Business Operations Puerto Rico (Portfolio 7320)

Tax Management Portfolio, Business Operations in Puerto Rico, No. 7320-2nd, offers background information on the relationship between Puerto Rico and the United States and a summary of the Puerto Rico legal system. To view this Portfolio, visit Bloomberg Tax for a free trial.

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Description

Tax Management Portfolio, Business Operations in Puerto Rico, No. 7320-2nd, offers background information on the relationship between Puerto Rico and the United States and a summary of the Puerto Rico legal system. It also discusses, in general, the main business laws applicable in Puerto Rico and analyzes tax laws affecting enterprises and individuals conducting business activities in Puerto Rico or receiving income from Puerto Rican sources. The various Puerto Rico tax incentive laws and their interrelationship with the United States federal tax laws are also covered.

The Worksheets contain examples of various tax forms, including forms relative to certain tax incentives, tax returns, and applications.

This Portfolio may be cited as Ríos-Méndez and Alemar-Escabí, 7320-2nd T.M., Business Operations in Puerto Rico.

Authors

Edgar Ríos-Méndez

Edgar Ríos-Méndez is one of Pietrantoni, Méndez & Álvarez LLC's tax capital members and his practice focuses on international tax matters, inbound and outbound corporate reorganizations, registered investment companies, structured investment vehicles and other complex federal, international and Puerto Rico tax law matters. He has been active in some of the major Puerto Rico tourism related projects with respect to the negotiation of tax incentive grants and the sale of tourism investment tax credits. In the Puerto Rico industrial tax incentive area, Edgarhas assisted clients in the industrial and service sectors and in recent times has actively participated in the negotiation of tax incentives for clients in the financial services industry. He has requested private letter rulings and negotiated closing agreements with the Puerto Rico Treasury Department for the firm's clients. Edgar has acted as tax counsel in the structuring of financing transactions with borrowers located in Puerto Rico, the Baltic region, Eastern Europe and Asia.

 

Credentials / Edgar received his B.A., Xavier University (Cincinnati, OH, 1993); J.D. University of Puerto Rico School of Law (1997); LL.M. (Taxation), New York University Law School (1999). 

Jeanelle Alemar-Escabí

Jeanelle Alemar-Escabí is an associate of the tax practice group of Pietrantoni, Méndez & Álvarez LLC. Before joining the firm, Jeanelle served as tax advisor for the Secretary of the Puerto Rico Treasury Department from 2001 to 2004. Her practice includes advising clients on federal and state income tax issues, corporate taxation, and the design and implementation of corporate reorganizations. Also, she advises clients as to local taxation issues such as property, municipal license, excise, and sales and use taxes. She has assisted in the negotiation of tax exemption grants and tax credits under various Puerto Rico Tax Incentives laws. Jeanelle is also a Certified Public Accountant, member of the American Institute of Certified Public Accountants and a Notary Public.

 

Credentials / Jeanelle received her B.S.B.A., University of Puerto Rico (Mayaguez, 2001); J.D. University of Puerto Rico School of Law (2006); LL.M. (Taxation), Georgetown University Law Center (Washington, D.C., 2008). 

