Doing Business in Puerto Rico

General Information

Location - Puerto Rico is an island located in the Caribbean on latitude 18 and longitude 67, east of the Dominican Republic. It is approximately 1,000 miles (1,600 kilometers) southeast of Miami, Florida and less than 5 hours by plane from Boston, New York, Atlanta, Chicago, Miami, Houston, Dallas and other cities in the southeast of the United States.

Size - Approximately 100 miles long and 35 miles wide.
Population - Close to four million people.
Climate - The average temperature is between 71° F to 88° F (23° C to 32° C).
Annual average income per capita - Approximately $13,000.
Time zone - Atlantic Standard Time.
Currency - U. S. dollar. Generally major credit cards are accepted.
Languages - Two official languages, Spanish and English.
Government - The government is divided in three branches: the executive, the legislative and the judicial branches.
Relationship with the U. S. Federal government - Puerto Rico is an unincorporated U. S. territory. U. S. laws apply except in those cases where the U. S. Congress legislates otherwise.
Financing - Available from various sources including private and government banks for new businesses

Investment opportunities

Puerto Rico offers the benefits and protections of operating within a U. S. jurisdiction with the added benefits of operating as a foreign corporation. Businesses in PR benefit from a wealth of facilities, a favorable pro-business environment and a well-educated bilingual workforce. A new tax incentives Act is approved on May 28, 2008, which is effective on July 1, 2008 with no expiration date. The principal categories of businesses qualifying for exemption include manufacturing and service units, owners of properties used by exempted businesses, research operations, energy suppliers, recyclers, software developers, renewable energy equipment assemblers, the construction of social interest housing and the planning and development of self-sustainable housing projects, among others. Film production no longer qualifies for tax exemption. The government offers incentives and favorable tax laws combined with cash grants, tax credits, and venture capital initiatives to certain businesses. Among the different benefits available to these businesses are:

Tax rate of 0% to 4% on their exempt income (1% in the case of certain pioneer core industries with new technology, 0% if the intangible property used was created or developed in PR).

Alternative withholding tax on royalty payments from 2% to 12%.

Income from qualified investments under Section 2(j) income continues to be fully exempt.

No tax on dividends or liquidating distributions.

Option to deduct in the year in which incurred (in lieu of capitalizing and depreciating them over their useful lives), the expenses incurred in the acquisition or construction of buildings, structures, machinery and equipment.

Tax credit for purchases of PR manufactured products, job creation and for special eligible investment such as for research and development, renewal energy or intangible property.

100% deduction on real and personal property taxes during the initial construction and first-year of operations.

60% exemption on Municipal License Tax.

The opportunity to conduct operations in a Foreign Trade Zone. Companies obtain significant financial savings since raw material, components, finished goods and packaging may be storage in and transported tax free through these zones.

Financing is available from different government sources depending on the type of industry. The Government Development Bank of Puerto Rico (GDB) makes long-term and large loans to private companies, The Puerto Rico Economic Development Bank loans or guarantees loans up to $1.5 million and also invests in qualified high-risk projects. The Authority of Financing for Industrial, Tourism, Educational, Medical and Environmental Control Facilities (AFICA) sells Puerto Rico tax-exempt industrial development bonds to provide low cost financing to some products. In addition, the Puerto Rico Industrial Development Company has a program of economic incentives for research and development projects.

Tax System:

Forms of business operations - A foreign enterprise may operate in PR as a separate corporation, a branch of a separate corporation, a partnership, a special partnership, or as sole proprietorship.

Foreign Corporations - Before any foreign corporation is authorized to do business in Puerto Rico, it must file with the Department of State a certificate of existence issued by the Secretary of State or other authorized officer of the jurisdiction of its incorporation, together with an application thereof.

The mere fact of registering with the Department of State doesn´t make a foreign corporation a resident taxpayer for Puerto Rico income tax purposes. Whereas a resident foreign corporate taxpayer is taxed on its net income (that is, it is entitles to deductions for expenses incurred in connection with its income which is subject to Puerto Rico income tax), a foreign corporation which doesn´t have tax residence in Puerto Rico is subject to income tax on its fixed or determinable income without an allowance for deductions. Tax residence generally requires that the foreign corporation be actively engaged in trade or business in Puerto Rico.

Taxes - The major taxes imposed in Puerto Rico are income taxes, property taxes, municipal license taxes, excise taxes, sales and use taxes, and payroll taxes. Entities doing business in Puerto Rico must comply with the requirements imposed by the different laws such as payments of the tax, withholdings on certain payments and filing different returns and reports with the different government agencies.

