There are many tax incentives offered to corporations under the Tax Incentives Act of 1998 and its corresponding amendments. Companies identified as “eligible businesses” qualify for a low corporate tax rate with additional tax credits, exemptions and special deductions. Depending on location, companies may benefit from income, and property tax reductions for periods of 10, 15, 20, and up to 25 years (See map.) The law provides the option to choose the specific years to be covered by the decree. The tax exemption period goes from 10 to 15 years according to business location.
A. Tax Rates
The Tax Incentives Act establishes a maximum corporate income tax rate of 7% on the industrial development income. The industrial development income is the income generated by the exempted business.
Specifically, the apparel, textile, shoe, leather products and fish canning industries are eligible for a special tax exemption rate of 4%. In exceptional cases, according to the importance of the investment project the rate could be lowered to a minimum of 2%.
Certain industrial projects that are considered as core pioneer industrial activities by PRIDCO could be eligible for a corporate income tax rate ranging from 2% to 0%. Core pioneer industries are those that employ innovative technology never used in Puerto Rico before January 1, 2000.
B. Core Pioneer Industries
Operations that are deemed to have a novel or innovative technology not utilized in Puerto Rico before January 1, 2000, and that will have a significant impact on the economic and industrial development of Puerto Rico may qualify for income tax rates between 2% and 0%. Eligibility will depend on such factors as:
The nature of the employment to be created
Development of high levels of technical, scientific and managerial expertise in the employees
The investment to be made in plant, machinery and equipment
A substantial concentration of production for global markets to be located in Puerto Rico
The integration of research, development and technological improvements as part of the industrial operation
Additional tax impact including such factors as payment of withholding tax on royalty payments for technologies transferred
C. Deductions
Payroll - 15% of annual production payroll, or $100,000 deduction
Eligible manufacturing industries may qualify for one of the following alternatives:
(i) a deduction of 15% of annual production payroll up to 50% of industrial development income when the latter is under $30,000 per production worker; or
(ii) a deduction of the first $100,000 of the industrial development income, if it is under $500,000 and the company keeps an average of 15 or more employees.
Training - 200% tax deduction on training expenses
The Tax Incentives Act offers an additional 100% tax deduction on training expenses related to the exempt business. This special deduction covers training aimed at improving productivity, quality control, and other qualitative aspects included in the human resource sector. This will actually result in a double deduction since it applies in addition to the standard deduction.
R&D - 200% tax deduction for R&D expenses
Another deduction is granted for research and development expenses for new or improved products or industrial processes. This deduction will not apply to any cash amount received as a donation, subsidy or incentive from the Commonwealth of Puerto Rico for the same purposes. It will also exclude any investment in property or machinery and equipment for which the exempt company had already received a 100% deduction under the deduction explained below.
Buildings, Machinery & Equipment – Accelerated depreciation
Every exempt business will be eligible to deduct, in a selected year, the expenditures incurred in the purchase, acquisition or construction of a building, structure, or machinery and equipment as long as these expenditures have not been subjected to prior depreciation and are used to produce the articles or services for which the Commonwealth of Puerto Rico has allowed tax exemptions under this Tax Incentives Act.
D. Credits
Locally Manufactured Goods - 25% tax credit
The Tax Incentives Act provides a credit of 25% for the purchase of products manufactured by unrelated parties in Puerto Rico. Since this credit is created to stimulate the demand for local products it will be allowed only for the amount exceeding the company’s mean purchase of local products for the previous three years. This credit may be applied to the basic income tax liability, but only up to a maximum of a 25% of the taxable industrial development income of the exempt business. This credit may be carried over to subsequent taxable years, until it is exhausted.
Locally Recycled Products - 35% tax credit
Exempt businesses that purchase locally recycled products or products manufactured with locally recycled materials will receive a 35% tax credit for the total purchases of said products during the taxable year for which the credit is claimed. This credit may be carried over to subsequent taxable years, until it is exhausted.
High Technology Goods: Tax credit for withheld royalty payments
Exempt businesses that produce high technology products, introduced to the market after January 1, 2000 may request from the Secretary of State a credit of the amount exceeding $100 million of annual taxes retained for the payment of rights, rents, royalties and licenses related to the production of those goods. This credit will apply to taxes imposed only to the high tech goods produced by the exempt activity.
Purchase of Closing Businesses - 50% credit
Investors who acquire an exempt business that is in the process of closing operations will be eligible to claim a credit of 50% of the cash amount used for the purchase of the corresponding stocks or operating assets of the firm that is going out of business.
Stock Owned by Residents of Puerto Rico - 30% credit
Residents of Puerto Rico that own stock in an exempt business will be able to credit 30% of the corresponding income tax paid by the exempted business against any personal income tax obligation due to the Puerto Rico Treasury Department.
E. Dividend Distribution
Stockholders or partners of a corporation or society that is an exempt corporation that operates under a decree under this Law is not subject to filing income tax returns on dividend distribution or benefits on the industrial development income of the exempt business.
F. Incentives for Service Industries
Operations of designated services for external markets will also be eligible for a tax rate of 7% on their industrial development income, 90% of their property taxes and 60% on municipal license taxes and fees.
Also, contact centers for external markets will be exempted from paying excise taxes on purchases of the equipment needed for their operations.
G. Industrial Tax Exemption Zones
Depending on your location and industry, your business may receive specific tax exemptions for up to 25 years. Click here or on the thumbnail to see the Industrial Tax Exemption Zone Map
