P.R. Laws tit. 13, § 10430
(a) Fixed income tax rate. — Exempt businesses that hold a decree granted under this chapter, shall be subject to a four percent (4%) fixed rate on their GEI for the entire corresponding exemption period as provided in this section, from the date of commencement of operations as determined under § 10436 of this title, in lieu of any other income tax, if any, levied by the Internal Revenue Code of Puerto Rico or any other law.
(b) Royalties and license fees. — Notwithstanding the provisions of the Internal Revenue Code of Puerto Rico, in the case of payments made by an exempt business that holds a decree under this chapter to corporations, partnerships, or persons non-residents and not engaged in a trade or business in Puerto Rico, on account of the use or use privilege in Puerto Rico of intangible property associated with the exempt operation pursuant to this chapter, and provided that such payments are deemed to be completely from sources within Puerto Rico, the following rules shall be observed:
(1) Tax on corporations, foreign partnerships or persons non-residents and not engaged in a trade or business in Puerto Rico; tax imposition. — A twelve percent (12%) tax shall be imposed, collected, and paid for each taxable year in lieu of the tax levied on Sections 1221 and 1231 of the Puerto Rico Internal Revenue Code on the amount of such payments received or implicitly received by any foreign corporation or partnership not engaged in a trade or business in Puerto Rico, originating exclusively from sources within Puerto Rico.
(2) Withholding at the source of the tax in the case of foreign corporations or partnerships not engaged in trade or business in Puerto Rico. — Any exempt business that has the obligation of making payments to non-residents on account of use in Puerto Rico of intangible property in connection with the exempt operation under this chapter, shall deduct and withhold at the source a tax equal to such tax imposed in clause (1) of this subsection.
(c) Distributions, sale or exchange of shares or stock. —
(1) Stockholders or partners of a corporation or partnership holding a decree granted under this chapter, shall be exempt from income taxes on distributions of dividends or profits of the GEI of the business. In the case of exempt businesses other than not domestic corporations or partnerships, the distributions of dividends or profits from the income earned by the business originating from sources outside of Puerto Rico, according to the Internal Revenue Code of Puerto Rico, shall also be exempt from income tax on the distributions of dividends or profits, when they are distributed among the shareholders or partners that are non-residents of Puerto Rico or domestic corporations or partnerships.
GEI subsequent distributions carried out by any corporation or partnership shall also be exempt from any taxation.
(2) Profits on the sale, exchange, or other disposition of corporate stock or partnership interest that are or have been exempt businesses; shares in joint ventures and similar entities constituted by several corporations, partnerships, individuals or combination thereof; that are or have been exempt businesses, and corporate stock or partnership interests that in some way own the entities described above, shall be subject to the provisions of clause (4) of this subsection when said sale, exchange or other arrangement, and any subsequent distribution of said profits, whether as dividends or distributions upon liquidation, shall be exempt from any additional taxation.
(3) Designation of exempt distributions. — The distribution of dividends or profits made by an exempt business that holds a decree granted under this chapter, even after the expiration of its tax exemption decree, shall be deemed to be made from its GEI, if upon its distribution date it does not exceed the undistributed balance of its accrued GEI, unless said exempt business chooses, at the time of its statement, to distribute the dividends or profits wholly or partially, from other gains or profits. The amount, year of accrual and nature of the distribution of the GEI shall be that designated by said exempt business through a notice sent jointly with the payment thereof to the stockholders or partners and to the Secretary of the Treasury, through an informative statement, not later than the 28th of February following the distribution year.
In the case of corporations or partnerships which, on the date they commence operations as exempt businesses have obtained profits or gains, the distributions of dividends or profits made as of said date shall be deemed to be made from the undistributed balance of said profits or gains, but once this balance is exhausted as a result of said distributions, the provisions of the preceding paragraph shall apply.