Table of Contents

Detailed Analysis
.01 PUERTO RICO — THE COUNTRY, PEOPLE, ECONOMY, AND GOVERNMENT
A. The Country
B. The People
C. The Economy
D. The Government
1. Historical Background and Status
2. Representation in the U.S. Congress
3. Government Structure
4. Legal System
a. Judicial System
b. Laws
5. Applicability of Provisions of U.S. Constitution and Federal Laws in Puerto Rico
a. General
b. The Privileges and Immunities Clause
c. Commerce Clause
d. Interstate Commerce Act and Safety Appliance Act
e. Federal Labor Laws
f. Federal Admiralty and Maritime Law
g. Federal Environmental Laws
h. Federal Antitrust Laws
i. Bankruptcy Laws
j. Tax on Shipments into the United States
k. Federal Income Tax Laws
l. Federal Immigration Laws
m. Extradition
n. Oversight Board
.02 OPERATING A BUSINESS IN PUERTO RICO
A. Foreign Investment Legislation
1. Opportunities
2. Incentives
B. Currency and Exchange Controls
C. Trade and Commerce Regulation
1. Imports and Exports
a. Licenses, Quotas, and Other Limitations
b. Customs Duties and Other Taxes
c. Records and Reports
2. General Regulation of Business
a. Monopolies
(1)  Historical Background
(2)  Puerto Rico Anti-Monopoly Act of 1964
b. Mergers and Acquisitions
c. Restrictive Trade Practices
d. Price Controls
e. Securities Regulations
3. Licensing and Franchising
a. Patents
b. Trademarks and Trade Names
(1)  In General
(2)  Local Trademark Protection
c. Industrial Know-how
d. Trade Secrets
e. Copyrights
f. Franchises
g. Registration
4. Unclaimed Property
D. Civil Law Contracts
E. Distributorship Agreements
1. General
2. Distributorship Agreements
3. Termination for Just Cause
4. Damages
5. Arbitrability and Applicable Law
6. Tortious Interference
F. Sales Representative Agreements
G. Real Property Transactions
1. Meaning of Real Property
2. Deeds
3. Public Notaries
4. Transfer of Real Property
5. Rights and Limitations on Real Property
6. Registry of Property
7. Special Rules in Cases of Sale of Property from Nonresidents of Puerto Rico
8. Limitation on Accumulation of Land
H. Bulk Sales and Fraudulent Conveyances
1. Bulk Sales Act
2. Fraudulent Alienation of Commercial Establishments
3. Conveyances in Fraud of Creditors
I. Secured Transactions
J. Leasing of Personal Property
1. General
2. Seizure of Leased Property
3. Contents of Lease Agreement
4. Assignment of Lease
K. Environmental Regulations
1. Public Policy Environmental Act
a. Regulation of Environmental Quality Board for Process of Presentation, Evaluation, and Processing of Environmental Documents
b. Regulation for Control of Atmospheric Pollution
c. Puerto Rico Water Quality Standards Regulation
d. Regulation for Management of Non-Hazardous Solid Wastes
e. Regulation for the Control of Hazardous Waste
f. Underground Storage Tank Regulation
g. Underground Injection Control Regulation
h. Regulation for Control of Noise Pollution
2. Environmental Emergencies Fund Act
3. Act for Conservation, Development, and Use of Water Resources of Puerto Rico
4. Regulation for Appropriation, Use, Conservation, and Administration of Waters of Puerto Rico
5. The Puerto Rico Solid Waste Management Authority Act
L. Labor Matters
1. Constitutional Rights of Employees
2. Minimum Wage
a. Fair Labor Standards Act of 1938
b. Puerto Rico Minimum Wage, Vacation, and Sick Leave Act
3. Regular Hours and Overtime
a. General Rule
b. Exemption for Executives, Professionals, and Administrators
c. Exemption for Employees in Computer-Related Occupations
d. Exemption for Outside Sales Employees
e. Interrelationship Between Overtime Pay Under the FLSA and the Puerto Rico Wage and Hour Laws
f. Settlement of Wage and Hour Cases
4. Day of Rest
5. Meal Period
6. Flexible Time
7. Employee Leave
a. General
b. Vacation Leave
c. Sick Leave
d. Maternity Leave
e. Military Leave
f. Jury Leave
g. Family and Medical Leave
h. Other Miscellaneous Leave
8. Payment of Wages
9. Deductions From the Paycheck
10.  Annual Mandatory Bonus
11.  Puerto Rico Anti-discrimination Laws
a. Act No. 100
b. Sexual Harassment
c. Discrimination Against Disabled Employees
d. Genetic Information Discrimination
12.  Dismissal From Employment Without Just Cause
a. The Meaning of Just Cause
b. Temporary Employment Agreements
c. Probationary Period
d. Severance Pay
13.  Dismissal for Jury Duty
14.  Dismissal for Political Affiliation
15.  Dismissal for Participation in Union Activities
16.  Dismissal or Discrimination Against Employee for Filing Complaint or Giving Testimony Against Employer in Administrative or Judicial Proceedings
17.  Dismissal for Refusal to Lift, Transport, or Bear Weight in Excess of Legally Established Limits
18.  Dismissal for Instituting Claim Based on Violation of Working Hours and Working Days Provisions
19.  Prior Notification of Closing of Operations
20.  Consolidated Omnibus Budget Reconciliation Act of 1986
21.  Posting Requirements
22.  Regulation of Labor Relations
a. National Labor Relations Act
b. Puerto Rico Labor Relations Act
23.  Wage Incentives for Small Businesses Operating in Urban Centers