Income taxes - for individuals and businesses. The tax rate to an individual depends on whether he is a resident of PR or not. The tax rate applicable for residents of PR during the entire taxable year ranges from 6% to 33% on his taxable income considering his worldwide income. For determining the taxable income, the individual may claim the deductions and exemptions provided in the Puerto Rico Internal Revenue Code of 1994. Nonresidents are taxed only on their income from sources within P R or on income effectively connected with the conduct of a trade or business within Puerto Rico. The tax rate for nonresidents depends on the class of income and on whether or not the individual is engaged in trade or business in Puerto Rico.

The tax rates for corporations and partnerships organized under the laws of Puerto Rico range from 20% to 39% on their taxable income. The taxable income is determined after the allowable deductions and credits. The rates for corporations and partnerships not organized under the laws of PR depend on whether or not the entity is engaged in trade or business in Puerto Rico.

Since 1989, no one can practice or continue practicing in Puerto Rico as a tax return preparer or "specialist" unless he or she enrolls as such with the Department of the Treasury. A penalty of up to $10,000 is imposed for failure to request enrollment in the Special Registry. A preparer or tax return specialist is a person who for compensation prepares or employs another to prepare, all or substantial portion of another´s tax return, statement or refund claim and who is enrolled in the Specialist Registry.

Property taxes - As a general rule, property taxes are imposed on the assessed value of real and personal property. The real property tax is imposed on the value of the property as assessed by the Municipal Revenue Collection Center. The tax is payable semiannually on July 1 and January 1 of each year.

The personal property tax is self-imposed upon the filing of a return by any natural or legal entity engaged in a Puerto Rico trade or business and that on January 1 owns personal property used in the trade or business. The tax rate depends on the place (municipality) in which the property is located. The personal property tax rates applicable in Puerto Rico range from 5.08% to 8.23%. The real property tax rates are 2% higher.

Municipal license taxes - This tax is similar in nature to the gross receipts. It is imposed on all persons engaged in business based on the volume of business attributable to the corresponding municipality. The tax rate is not the same in every municipality. For determining the applicable rate, businesses are grouped in two categories: financial and non-financial. Financial businesses are subject to a maximum rate of 1.50% of the volume of business. Non-financial businesses are imposed a maximum tax of one half of one percent of the volume of business. The definition of volume of business is different for financial and non-financial businesses. In order to conduct operations free of this tax for the semester a business commenced operations, every person who commences any industry or business is obliged to notify the Municipal Treasurer within 30 days of commencement of operations.

Excise taxes - This tax is imposed only to certain articles imported into, sold, consumed, used or transferred in Puerto Rico. The excise tax varies depending on the article or transaction. Only on the following goods are subject to the excise tax: sugar, carbonated beverages, hydraulic cement, petroleum, cigarettes, fuel, gasoline, crude oil and petroleum products, vehicles and trucks, alcoholic beverages, and occupancy or rooms in hotels.

Sales and Use Tax - This tax is imposed on every sale of tangible personal property or taxable service, admission, use, storage or consumption in Puerto Rico, unless specifically exempted. The sales and use tax is 7%, which is segregated 6% for the Commonwealth of Puerto Rico and 1% for the Municipalities.

You must register as a merchant at least 30 days before beginning operations, otherwise, you are exposed to a fine of $10,000.

Payroll taxes - A business operating in PR must comply with the U. S. Federal Insurances Contribution Act (FICA), the U. S. Federal Unemployment Tax Act (FUTA), the PR Unemployment and Disability taxes provisions, the PR Chauffeur´s Social Security, the PR Workmen´s Compensation Insurance, and the PR Christmas Bonus Act provisions.

Annual report - Every corporation is required to file an annual corporation report with the Puerto Rico State Department on or before April 15 of each year. A $100 annual fee for all corporations ($10.00 for non-profit corporation) is due when filling the report. In addition, a corporation organized under the laws of the Commonwealth of Puerto Rico must file the annual report which includes a balance sheet that must be certified by a CPA licensed in Puerto Rico when the volume of business exceeds $3,000,000, and with a compilation report when the volume of business is equal or less than $3,000,000. This applies for both domestic and foreign corporations. The submission requirements of the audited or compilation reports do not apply to non for profit entities or corporations without stocks.

Also, limited Liability Companies do not file a report, but must pay an annual fee of $100 on or before March 1 of each year to the Puerto Rico State Department.

Financial Reporting:

Every entity whose business volume exceeds $3,000,000 must file an Income Tax Return; a Property Tax Return, and a Volume of Business Return, together with financial statements certified by a CPA licensed in Puerto Rico. For the Income Tax Return of special partnerships and corporations of individuals, the requirement is $500,000.

For more information about doing business in Puerto Rico, please contact us.