Planning to establish or expand your business operations in Puerto Rico
Principal Tax Filing Liabilities of any Foreign Business Entity (a Business Entity organized outside of Puerto Rico) doing business in Puerto Rico:
Before any foreign corporation is authorized to do business in Puerto Rico, it must file with the Department of State of the Commonwealth 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.
In addition, every business entity that has a nexus and/or derives income from Puerto Rico sources, is required to register with the Puerto Rico Treasury Department and apply for a Merchant Registration Certificate through the Puerto Rico Treasury Department’s tax system known as the Internal Revenue Unified System or “SURI” for its Spanish acronym. The registration is also made through electronic means and must be done before the entity commences to operate in Puerto Rico.
The foreign business entity is required to maintain in Puerto Rico (or have it readily available to be submitted at the request of Puerto Rico's taxing authorities), those books of account and related underlying supporting records needed to reflect the items required to be informed in the Puerto Rico tax returns.
Any foreign corporation authorized to do business in Puerto Rico shall file by electronic means with the office of the Secretary of State a report showing the names of two corporate officers, no later than April 15 of each year. For corporations, whose volume of business does not exceed $3,000,000 this report shall be accompanied by a balance sheet prepared under Generally Accepted Accounting Principles (GAAP) by a person with a general knowledge in accounting and by a filing fee of $150. An audited balance sheet must be submitted if volume of sales in Puerto Rico equals $3,000,000 or more per year. It is expected that for taxable years commenced after December 31, 2019, the volume of business threshold mentioned above is changed from $3,000,000 to $10,000,000.
On the other hand, if the business entity was organized as a Limited Liability Company (LLC), it will only be required to pay an Annual Fee of $150 with the Puerto Rico Department of State.
Any foreign business entity who commences any industry or business subject to the payment of a license tax, shall notify the Finance Director of the corresponding Municipality, no later than thirty (30) days after commencing such activity. A Volume of Business Declaration must be annually file in the Municipality and/or Municipalities where the business entity generates income from its operations, on or before five (5) working days after April 15th of each calendar year. This Volume of Business Declaration shall contain financial statements prepared by a Certified Public Accountant (CPA) holding a license issued by the Commonwealth of Puerto Rico, if the volume of sales in Puerto Rico exceeds three million dollars ($3,000,000) or more per year. However, the taxpayer has the option to file an Agreed Upon Procedures or Compliance Attestation Report issued by a CPA when the volume of business in Puerto Rico exceeds $3,000,000 but not more than $10,000,000. In other words, the audited financial statements requirement is mandatory when the volume of business is $10,000,000 or more.
Any foreign business entity must file a Personal Property Tax Return if it is engaged in trade or business in Puerto Rico, and/or on the first day of January of any one year is the owner of personal property used in his trade or business or owned in a fiduciary capacity. This Return should be filed no later than May 15th of each calendar year. The Return shall contain financial statements corresponding to the last fiscal year of the business entity, prepared in accordance with GAAP, and duly audited by a Certified Public Accountant licensed in the Commonwealth of Puerto Rico, accompanied by the corresponding CPA's opinion thereon. As a general rule, the financial statements must be submitted if the volume of business is three million dollars ($3,000,000) or more per year. However, in lieu of the audited financial statements, the taxpayer has the option to file an agreed upon procedures or compliance attestation report issued by a CPA when the volume of business in Puerto Rico is at least $3,000,000 but less than $10,000,000. In other words, the audited financial statements requirement is mandatory when the volume of business is $10,000,000 or more.
In addition, the business entity must file, by electronic means, four (4) equal estimated tax payments on the following dates: August 15th, November 15th, February 15th, and May 15th of each calendar year.
However, those entities that have a business volume of less than $3 million may be subject to submit an Agreed Upon Procedure (AUP) or Compliance Attestation Report to deduct certain business expenses for Alternative Minimum Tax Purposes.
Four equal estimated tax installments must be filed by the fourth, sixth, ninth and twelfth month following the end of the taxable year.
The current corporate income tax rate is comprised of a 18.5% normal tax and a graduated surtax (computed on its “surtax net income”) up to a maximum combined and effective rate of approximately 37.5%. The “surtax net income” is basically, the net taxable income subject to regular tax less a surtax credit in the amount of $25,000.