24.  Monitoring of Telephone Conversations, Requirement to Take a Polygraph Test, and Videotaping of Employees at Work
25.  Domestic Violence in the Workplace
26.  Drug Testing
M. Financing the Business
1. Government Development Bank for Puerto Rico
2. Commercial Banks
3. Mortgage Banks
4. Specialized Institutions
5. Puerto Rico Industrial, Medical, Education, and Environmental Pollution-Control Facilities Financing Authority
6. Puerto Rico Industrial Development Company
7. Venture Capital
a. Venture Capital Funds
b. Private Placement With Investment Banker
c. Real Estate Investment Trusts
d. Puerto Rico International Banks
.03 FORMS OF DOING BUSINESS IN PUERTO RICO
A. Principal Business Entities
1. Sole Proprietorship
a. General
b. Separate Accounting Requirement
c. Losses of Sole Proprietorship — General Rule
d. Losses of Sole Proprietorship — Exceptions
(1)  Losses of Principal Trade or Business
(2)  Losses at the Start of the Trade or Business
(3)  Losses of Special Corporations Owned by Employees
e. Gain on Sale of Sole Proprietorship
f. Protection of Name of Sole Proprietorship
g. Usury Laws
2. Corporations
3. Limited Liability Companies
4. Low-Profit Limited Liability Companies and Public Benefit Corporations
5. Partnerships
6. Branch of Foreign Corporation
7. Other Entities
B. Corporations
1. Historical Background
2. Formation
a. Purpose Clause
(1)  General
(2)  Illegal Purposes
b. Corporate Name
c. Incorporators
d. Articles of Incorporation
e. Capital Stock
f. Incorporation Procedure
g. Costs of Incorporation
3. Operation
a. Right to Operate as a Puerto Rico Corporation
b. Changes to Certificate of Incorporation
(1)  Certificate of Correction
(2)  Amendment Prior to Receipt of Payments of Capital
(3)  Amendment After Receipt of Payments
(4)  Amendment to Change Resident Agent
(5)  Resignation of Resident Agent
c. Increases and Reductions in Capital Stock
d. Acquisition of Corporate Stock
e. Corporate Officers
f. Directors
g. Shareholders
h. Books and Records
i. Annual Reports
j. Dividends
k. Reserves
4. Statutory Merger or Consolidation and Conversions
5. Dissolution
6. Liquidation
7. Limited Liability
C. Special Types of Corporations
1. Professional Corporations
2. Close Corporations
3. Special Employee-owned Corporations
a. General
b. Members
c. Accounts and Funds
4. Foreign Corporation
a. Meaning of Foreign Corporation
b. Requirement to Register to Do Business
c. Doing Business in Puerto Rico
d. Consequences of Not Being Registered to Do Business
e. Accounting Books and Records
f. Annual Report
5. Registered Investment Companies
a. General
b. Requirements for Qualification as Investment Company
c. Registration Requirement
d. Requirements for Registered Investment Companies
e. Taxation
f. Puerto Rico Registered Investment Companies Act of 2013
6. Nonprofit Corporations
7. Special Types of Corporations
D. Limited Liability Companies
E. Partnerships
1. Civil Partnerships
2. Commercial Partnerships
a. General Partnerships
b. Limited Partnerships
c. Classification of Partnerships as Civil or Commercial
3. Limited Liability Partnerships
a. General
b. Registration
c. Name
d. Limited Liability
e. Taxation
F. Business Trusts
G. Cooperatives
.04 PRINCIPAL TAXES
Introductory Material
A. Puerto Rico Income Tax
1. Background
2. Overview of Puerto Rico Income Tax
a. The Income Tax Formula
b. Due Date for Filing Income Tax Return
c. Income Taxation of Individuals
d. Information Returns
e. Income Taxation of Corporations
B. Gift and Estate Tax
1. General
2. Gift and Estate Tax Rates
3. Gift and Estate Tax Returns
4. Estate Tax Lien
C. Excise Tax
1. General
2. Articles Imported into or Manufactured in Puerto Rico
a. General
b. Articles Specifically Taxed
(1)  Hydraulic Cement
(2)  Sugar
(3)  Plastic Products
(4)  Cigarettes and Products Made or Derived from Tobacco
(5)  Combustible Fuels
(6)  Crude Oil, Products Partially Elaborated of Crude Oil, End Products Derived From Crude Oil, and Any Other Hydrocarbon Mix
(7)  Vehicles
(8)  Heavy Equipment and Vessels
c. Exemptions From Excise Tax on Specifically Taxed Articles
(1)  Public Service Vehicles
(2)  Vehicles for the Personal Use of Consuls
(3)  Vehicles of Disabled Persons
(4)  Certain Vehicles Acquired by Churches
(5)  Vehicles to Be Donated to the Police
(6)  Articles Used in Manufacture
(7)  Articles in Transit and for Export
(8)  Exemption in Relation to Returned Articles
(9)  Exemption on Cigarettes Introduced by Tourists and Residents of Puerto Rico
(10)    Articles Sold at Air and Maritime Terminal Stores to Persons Leaving Puerto Rico
(11)    Vehicles Acquired by Nonprofit Charitable Organizations
(12)    Articles Acquired by Government Agencies
(13)    Articles Introduced by Persons in Government Service
(14)    Exemption on Cigarettes
(15)    Contaminated Gasoline, Diesel Oil and Gas Oil and Diesel Oil for Use Outside Puerto Rico
(16)    Gasoline for Air and Marine Use
(17)    Vessels Used to Render Towing Services or Bunkering
(18)    Reimbursement of Excise Taxes on Vehicles Propelled by Alternate Energy or Hybrids
