Puerto Rico Taxes

Be aware! The Puerto Rico Revenue Code has/is ongoing big changes on increased tax rates and how the returns are filed; for both individuals and corporations. As I write this matters change daily. Contact us with any questions to your particular situation.

 

Puerto Rico has its own internal revenue code and tax system.  In addition it has tax incentives programs for manufacturing, hotel operations, agriculture, venture capital funds, and service industries, make Puerto Rico an attractive location to establish operations.

 

The tax system is the responsibility of the Treasury Department and the Secretary of the Treasury.  The Treasury Department issues tax regulations that are interpretations of the tax code, issues rulings on the tax effects of transactions and also publishes bulleting and circulars clarifying in the provisions of the tax code.

  

The Puerto Rico tax system has similarities to the United States tax code.  Thus, Puerto Rico imposes taxes on the income of corporations, partnerships, estates, trusts, and individuals as well as on merchandise introduced and certain transactions.  There are also unemployment taxes, administrated by the Secretary of Labor and workmen’s compensation taxes.

 

Withholding taxes are required on various payments, such as wages and for services rendered by individuals and corporations in Puerto Rico and on dividends, royalties, and other income remitted from Puerto Rico sources to nonresident corporations, partnerships, and individuals.

 

Dividends paid to corporate and individual shareholders are subject to a 10% tax while interest paid to individuals from interest bearing accounts in Puerto Rico are subject to a maximum tax of 17%.

 

Under the Puerto Rico Internal Revenue Code of 2011, as amended, partnerships are now considered "flow-through" entities, unless certain elections are made.  Minimum income tax provisions are also applicable.

 

Puerto Rican individual taxpayers are allowed certain deductions and personal exemptions in determining their net income.  A tax credit for income taxes paid to the U.S. and foreign countries is allowed to resident individuals and domestic corporations, with certain limitations.

 

A self-employed person’s net profit or loss from solely owned trade or business (including a profession or other independent occupation) is reportable with any other income, and is taxable at individual income tax rates.  Certain limitations apply to certain expenses and they are considered for an alternate tax calculation in the individual's income tax return.

 

The federal social security tax levied on the self-employed and on wage earners, and federal unemployment insurance taxes in Puerto Rico are identical to those in the U.S..

 

Resident individuals and domestic corporations and partnerships are taxed on the worldwide income.  A resident foreign corporation or partnership is taxed on income from source within Puerto Rico and, on income from sources outside Puerto Rico if considered effectively connected to its Puerto Rico trade or business.  Estimated income taxes must be paid during the taxable year.

 

Nonresident individuals and foreign corporations and partnerships not engaged in trade or business in Puerto Rico are subject to income taxation in Puerto Rico only on their income from sources within Puerto Rico and in most cases, these taxes are paid through withholding.

 

Resident individuals and domestic corporations and partnerships are taxed on their worldwide income.  A resident foreign corporation or partnership is taxed on income from sources within Puerto Rico and, on income from sources outside Puerto Rico if considered effectively connected to its Puerto Rico trade or business.  Estimated income taxes must be paid during the taxable year.

 

Nonresident individuals and foreign corporations and partnerships not engaged in trade or business in Puerto Rico are subject to income taxation in Puerto Rico only on their income from sources within Puerto Rico and in most cases, these taxes are paid through withholding.

 

Individuals

Section 933 of the United States Internal Revenue Code provides that U.S. citizens who are bonafide residents of Puerto Rico are subject to U.S. income tax only on income received from sources outside Puerto Rico and on salaries received as employees of the U.S. government.  This general rule may differ in the year an individual moves to or from Puerto Rico.

 

Corporations

A U.S. corporation may operate through a branch in Puerto Rico.  The U.S. corporation includes the branch profit in U.S. taxable income and claims a foreign tax credit in its U.S. income tax return for the Puerto Rican income tax on the branch profit.  The branch is taxable in Puerto Rico as a resident corporation.  A branch profits tax is payable on its equivalent dividend amount.

 

U.S. corporations operating through subsidiary corporations and partnerships, organized in Puerto Rico are taxed as domestic corporations.  Withholding of P.R. tax is required on dividends and profit distributions paid by these subsidiaries to the U.S. parent corporation.  The U.S. shareholder is allowed a foreign tax credit in the U.S. for the Puerto Rican income tax withheld.

 

Taxes imposed by municipalities include the municipal license tax, levied by a municipality where you have an office or operation, on gross sales and other revenues, excise tax on construction and taxes on real and personal property. Rates vary by municipality.

There is also a Sales and Use tax of 7%, which is split 5% for the Central government, 1% for municipalities, and 1.0% for other govenment uses.