(4) Sale or exchange of stock or assets. —
(A) During the exemption period. — Profits from the sale or exchange of stock or partnership interest, or of substantially all the assets of an exempt business made during its exemption period and that would have been subject to the payment of income taxes under the Internal Revenue Code of Puerto Rico shall be subject to a four percent (4%)-tax on the amount of the profits, if any, in lieu of any other tax levied by said Code. Any losses through the sale or exchange of said stock or assets shall be recognized in accordance with the provisions of the Internal Revenue Code of Puerto Rico.
(B) After the exemption period termination date. — In the event that said sale or exchange is made after the termination date of the exemption, the profits shall be subject to the tax provided in paragraph (A) above, but only up to the value of the stock or partnership interest, or of substantially all book assets of the corporation or partnership as of the termination date of the exemption period, after subtracting by the amount of the exempt distributions received on the same stock or partnership interest after said date, minus the base of said stock or partnership interest, or substantially all the assets. Any remainder of the profits or any loss, if any, shall be recognized according to the provisions of the Internal Revenue Code of Puerto Rico in effect on the date of the sale or exchange.
(C) Exempt exchanges. — Any exchanges of stock or partnership interest not resulting in taxable events due to their being exempt corporate reorganizations, shall be treated according to the provisions of the Internal Revenue Code of Puerto Rico in effect on the date of the sale or exchange.
(D) Determination of the dase in the sale or exchange. — The base of the stock, interests, or assets of exempt business under this chapter, in the sale or exchange, shall be determined pursuant to the applicable provisions of the Internal Revenue Code of Puerto Rico in effect at the time of the sale or exchange, after adding the amount of GEI accrued under this chapter.
(E) For the purpose of this clause, the term “substantially all the assets” shall mean any asset of the exempt business that constitute not less than eighty percent (80%) of the book value of the exempt business at the time of the sale.
(F) The Secretary of the Treasury shall establish regulations as necessary to enforce the provisions of this clause.
(5) Liquidation. —
(A) General rule. — No income tax shall be levied on or collected from the transferor or transferee with regard to the total liquidation of an exempt business which has obtained a decree under this chapter, on or before the expiration date of the decree, provided the following requirements are met:
(i) All property distributed in liquidation was received by the transferee in accordance with a liquidation plan on or before the expiration date of the decree, and
(ii) the distribution upon liquidation by the transferor, whether in a lump sum or in installments, was made by the transferor in cancellation or in full redemption of its entire capital stock.
(B) The basis of the transferee in the property received in liquidation shall be equal to the adjusted basis of the exempt business in said property immediately before the liquidation. Furthermore, and for the purposes of this section, any corporation or partnership holding shares in a partnership that is an exempt business shall, in turn, be deemed to be an exempt business.
(C) Liquidation of transferors with revoked decrees. — If the decree of a transferor is revoked before its expiration, in accordance with the provisions of § 10438(f)(1) of this title with respect to the permissible revocations, the surplus GEI accrued on the date the revocation becomes effective may be transferred to the transferee at any later time, subject to the provisions in paragraph (A) of this clause. In the case of mandatory revocation under § 10438(f)(2) of this title, the accrued surplus shall be taxable as in accordance with the Internal Revenue Code.
(D) Liquidations after the expiration of the decree. — After the decree of the transferor has expired, the latter may transfer to the transferee the GEI surplus accrued during the effectiveness of the decree, subject to the provisions of paragraph (A) of this clause.
(E) Liquidation of transferors with exempt and nonexempt activities. — In case the transferor carries out exempt and nonexempt activities, it may transfer to the transferee the GEI surplus accrued under this chapter and the property engaged in the eligible activity under this chapter as part of its total liquidation, subject to the provisions of paragraph (A) of this clause. The accrued surplus other than the GEI and the property that is not engaged in the eligible activity shall be distributed according to the provisions of the Internal Revenue Code of Puerto Rico.
(d) Tax payment. — Absent a provision to the contrary, the taxes withheld or payable shall be withheld and paid as provided by the Internal Revenue Code of Puerto Rico for payment of general income tax and withholdings.
History —July 19, 2010, No. 83, § 2.9.