(19)    Temporary Exemption for Items Introduced by Telecommunication Merchants
d. Computation and Payment of Excise Tax
3. Excise Tax on Transactions
4. Licenses
5. Excise Tax to Certain Personal Property and Services Among Related Parties
D. Sales and Use Tax
1. Background
2. Definition of “Taxable Items”
a. Tangible Personal Property
(1)  Meaning of Tangible Personal Property
(2)  Exclusions From Tangible Personal Property
b. Combined Transactions
(1)  Meaning of Combined Transactions
(2)  Exclusions From Combined Transactions
c. Taxable Services
(1)  Meaning of Taxable Services
(2)  Excluded Services
(a)   Exemptions Beginning Oct. 1, 2015
(b)   Exemptions Prior to Sept. 30, 2015
(3)  Special Rules for Leases
(4)  Reimbursed Expenses
(5)  Method of Accounting
d. Admission Rights
(1)  Meaning of Admission Rights
(2)  Exclusions From Admissions Rights
3. Exemptions From the Sales and Use Tax
4. Taxpayer
5. Source of Income
a. Internet Sales and Non-Withholding Agents
6. Registration and Certificates
a. Registration Requirement
b. Determining Nexus with Puerto Rico
c. Certificate of Exemption for Manufacturing Plants
d. Certificate of Eligible Reseller (Exemption from Tax)
e. Reseller Certificate (Credit for Tax Paid)
7. Credit for Payment of Sales Tax on the Purchase of an Article Resold to Another Merchant
8. Credit for Bad Debts
9. Credit for Excess Sales Tax Payments
10.  Deduction for the Return of Taxable Items
a. General
b. Items Sold Prior to July 1, 2015, Subject to 6 Percent Sales and Use Tax Rate, and Returned After June 30, 2015
(1) Merchants
(2) Importers
11.  Record Keeping Requirement
12.  Filing Requirements
a. After Oct. 31, 2016
b. Prior to Oct. 31, 2016
13.  Payment of the Sales and Use Tax
a. Sales Tax
b. Use Tax
14. Sales and Use Tax (SUT) Oversight Program
15. Integrated Portal for Merchants (PICO) - Former System
16. Internal Revenue Unified System (SURI) - Current System
E. Alcoholic Beverages Tax and License
F. Special Treatment Entities
1. Corporations of Individuals
a. General
b. Corporation of Individuals Qualification Requirements
c. Non-Eligible Corporations
d. Husband and Wife as Shareholders
e. Trusts as Shareholders
f. Procedure for Electing Treatment as Corporation of Individuals
g. Time for Making Election — General Rule
h. Time for Making Election — New Corporations
i. Termination of Effectiveness of Election
j. Tax Elections That May Be Made by Corporations of Individuals
k. Taxation
2. Real Estate Investment Trusts
a. General
b. Real Estate Investment Trust Qualification Requirements
c. Income Tests
d. U.S. Real Estate Investment Trusts
e. Taxation
3. Special Partnerships
a. Definition
b. Requirements
c. Election
d. Limited Liability
e. Accounting Method
f. Accounting Year
g. Termination
h. Taxation
4. International Banking Entity
a. Background
b. International Banking Entity Qualification Requirements
c. Organization
d. Operations
e. Taxation
5. International Financial Entities
a. Background
b. International Financial Entity Qualification Requirements
c. Permitted Transactions
d. Prohibited Transactions
e. Taxation
G. Property Taxes
1. General
2. Property Tax Rates
3. Assessed Value of Property
4. Exemptions
5. Due Date for Payment of Property Taxes
H. Municipal License Tax
1. General
2. Exemptions
3. Municipal License Tax Rates
4. Due Date for Payment of Municipal License Taxes
I. Construction Excise Tax
J. Payroll Taxes
1. Puerto Rico Income Tax Withholding
a. In General
b. Exceptions
c. Exemptions
d. Procedural Requirements
2. FICA Tax
3. Puerto Rico Unemployment Tax
4. Federal Unemployment Tax
5. Disability Benefits Tax
6. Workmen's Compensation
7. Chauffeur's Insurance
K. Room Occupancy Tax
L. Municipal Occupancy Tax
M. U.S. Income Tax
1. General
2. Individuals Residing in Puerto Rico
3. Puerto Rico Corporations
4. U.S. Corporations
N. Value-Added Tax
1. Background
.05 TAXATION OF DOMESTIC CORPORATIONS
A. Meaning of Domestic Corporation
B. Corporate Income Tax
1. Taxation of Worldwide Income
2. Tax Accounting
a. General
b. Tax Accounting Periods
(1)  General
(2)  Special Rules Regarding 52–53 Week Taxable Year
(3)  Calendar Year
(4)  Change of Taxable Year
c. Tax Accounting Methods
(1)  General
(2)  Cash Receipt and Disbursement Method
(3)  Accrual Method
(4)  Installment Method
(5)  Long-term Contracts
(6)  Hybrid Methods
(7)  Change of Accounting Method
d. Inventories
(1)  General
(2)  Methods of Inventory
(3)  Valuation of Inventories
e. Reserves
3. Calculation of Gross Income
a.  Gross Income
b.  Exclusions From Gross Income
c. Exemption From Gross Income
d. Capital Gains
(1)  General
(2)  Realized Gain
(3)  Capital Assets
(4)  Capital Gains and Losses
(5)  Taxation of Capital Gains
e. Nonrecognition Transactions
(1)  Like-kind Exchanges
(2)  Involuntary Conversions
f. Earnings Derived Under a Grant of Tax Exemption
g. Rental Income for Property Used by Special Employee-Owned Corporations
h. Income From Certain Agricultural Activities
i. Dividend Income
(1)  General
(2)  Dividends From Puerto Rico Industrial Development Income
