Doing Business in Puerto Rico
Puerto Rico offers the benefits and protections of operating within a U. S. jurisdiction with the added benefit of operating as a foreign corporation. Businesses in Puerto Rico benefit from a wealth of facilities, a favorable pro-business environment, and a well-educated bilingual workforce. 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:
- Maximum 4% corporate tax rate for the exempted period of 15 years.
- 0% in the municipalities of Vieques and Culebra during the first 10 years and 2% thereafter.
- 1% for an innovative pioneer activity
- 100% exemption on income from intangible property created or developed in Puerto Rico.
- 0% tax on certain eligible investment income.
- 100% exemption on dividends.
special deduction for expenses incurred in the acquisition or
construction of buildings, structures, and machinery and equipment not
previously used or depreciated in Puerto Rico.
- Purchase of products manufactured in Puerto Rico,
of jobs, for investment in investigation and development, clinical and
toxicological tests, infrastructure, energy renewal or intangible
- Investment in machinery and equipment for the production and efficient use energy,
- Reduction in the cost of energy,
- Investment in the transfer of technology,
- Investment in strategic projects, and Industrial investment.
|Municipal licenses and Taxes
- 60% regular exemptio
- 90% for businesses in the municipalities of Vieques and Culebra.
- 75% exemption for small and medium size businesses.
- 100% exemption for central or regional headquarters during the first 5 years, and 90% thereafter.
- 100% exemption on eligible investments
- 90% exemption on eligible real and personal property
- 100% exemption on real property to corporate headquarters engaged in centralized management services during the first 5 years and 90% thereafter
- 100% exemption on real property during the initial construction or expansion period.
Construction Excise Tax
- 100% exemption for the construction to be used by the exempted business during the period authorized in the grant of tax exemption.
Excise and Sales and Use Tax
- 100% exemption on excise and sales and use tax on raw materials (excluding hydraulic cement, crude oil, unfinished or end products derived from oil, and other hydrocarbon mixtures), manufacturing machinery, equipment and vehicles and accessories used in the exempt operations, energy efficiency equipment certified by Energy Affairs Administration, etc.
Foreign Trade Zone Operations
- 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 significant loans to private companies. On the other hand, The Puerto Rico Economic Development Bank provides loans or guarantees loans up to $1.5 million and also invests in qualified high-risk projects.
An AFICA facility (Spanish acronym for the Authority for Financing Puerto Rico Industrial, Tourism, Educational, Medical & Environmental Control Facilities-a GDB affiliate) sells Puerto Rico tax-exempt industrial development bonds to provide low-cost financing to some products.
Types of business operations - A foreign enterprise may operate in Puerto Rico as a separate corporation, a branch of a separate corporation, a partnership, a special partnership, or as sole proprietorship.
Taxes - The major taxes imposed in Puerto Rico are income taxes, property taxes, municipal license taxes, excise 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 applied to an individual depends on whether he or she is a resident of Puerto Rico or not. The tax rate applicable in 2009 for residents of Puerto Rico during the entire taxable year ranged from 7% to 38% on his/her taxable income considering the global income. In determining the taxable income, the individual may claim the deductions and exemptions provided in the Puerto Rico Internal Revenue Code of 1994.
Non-residents are taxed only on their income from sources within Puerto Rico or on income effectively connected with the conduct of a trade or business within Puerto Rico. The tax rate for non-residents 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 44% 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 Puerto Rico depend on whether or not the entity is engaged in trade or business in Puerto Rico.
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 semi-annually on July 1 and January 1st 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 1st owns personal property used in the trade or business. The tax rate depends on the place (municipality) in which the property is located. For the taxable year 2009-10 the personal property tax rates range from 5.08% to 8.33%. The real property tax rates are 2% higher.
In addition, and as a measure to recover the economic and governmental health of the island, the Government of Puerto Rico, imposed during the year 2009, a temporary special real property tax over all the residential and commercial real properties in the island. This new tax is in addition to the already imposed real property tax and used the same basis of valuation as the previous one. The tax will be imposed for a predetermined time of three fiscal years (2009-2010, 2010-2011 & 2011-2012) or until the government collect at least $690 millions. The tax imposed is .0591% over the assessed valued and all the exemptions and exclusions available under the regular tax will be honor under the new tax, except such exemptions and exclusion granted by the Municipal Governments. Also, the tax will be paid semiannually in March and September, starting with September 2009.
Municipal license tax - 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 (.50%). 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.
Sales and use tax (IVU) - A sales and use 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% (6% for the Commonwealth of Puerto Rico and 1% for the municipalities).
Generally retail sales are taxable, but sales for resale and export are exempt. The sales and use tax will be paid on a monthly basis, on or before the 20th of the next month. Also, a sales and use tax return needs to be filed to the state.
Excise taxes (Arbitrios) - This tax is imposed one time fashion on articles imported, sold, consumed, used or transferred in Puerto Rico. This tax is imposed on cement manufactured or introduced into Puerto Rico, sugar, plastic products, cigarettes, fuels, products derived from oil and hydrocarbon mixture and, vehicles and on certain transactions. The tax rates are different for the different products.
Some other transactions are also subject to an excise tax. Included in these transactions are sales of jewelry, occupancy or rooms in hotels, public shows, and horse race winnings. The tax rate varies depending on the transaction.
Payroll taxes - A business operating in Puerto Rico must comply with the U. S. Federal Insurance Contribution Act (FICA), the U. S. Federal Unemployment Tax Act (FUTA), the Puerto Rico unemployment and disability tax provisions, the Puerto Rico chauffeur’s social security, the Puerto Rico workman’s compensation insurance, and the Puerto Rico Christmas Bonus Act provisions.
Annual report - Every corporation is required to file an annual corporation report with the Puerto Rico State Department. A $100 annual fee is payable when filing the report. In addition, a corporation organized under the laws of Puerto Rico must file a balance sheet certified by a CPA licensed in Puerto Rico when the volume of business exceeds $3,000,000.
Every person whose volume of business exceeds $3,000,000 must file with the income tax return; the property tax return and the volume of business return financial statements certified by a CPA licensed in Puerto Rico.
All foreign corporations must file a balance sheet certified by a CPA licensed in Puerto Rico together with the Annual Corporation Report without considering the volume of business.
For more information about doing business in Puerto Rico, please contact us.
Location - Puerto Rico is an island located in the Caribbean on latitude 18 and longitude 67, south of the United States and 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 major cities in the southeast of the United States.
Size - Approximately 100 miles long and 35 miles wide.
Population - Close to four million (4,000,000) people, according to the 2000 Census.
Climate - The average temperature is between 71° F and 88° F (23° C and 32° C).
Annual average income per capita –Approximately $19,600 for 2007.
Time zone - Atlantic standard time.
Currency - U. S. dollar. Generally major credit cards are accepted.
Languages -Two official languages, Spanish and English, with Spanish being the primary language.
Government - The government is divided into three branches: the executive, the legislative and the judicial branches.
Relationship with the U. S. Federal Government - Puerto Rico is an unincorporated US territory. US laws apply except in those cases where the US Congress legislates otherwise.
Financing - Available from various sources including private and government banks for new businesses.