Puerto Rico: Corporate tax law changes in Act No. 159

Tax law changes for corporations in Puerto Rico

The governor of Puerto Rico in late September 2015 signed into law Act No. 159 that includes corporate income tax amendments such as a change to the alternative minimum tax surcharge rules, rules for a special tax on dividend distributions, changes to the rules for the deductibility of certain expense items, capital gain and loss rule revisions, and tax incentives for television production and programming in Puerto Rico.

Related content

Act No. 159 also amends the sales and use tax and value added tax (VAT) provisions. Read a report [PDF 332 KB] prepared by KPMG LLP about these indirect tax measures.

The following discussion briefly describes some of the corporate income tax amendments included as part of Act No. 159.

Alternative minimum tax

The alternative minimum tax (AMT) in Puerto Rico is imposed at a rate of 30%, with a 20% surcharge imposed on charges for intercompany transactions. Taxpayers can request relief from the 20% surcharge, up to 60% of the amount of the charges.

The amendments provide that for tax years beginning after December 31, 2014, financial or banking entities subject to Act No. 55 of 2012 (known as the “Bank Act”) or those organized or authorized under the National Bank Act and doing business in Puerto Rico may be able to exclude 100% (instead of 60%) of their intercompany service charges incurred or paid to a related person located outside of Puerto Rico from the AMT surcharge, if a request is filed with the Puerto Rico Treasury Secretary and the request is approved.

For requests filed after May 28, 2015 (note that there are questions as to whether this date is correct or whether it is a typo in the legislation), the Secretary will not issue any new administrative determinations or final agreements in connection with the AMT surcharge on purchases of tangible personal property by a corporate home office located outside of Puerto Rico, involving a branch in Puerto Rico.

Special tax on dividend distributions; prepayment of special tax on deemed distributions

Dividend distributions made during the period from October 1, 2015, through December 31, 2015, will be subject to a special tax at a rate of 8% of the total amount of dividends received by the shareholder in lieu of any other tax.

There will also be a special tax rate of 8% that applies for amounts of deemed distributions for which an election is made and tax payment is remitted between October 1, 2015, and December 31, 2015.

Non-deductible items

51% disallowance on intercompany expenses: Generally, the Secretary may provide relief from the 51% disallowance rule up to 60% of the amount of intercompany charges.  However, for tax years beginning after December 31, 2014, entities subject to Act No. 55 of 2012 (the “Bank Act”) or those organized or authorized under the National Bank Act doing business in Puerto Rico may be able to deduct 100% of their intercompany service charges incurred or paid to a related person located outside of Puerto Rico, upon a request made to and approval by the Secretary. The tax relief petitions must be filed within the first tax year included in the request. Accordingly, taxpayers wishing to request tax relief applicable for calendar year 2015 must submit the request by December 31, 2015.

Expenses for services rendered by a non-resident of Puerto Rico and the cost or depreciation of goods of any taxable item cannot be claimed as a deductible expense for income tax purposes if the applicable sales and use tax or value added tax (VAT) has not been paid. This provision does not apply to items and services excluded from sales and use tax and VAT.

Other measures

Capital gain and losses: A capital loss deduction is limited to 80% of the net gain for tax years commencing as of January 1, 2015.

 Long-term contracts: Entities engaged in the development of land or structures are not allowed to use the completed contract method to determine their taxable income.

New tax credit for the purchase or broadcast of TV programming made in Puerto Rico: Any television production company can claim a tax credit of 15% of expenses paid for the purchase of or broadcast of new TV programming made in Puerto Rico by independent producers, provided that 90% of the “talent” in the programming is comprised of Puerto Rico resident artists.

 

For more information, contact a tax professional with KPMG in Puerto Rico:

 

Rolando Lopez | +1 (787) 622-5330 | rlopez@kpmg.com

Carlos Molina | +1 (787) 622-5311 | cmolina@kpmg.com

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