefits paid by international insurers due to income taxes liquidation.
  • Tax exemption of up to $1.2 million on net income applicable at individual cell level for Protected Cell Company arrangements and at company level.
  • Preferred 4% tax rate on net income guaranteed by a decree effective over 15 years with possible renewal.

 

Act 73

In 2008, Act 73, the Economic Incentives Act for the Development of Puerto Rico, otherwise known as Manufacturing Incentives Act, was enacted. This to provide incentives and tax exemptions and credits to eligible businesses. The program promotes the continued development of local industries and attracts foreign investment of companies all around the Globe, particular those dedicated to technology advancement. Additionally, it promotes investments on research, development and initiatives from the academic and private sectors by granting credits and exemptions to them. It also helps to decrease operational and energy related costs for these companies moving to the Island to improve its economy.

Incentives:

  • Fixed tax of 4%
  • Income tax from innovative activities of 0-1%
  • Tax credit of up to 50% for purchasing local and recycled local products
  • Tax credit of up to $5,000 for job creation
  • Tax credit of up to 50% for research and development
  • Tax credit of up to 50% for investment in efficient energy use
  • Rebates for investing in structures, machinery and equipment