(3)  Distributions Made Under the Puerto Rico Tax Incentives Act of 2008
j. Income Derived Under the Tourism Development Act of 2010
k. Income Derived by Exempt Hospital Units
4. Business Expenses
a. General
b. Organizational Expenses
c. Travel and Entertainment Expenses
d. Interest and Royalties
e. Taxes
f. Depreciation and Depletion
g. Obsolescence
h. Charitable Contributions
i. Capital Losses
j. Casualty Losses
k. Bad Debts
l. Worthless Bonds and Similar Obligations; Worthless Stock and Right to Acquire Stock
m. Inventory Write-downs
n. Rents
o. Salaries and Wages
p. Other Miscellaneous Deductions
5. Capital Expenditures
6. Loss Carryovers
a. Net Operating Loss
b. Capital Loss Carryover
7. Tax Credits
a. Foreign Tax Credit
b. Investment Tax Credits
(1)  Tourism Investment Tax Credit
(2)  Agricultural Tax Credit
(3)  Solid Waste Disposal Investment Credit
(4)  Capital Investment Fund Credit
c. Purchase Credits
(1)  Tax Credit for Purchase of Products Manufactured in Puerto Rico
(2)  Tax Credit for Purchase of Puerto Rico Agricultural Products
d. Other Credits
8. Tax Rates and Calculation of Taxable Income
a. Corporate Income Tax Rates
b. Special Tax Rate for Certain Interest Income
c. Alternative Minimum Tax
9. Assessment and Filing
a. Assessment of Corporate Income Tax
b. Corporate Income Tax Return
c. Payment of Estimated Tax
d. Personal Property Tax Return
e. Volume of Business Tax Return
f. Corporation Annual Report
g. Excise Tax Returns
h. Consolidated Returns
10.   Withholding
a. Puerto Rico Corporations and Partnerships and Foreign Corporations and Partnerships Engaged in Trade or Business in Puerto Rico
b. Indemnification Payments
c. Payments for Services Rendered
11.   Corporate Transactions
a. Funding the Corporation
b. Reorganizations in General
c. Mergers, Consolidations, and Type B and C Reorganizations
d. Type D Reorganizations
e. Type E and F Reorganizations
f. Liquidations
g. Acquisition of Stock With Step-up in Basis of Assets of Acquired Corporation
12.   Advance Ruling
.06 TAXATION OF FOREIGN CORPORATIONS
A. Meaning of Foreign Corporation
B. Background on Use of Foreign Corporations in Puerto Rico
C. Foreign Corporations Engaged in Trade or Business in Puerto Rico
1. Engaged in Trade or Business
2. Taxation of Foreign Corporations Engaged in Trade or Business in Puerto Rico
3. Determination of Taxable Net Income of Foreign Corporations Engaged in Trade or Business in Puerto Rico
D. Foreign Corporations Not Engaged in Trade or Business in Puerto Rico
1. General
2. Tax Jurisdiction
3. Source of Income Rules
a. Interest
b. Dividends
c. Personal Services
d. Rents and Royalties
e. Sale of Real Property
f. Sale of Personal Property
g. Distribution From Liquidation of Puerto Rico Corporation
h. Distribution From the Liquidation of Foreign Corporation
i. Insurance Premiums
4. Real Property Income Option
5. Exceptions to 10 Percent Tax on Dividends
a. Dividends From Industrial Development Income Derived Under Puerto Rico Tax Incentives Act of 1998
b. Dividends From Industrial Development Income Derived Under Puerto Rico Tax Incentives Act of 1987 and Puerto Rico Industrial Incentives Act of 1978
6. Method of Taxation
a. Foreign Corporations Engaged in Trade or Business in Puerto Rico
b. Foreign Corporations Not Engaged in Trade or Business in Puerto Rico
.07 TAXATION OF A BRANCH
A. General
B. Branch Profit Tax
C. Subsidiary v. Branch
.08 TAXATION OF PARTNERSHIPS
A. General
B. Partnership Operations
1. Determining Partnership Income and Deductions
a. Passthrough of Income and Losses
b. The Partnership as the Tax Accounting Entity
2. Special Allocations and Capital Accounts
3. Loss Limitations
4. Adjusting the Outside Basis for Partnership Operations
a. Operations and Distributions
b. Partnership Liabilities
5. Timing of Reporting Partnership Profits and Losses
6. Partnership — Partner Transactions
7. Continuation of a Partnership
C. Partnership Formation
1. Contributing Property to a Partnership
a. Nonrecognition of Gain or Loss
b. Basis
(1)  Contributing Partner's Outside Basis
(2)  Partnership's Inside Basis
c. Allocating Income or Deduction Inherent at Contribution
d. Character of Contributed Property
2. Organizational and Syndication Expenses
D. Partnership Distributions
1. Current Distributions
a. Nonrecognition of Gain or Loss
b. Partner's Basis Consequences
(1)  Distributee Partner's Transferred Basis in Distributed Property
(2)  Effect on Distributee's Outside Basis
c. Character and Holding Period of Distributed Property
(1)  Character of Distributed Property
(2)  Holding Period of Distributed Property
d. Anti-abuse Rules to the Nonrecognition Treatment
2. Liquidating Distributions
a. In General
b. Nonrecognition of Gain or Loss
3. Withdrawal Payments
a. Payments for Interest in Partnership
b. Distributive Share or Guaranteed Payments
E. Withholding on Distributive Share
.09 TAXATION OF OTHER BUSINESS ENTITIES
A. Corporation of Individuals
1. Taxation of Corporation of Individuals
2. Taxation of Shareholders
a. In General
b. Losses
c. Adjustments to Basis of Shareholder's Stock
