• As general rule, pursuant Section 933 of the United States Tax Code, the income derived from sources within Puerto Rico by a Puerto Rico bona fide resident (except amounts received for services performed as an employee of the United States or any agency thereof) shall be excluded from US gross income.

• Income tax rate for individuals in Puerto Rico could be up to 33% of net taxable income. An Alternative Basic Tax may apply, and there are reduced tax rates for certain types of income or gains.

Foreign Corporations

Taxed on worldwide Income.

• Foreign corporations engaged in a trade or business (ETB) in Puerto Rico could be taxed on its Puerto Rico source income and effectively connected foreign source income.
• Foreign corporations could be a branch or subsidiary of other foreign entities. in this case, a branch profit tax may apply.
• In the case that the corporation is ETB, the company will pay their income tax with the filing for the corporate income tax return.
• Not ETB corporations could pay its tax responsibility through withholding at source.

Limited Liability Company (LLC)

Certain Limited Liability Companies may elect to be treated as flow-through entities for Puerto Rico income taxes.

Tax Rates

• The normal tax rate for corporations is 20% of net taxable income plus an additional tax of up to 19%, for a maximum rate of 39%.
• An alternative minimum tax of 30% may apply.
• The branch profit tax for certain foreign corporations is 10%.
• Reduced tax rates may apply for certain types of income or gains.

Corporate Annual Report

Every corporation operating in PR must file with the Puerto Rico Department of State a Corporation Annual Report. This report is essentially an informative return and requires the names of officers and directors, as well as a balance sheet as of the close of the taxpayer’s fiscal year.

Audited Financial Statements

Generally, an audit of the PR operations must be performed if the PR gross receipts are more than $3,000,000.  The audited financial statements (i.e., Balance Sheet, Profit & Loss Statement and Statement of Cash Flows) must be issued by a Certified Public Accountant (“CPA”) licensed to practice in PR.

However, for purposes of the PR General Corporation Law, every foreign corporation is required to submit, along with its Corporation Annual Report, a balance sheet showing only the assets and liabilities of the PR operations, regardless of the corporation’s gross receipts.  The balance sheet should also be certified by a CPA licensed in PR.

Puerto Rico Sales and Use Taxes

Puerto Rico has a hybrid indirect tax system, considering that the sales and use tax (“SUT”) is paid at entry and not necessarily at the point of sale. Generally, there are two tax rates related to SUT:

• 11.5% (10% State SUT + 1% Municipal SUT), that generally applies on the sale and use of tangible personal property and certain taxable services; and
• 4% State SUT, that generally applies to the sale and use of designated professional services and services rendered between businesses.

Note that the provisions set forth in the Puerto Rico Tax Code to determine if a company has nexus in PR for SUT purposes are different and broader than the provisions established to determine if a company is ETB in PR for income tax purposes. As such, there could be instances where a company may not be ETB in PR for income tax purposes, but could still be required to register for SUT purposes if it meets with certain conditions.

Municipal License Tax

The Municipal License Tax Act (MLTA) establishes the requirements for determining wheter a business or industry is subject to municipal license tax. The MLTA generally provides that every person engaged for profit in the rendering of any service, in the sale of goods, in any financial business or in any industry or business in Puerto Rico will be subject to municipal license tax.

The municipal license tax rates vary among municipalities, but may not exceed fifty hundredths of one percent (0.5%) for industries dedicated to the sale of goods or services, or one point five percent (1.5%) for financial businesses.

Property Tax

The Municipal Property Tax Act (MPTA) states that every person engaged in trade or business in Puerto Rico who on January 1st of each year is the owner of personal property used in the industry or business, even if such property is leased to another person (not ETB in PR), will be responsible for the payment of personal property tax.

The maximum tax rate is 9.83% and varies depending on the municipality in which the taxable property is located. Personal property tax normally includes cash on hand, inventory, materials, machinery and equipment, furniture and fixtures, and personal leasehold improvements.

Payroll Taxes

Employer’s in Puerto Rico may be responsible for the payment and compliance of the following payroll taxes:

• Withholding taxes on salaries and wages;
• Federal Social Security;
• State Unemployment Tax (“SUTA”)
• Federal Unemployment Tax (“FUTA”)
• Disability Insurance;
• Workmen’s Accident Compensation Insurance; and
• Chauffeurs’ Social Security.