Notwithstanding the above, for taxable years commencing after December 31, 2018, those corporations that provides services may choose to use the Optional Tax computation if all the following requirements are met:
This optional tax will be computed on gross revenues without considering any operating expenses, using the following tax rates:
The Alternative Minimum Tax (AMT) will be the greater of $500 or 18.5% of the alternative minimum net income. In the case of taxpayers whose business volume is $3 million or more, the tax rate will be 23%. Further, there are new limitations on the deductible expenses to determine the net income subject to AMT. If the taxpayer submits Audited Financial Statements, Agreed Upon Procedures (AUP) or Compliance Attestation Reports, the taxpayer is allowed to claim all ordinary and necessary expenses. In all cases, the report must be issued by a Certified Public Accountant (CPA) with a valid Puerto Rico license.
Net gains from the sale of capital assets having a holding period of more than one year may be subject to a preferential tax rate of 20%.
As mentioned above, every merchant that have nexus and derives income from Puerto Rico sources is required to register at the Merchants’ Registry of the Puerto Rico Treasury Department. The registration needs to be filed with the Secretary of Treasury before the company commences to operate a business in Puerto Rico. There are two types of taxes: the basic sales and use tax (an aggregate tax of 11.5%) and a special sale and use tax (4%). Further, the basic sales and use tax is comprised of a state tax of 10.5% and a municipal tax of 1%, which applies to the sale, use, storage, and consumption of tangible personal property in Puerto Rico, and certain taxable services. The special sales and use tax must be charged and collected, as a general rule, on designated professional services and services rendered to other merchants, also known as business-to-business transactions. This tax is imposed provided that such services are related directly or indirectly to the operations or activities carried out in Puerto Rico.
Effective October 1, 2019, the SUT on prepared food, carbonated drinks, confectionery products, and sweets sold by restaurants, was reduced to a 7%.
The merchant is required to file a Declaration of Imports (Form AS 2970.1) upon introduction of the merchandise at the port, and immediately pay the state sales and use tax of 10.5%. Furthermore, it must be required to file a Tax on Imports Monthly Return (Form AS 2915.1 D) by the 10th day of the following month, and a Sales and Use Tax Monthly Return (Form AS 2915.1) by the 20th day of the following month.
When the service is provided by a non-resident person, the person receiving the service in Puerto Rico is responsible for paying the tax by way of self-imposition, also known as reverse-charge taxation. As a general rule, the following services are exempt from taxation:
Compensation paid to employees for services rendered in Puerto Rico is subject to withholding of income taxes by the employer under the rules and tax rates prescribed by the Puerto Rico Internal Revenue Code of 2011.
The employer must also pay disability and unemployment insurance to the local government.
FICA and FUTA taxes must be paid to the United States government following basically the same rules that are applicable in the States.
It is a compulsory insurance program covering employees who suffer injury, become disable or lose their lives due to a job-related accident or function. A new employer should promptly seek WACA coverage and pay the corresponding premium.
The employees who receive compensation for services rendered in Puerto Rico must file an income tax return on or before April 15th with the Commonwealth of Puerto Rico, reporting the income received from Puerto Rico sources (income from all sources if he / she is a resident of Puerto Rico) and accompany the corresponding withholding statement provided by the employer. For taxable year 2015 and subsequent years, the Puerto Rico Treasury Department is enforcing the electronic filing of the income tax return subject to certain exceptions.
For taxable years commencing after December 31, 2018, self-employed individuals that substantially generates income from services (80% or more) may qualify to pay an Optional Tax on gross revenues without considering any operating expenses or personal deductions, based on the following tax rates:
It is important to note that in order to be able to benefit from the optional tax, the tax on the service income must be withheld at source. Further, the tax associated to the other types of income (less than 20% of the gross income) must be totally satisfied through estimated income tax payments.
The Puerto Rico Internal Revenue Code requires that income taxes also be withheld on payments made to independent contractors (generally a withholding tax of 10%), subject to some exceptions.
The above paragraphs contain only general information and shall not be used to solve specific problems. You may contact us if you need any further help.
Qualified businesses establishing or expanding operations in Puerto Rico, can benefit from a unique combination of tax incentives and other advantages that no other place in the world can offer. For more information contact the Puerto Rico Department of Economic Development and Commerce.