d. Adjustment to Basis of Debts of Corporation of Individuals Owed to Its Shareholders
e. Distributions by Corporations of Individuals
3. Midstream Conversion into Corporation of Individuals
a. Income Recapture
b. Built-in Gain Recognition
4. Distributions Made After Termination of Corporation of Individuals Status
5. Withholding on Distributive Share
B. Special Partnerships
1. Taxation of a Special Partnerships
2. Transfer of Property into a Special Partnership
3. Taxation of Partners of Special Partnership
a. General
b. Losses
4. Adjustments to Basis of Partner's Interest in Special Partnership
5. Basis of Property Contributed to Special Partnership
6. Distributions to Partners by Special Partnership
7. Basis of Property Received in Distribution
8. Withholding on Distributive Share
C. Special Employee-owned Corporations
1. Determination of Income and Loss of Special Employee-owned Corporation
2. Taxation of Special Employee-owned Corporation
3. Taxation of Regular and Special Members
4. Exemption for Interest Derived From Bonds and Obligations for the Financing of the Development of the Objectives of a Special Employee-owned Corporation
D. Registered Investment Companies
1. Taxation of Registered Investment Companies
a. In General
b. Registered Investment Companies Treated as an Exempt Trust
(1) Taxable as a Domestic Corporation
(2) Taxable as a Partnership
(3) Definitions
(a) Eligible Activities
(b) Activities Automatically Eligible
(c) Eligible Business
(d) New Infrastructure
2. Taxation of Shareholders of a Registered Investment Company
E. Real Estate Investment Trusts
1. Taxation of Real Estate Investment Trusts
2. Taxation of Beneficiaries of Real Estate Investment Trusts
F. Limited Liability Companies
1. General
2. Taxation of an LLC
a. In General
b. Election to be Taxed Under the 1994 Code
.10 TAXATION OF INDIVIDUALS — RESIDENTS
A. Scope of Taxation
B. Residence
C. Determination of Gross Income
1. Gross Income
2. Exclusions From Gross Income
D. Exemptions From Gross Income, Deductions, Personal Exemptions, Exemptions for Dependents, and Credits
1. Adjusted Gross Income and Net Taxable Income
2. Exemptions From Gross Income
3. Deductions From Gross Income
4. Deductions From Adjusted Gross Income
5. Special Deduction for Certain Individuals
6. Deductions for Personal Exemptions
7. Deductions for Dependents Exemptions
8. Credits
a. Earned Income Credits
b. Credit for Low-income Individuals Older than Sixty-Five (65) Years of Age.
c. Tax Credit Program for the Acquisition of Newly-Built Housing.
d. Existing Housing Acquisition Tax Credit Program.
E. Withholding
1. Indemnification Payments
2. Payments for Services Rendered
3. Dividends
F. Rates and Calculation of Taxable Income
1. Regular Individual Income Tax Rates
2. Special Individual Income Tax Rates
a. General
b. Interest Derived From Accounts With Banking Institutions
c. Interest Derived From Individual Retirement Accounts
d. Interest Derived From Certain Qualified Bonds, Notes, and Mortgages
e. Withholding and Filing Requirements
f. Self-employed Individuals
3. Alternative Minimum Tax
4. Capital Gains
G. Assessment and Filing of Income Tax Return
1. Assessment of Income Tax
2. Filing of Income Tax Return
.11 TAXATION OF NONRESIDENTS
A. Nonresident U.S. Citizens
1. Taxable Income Subject to Puerto Rico Income Tax
2. Deductions
3. Withholding
4. Returns
B. Nonresident Aliens Not Engaged in Trade or Business in Puerto Rico
1. Taxable Income Subject to Puerto Rico Income Tax
2. Deductions
3. Withholding
4. Returns
C. Taxation of Nonresident Aliens Engaged in Trade or Business in Puerto Rico
1. Engaged in Trade or Business
2. Taxable Income Subject to Puerto Rico Income Tax
3. Deductions
4. Returns
.12 TAXATION OF RETIREMENT PLANS
A. General
B. Qualified Retirement Plans
1. Pension Plans
2. Profit-Sharing Plans
3. Stock Bonus Plans
4. Cash or Deferred Contribution Arrangements
5. Plans of Self-Employed Individuals
C. Qualification Requirements
D. Investment Limitations
E. Contributions to the Pension Trust Fund
F. Taxation of Employees in Relation to Contributions to and Distributions From the Trust of a Qualified Retirement Plan
1. Contributions to a Qualified Retirement Plan
2. Distributions From a Qualified Retirement Plan
.13 ESTATE AND GIFT TAX
A. Estate Tax
1. Liable Persons
2. Territorial Scope
3. Taxable Base
a. Gross Estate
(1)  General
(2)  Community Property
(3)  Life Insurance
b. Deductions Based on Transferred Property or Transferee
(1)  General
(2)  Property Located in Puerto Rico
(3)  Property Passing to Surviving Spouse
(4)  Eligible Investments
(5)  Deductions for Charitable Bequests
(6)  Agricultural Exemption
c. Deductions Based on Expenses and Liabilities
d. Fixed Exemption
4. Estate Tax Rates
5. Estate Tax Lien
B. Gift Tax
1. Liable Persons
2. Territorial Scope
3. Taxable Gift Amount
a. General
b. Deductions Based on the Transferred Property or the Transferee
c. Annual Exclusion
d. Gift Tax Rates
.14 AVOIDANCE OF DOUBLE TAXATION
A. Foreign Tax Credits
B. Tax Treaties
.15 TAX INCENTIVES
A. Overview
1. Historical Background
2. Registration and Compliance Requirements
B. Economic Incentives for the Development of Puerto Rico Act (EIDA)
1. Applying for Economic Incentives for the Development of Puerto Rico
2. The Economic Incentives Act
a. Background Information in Relation to the Economic Incentives for the Development of Puerto Rico Act
(1) General
(2) United States Income Tax Considerations
(3) Foreign Tax Law Considerations
b. Tax Incentive Period
c. Qualifying Businesses
(1) General
(2) List of Qualifying Businesses
d. Income Tax Benefits
(1) Low Flat Income Tax Rate and Exemptions
(a) General Rule
(b) Alternative Tax Rates
(c) One Hundred Percent Exemption for Exempted Businesses Located in Vieques and Culebra
(d) One Hundred Percent Exemption for Income Derived from § 2(j) Investments
(e) Distribution, Sale, or Exchange of Stock or Assets
(f) Liquidation
(g) Novel Pioneer Industries
(h) Exempted Businesses Located in Low or Intermediate Industrial Development Zone
(i) Special Limitations
(2) Special Deductions
(a) Current Deduction for Investment in Buildings, Structures, Machinery and Equipment
(b) Current Deduction for Expenses Incurred in Remodeling or Repairing of Buildings, Structures, Machinery, and Equipment
(c) Net Operating Loss
(3) Tax Credits
(a) Credit for Purchases of Products Made in Puerto Rico
(b) Credit for Purchases of Products or Raw Materials Made from Recyclable Materials Produced by Exempt Businesses in Puerto Rico
(c) Credit for the Creation of Employment
(d) Investment in Research and Development, Clinical Tests, Toxicology Tests, Infrastructure, Renewable Energy, and Intangible Property
(e) Investment in Machinery and Equipment for the Efficient Production and Use of Electric Power
(f) Credit to Reduce the Cost of Energy
(g) Credit for Investment in the Transfer of Technology
(h) Credit for Investment in Strategic Projects
(i) Credit for Industrial Investment
e. Property Tax Benefits
(1) Property Tax Rates
(2) Property Tax Exemption
(a) First Year — One Hundred Percent Exemption
(b) First Five-Year Exemption for Real Property Owned by Eligible Service Business of Corporate Headquarters
(c) Remaining Years — Ninety Percent Exemption
(d) Exemption During Expansion Period
(e) One Hundred Percent Exemption for § 2(j) Investments
(3) Self-Assessment Method
f. Municipal License Tax Benefits
(1) Municipal License Tax
(2) Municipal License Tax Exemption
(a) One Hundred Percent Exemption — for First Three Semesters
(b) Ninety Percent Exemption — Businesses Located in Vieques or Culebra
(c) Exemption for Remaining Period
(d) One Hundred Percent Exemption on Income from § 2(j) Investments
(e) Seventy Five Percent Exemption for Small and Medium-Sized Businesses
(3) Municipal Construction Tax Benefits
g. Excise and Sales and Use Tax Benefits
C. Tourism Tax Incentives
1. Background
2. Application for Tourism Decree
3. Procedure for Obtaining Tourism Decree
4. Exemption Period
5. Eligible Tourism-Related Activities
6. Income Tax Benefits
a. Percentage of Exemption
b. Applicable Tax Rates
c. Sale of Shares of Business Operating Under Tourism Decree
d. Other Income Tax-related Exemptions
e. Commencement of Exemption Period
f. Deduction for Net Losses
g. Option with Respect to Effectiveness of Tourism Decree
h. Tourism Investment Credit
7. Property Tax Benefits
8. Municipal License Tax Benefits
9. Municipal Construction Tax Benefits
10. Sales and Use Tax Benefits
11. Renegotiation of Tourism Decree
12. Extension of Tourism Decree
13. Tax Exemption with Respect to Charges and Interest Paid to Financial Institutions in Relation to Financing of Projects for Development of Tourism
14. Cruise Ships Incentives
a. Destination Incentive
b. Frequent Home Port Visits Incentive
c. Time in Puerto Rico Incentives for Ships in Transit
d. Incentives for Goods
D. Agricultural Tax Incentives
1. Historical Background
2. Agricultural Tax Incentives
a. Income Tax
b. Property Tax Exemption
c. Municipal License Tax Exemption
d. Excise Tax Exemption
e. Agricultural Matching Grants
f. Applying for Agricultural Incentives
E. Tax Incentives for Hospital Facilities
1. Background
2. Hospital Facilities Tax Incentives
a. Income Tax Incentives
b. Property Tax Incentives
c. Excise Tax Incentives
d. Municipal Tax Incentives
3. Period of Tax Exemption
4. Application Procedure for Hospital Facilities Tax Incentives
F. Tax Incentives for Air Carriers
1. Background
2. Property Tax Incentive
3. Applying for Air Carrier Tax Incentives
4. Extension of Exemption on All Property
G. Tax Incentive Relating to Treatment and Disposal of Solid Waste
1. Investment Tax Credit
2. Distribution of Tax Credit
3. Reduction in Base
4. Sale or Other Disposition of Eligible Investment
5. Transfer of Tax Credit
6. Other Tax Incentives for Certain Recycling Activities
H. Foreign Trade Zones
1. General
2. Federal Tax Benefits
3. Puerto Rico Excise Tax
4. Puerto Rico Property Tax
5. Municipal License Tax
6. Puerto Rico Income Tax
I. Tax Incentives for Film Industry
1. Background
2. Film Projects
a. Eligibility
b. Grants
c. Tax Credit Advance
3. Infrastructure Projects
4. Tax Incentives Offered with Respect to Film Projects and/or Infrastructure Projects
a. Income Tax
b. Property Taxes
c. Municipal License Tax
d. Municipal Construction Excise Tax
e. Excise Tax
f. Hotel Occupancy Tax
g. Tax Credit
J. Tax Incentives for Construction and Rehabilitation of Social Interest Housing and Middle Class Housing under Public and Private Sector Co-partnership Program
1. Public and Private Sector Co-Partnership Program
2. Tax Benefits
3. Low or Moderate Income Family
4. Procedure
K. Tax Credit for Investment in Housing Infrastructure
1. Infrastructure Tax Credits
2. Adjustment to Amount of Investment in Infrastructure
3. Meaning of Infrastructure
4. Amount of Infrastructure Tax Credits Available
5. Transfer of Infrastructure Tax Credit
6. Transfer of Ownership Interest
7. Procedure
L. Tax Credit for Investment in New Construction or Rehabilitation of Housing Units for Leasing to Low and Moderate Income Families
1. Tax Credit for Construction and Rehabilitation of Housing Facilities for Low and Moderate Income Families
2. Total Construction and Rehabilitation Tax Credits Available
3. Basis of Housing Units
4. Transfer of Tax Credit
5. Transfer of Ownership Interest
6. Procedure
M. Tax Incentives for Promoting Major League Games
1. Special Income Tax Rate for Players, Managers, Referees, Technical Personnel, and Others
2. Withholding
3. Exclusion from Gross Income
4. Excise Tax Exemption
5. Exemption from Tax on Admissions to Public Shows
N. Gifts to the “Patronato del Palacio de Santa Catalina”
O. Tax Incentives for Development of Geographical Zones
1. Historical Zones Exemption
2. Theater District in Santurce
3. Rio Piedras Ward
4. Tax Incentives with Respect to Development of Cantera
5. Tax Incentives for Development of Area of Castañer
6. District of World Commerce of the Americas
7. Revitalization of Urban Centers
a. Income Tax Exemption for Interest on Loans
b. Tax Credit for Qualified Investments in Constructions in Designated Urban Centers
c. Special Deduction of 5 percent of the Payroll of New Employees
d. Special Deduction of 15 percent of the Payroll of the Employees of Businesses Transferred to a Designated Urban Center
e. Tax Credit for Investments in Infrastructure
f. Tax Exemption for the Construction of Parking Structures
g. Accelerated Depreciation
8. Tax Incentives for the Rehabilitation and Development of Santurce
P. Green Energy Incentives Program
Q. Export Services Act
R. Individual Investors Act
S. Tax Incentives for Liability Payments
1. General
2. Tax Incentive for Voluntary Disclosure of Income and Tax Payments
3. Tax Incentive for Sales and Use Tax and Tax Income Withholding
4. Tax Incentive for Liabilities Based on Fines, Surcharges, Interest and Penalties
5. Payment Deadline
6. Terms and Conditions
7. Exclusions
T. Other Tax Incentives
1. General
2. Institutions for Teaching of Fine Arts
3. Sale of Literary and Artistic Work
4. Commercial Production of Flowers and Ornamental Plants
5. Real Estate Market Stimulus Act of 2010 and Transitional Housing Market Boost Program Act of 2011
a. Sale of a Newly-built Residential Property
b. Sale of Existing Residential or Commercial Property
c. Rental Income
6. Small and Midsize Business (SMB) Job Creation and Retention Incentive Act
a. Public Policy
b. Eligibility
c. Job Creation and Retention Agreement
d. Benefits
e. Applying for Incentives under the SMBs (Small and Midsize Business) Job Creation and Retention Incentive Act
7. International Insurers and Reinsurers Act
8. Private Equity Funds Act
9. Incentives and Financing for Young Entrepreneurs Act
10. Puerto Rico Creative Industries Promotion Act
a. Public Policy
b. Eligibility
c. Funding Proposals
d. Benefits
e. Applying for Incentives under the Creative Industries Promotion Act
11. Credit for Donations to Foundations of Former Governors

Working Papers

Table of Worksheets
Worksheet 1 Corporation Income Tax Return
Worksheet 2 Partnership Informative Income Tax Return — Composite
Worksheet 3 Schedules and Forms Accompanying Corporation and Partnership Tax Returns
Worksheet 4 Income Tax Returns and Schedules for Exempt Businesses Under the Puerto Rico Incentives Programs
Worksheet 5 Nonresident Annual Return for Income Tax Withheld at Source
Worksheet 6 Foreign Corporations and Partnership Tax on Dividend Equivalent Amount and Effectively Connected Interest (Branch Profits Tax)
Worksheet 7 Estate Tax Return of Nonresident or United States Citizen Resident of Puerto Rico
Worksheet 8 Value Added Tax Monthly Return and Instructions
Worksheet 9 Summary of the Informative Returns
Worksheet 10 Annual Reconciliation Statement of Income Subject to Withholding
Worksheet 11 Request for Extension of Time to File the Income Tax Return
Worksheet 12 Application for Merchants' Registration, Exemption Certificate and Change in Information — Principal Office
Worksheet 13 Certificate of Authorization to Do Business as a Foreign Corporation
Worksheet 14 Application for Registration of a Limited Liability Company