P.R. Laws tit. 13, § 10653
(a) Regular procedure. —
(1) Applications for tax exemption. — Any person who has established or who intends to establish an eligible business in Puerto Rico may apply to the Secretary of Development for the benefits of this chapter by filing the corresponding application, duly sworn before the Tax Exemption Office.
At the time of filing, the Director shall charge fees on account of the corresponding processing, which fees shall be paid by certified check, postal money order or manager’s check payable to the Secretary of the Treasury.
The Secretary of Development shall establish through regulations the fees to be charged for processing. Provided, That said regulations shall be revised every three (3) years after their approval.
The fees in effect under §§ 10101 et seq. of this title, shall remain in effect until the first regulations are approved under this provision.
(2) Interagency consideration of applications. —
(A) Upon receipt of any application under this chapter by the Tax Exemption Office, its Director shall remit, within a period of five (5) days as of the date the application was filed, a copy of said application to the Secretary of the Treasury and to the Executive Director, in order for the latter to render an eligibility report on the activity to be carried out and other facts relative to the application. When evaluating the application, the Secretary of the Treasury shall verify that the stockholders or partners of the business filing the application comply with their tax responsibility under the Puerto Rico Internal Revenue Code. This verification shall not be necessary in the case of stockholders not residing in Puerto Rico or public corporations. Failure to comply with such a tax responsibility shall be sufficient grounds for the Secretary of the Treasury not to endorse the application of the business applying for exemption.
(B) After the Executive Director submits his/her eligibility report and recommendations, the Director shall remit a copy of the draft decree within five (5) work days as of the date of receipt of the documents necessary to process the case, to the agencies concerned, including the municipality concerned and the Municipal Revenue Collection Center (CRIM) for its evaluation and recommendation, should no application of opposition thereto be filed. Any unfavorable recommendation regarding the draft decree shall be accompanied by the reasons therefor.
The agencies and municipalities consulted by the Director shall have thirty (30) days to submit their report or recommendation regarding the draft decree referred to them. In the event the recommendation of the agency or municipality is favorable, or if the same is not received by the Industrial Tax Exemption Office during the aforementioned thirty (30) day period, it shall be understood that said draft decree has received a favorable recommendation, and the Secretary of Development may take the corresponding action on said application.
In the event that the municipality raises any objection with regard to the draft decree referred thereto, the Industrial Tax Exemption Office shall then give consideration to said objection, as it may believe necessary, reason for which the Tax Exemption Office shall notify the parties and the corresponding agencies, for the administrative action or the revision of the draft decree, as deemed pertinent. Once the controversy thus arisen has been elucidated, the Director shall make the determination he/she believes to be in order and submit the case to the Secretary of Development for his/her final consideration.
(C) In the event of amendments to grants approved under this chapter, the period for the agencies and municipalities concerned to submit a report or opinion to the Director shall be twenty (20) days.
(D) Upon receipt of the reports, or upon expiration of the terms to make such reports, the Director shall submit the draft decree and his/her recommendations for the consideration of the Secretary of Development, within the next five (5) days.
(E) The Director may rely on the recommendations furnished by such agencies or municipalities that render reports or opinions and he/she may request them to supplement the same.
(F) The Secretary of Development shall issue a final determination, in writing, within a term not greater than five (5) days as of the date the draft decree was submitted for his/her consideration.
(G) The Secretary of Development may delegate onto the Director those functions as he/she deems convenient in his/her discretion, in order to facilitate the administration of this chapter, except for the function of approving or denying original tax exemption grants, with the exception of the grants conferred under subsections (b) and (d)(1)(E) of § 10642 of this title.
(b) Renegotiations and conversions. —
(1) Renegotiation of decrees in effect. —
(A) Any tax-exempt business that holds a decree granted under this chapter or under preceding acts may request that the Secretary of Development consider renegotiating its decree in effect if said tax-exempt business proves that there will be a raise of twenty-five percent (25%) or more in the average employment it has generated for the past three (3) taxable years before the date the application was filed; or that said tax-exempt business shall make a substantial investment in its existing operations which shall help to maintain the economic and labor stability of the industrial unit, and that the same represents an increase of twenty-five percent (25%) or more in the investment in property devoted to industrial development existing as of the date of effectiveness of this act. If said tax-exempt business proves to the satisfaction of the Secretary of Development that it is unable to meet the requirements relative to the raise in the average employment or to the increase in investment described above, shall submit the necessary evidence to the Tax Exemption Office. The Secretary of Development, with the prior favorable recommendation of the Secretary of the Treasury and the Executive Director, and with the prior recommendation of the agencies that render reports on tax exemption, may, in his/her discretion, consider the renegotiation, taking into account any other factor or circumstance which reasonably shows that the renegotiation of its decree shall serve the best social and economic interests of Puerto Rico.
For purposes of this section, the employment of the aforementioned tax-exempt business shall consist of the number of individuals residing in Puerto Rico who work permanently on a full-time basis during regular business hours at the tax-exempt business rendering services as employees, even if they are not directly in the payroll of the tax-exempt business (such as persons provided under manpower leasing contracts, but shall not include persons such as freelance contractors or consultants).
For purposes of this section, the investment of the tax-exempt business that holds a decree granted under this chapter or under preceding acts, in its existing operations, shall be computed according to the book value of the property devoted to industrial development, factoring in the benefit of admissible depreciation under the straight-line method, taking into account the useful life of said property as determined pursuant to Subtitle A of the Puerto Rico Internal Revenue Code, in lieu of any other accelerated depreciation allowed by law.
Upon agreement to conduct the renegotiation thus requested, the Secretary of Development, with the prior recommendation of the agencies that render reports on tax exemption, shall take into account the number of jobs of the tax-exempt business, the place where it is located, the additional jobs and investment, as well as the remainder of the term of its decree, the tax benefits already enjoyed and its financial capacity, in order for the tax-exempt business to be able to obtain a new decree with tax benefits adjusted under this chapter.
The Secretary of Development shall establish the terms and conditions he/she deems necessary and convenient to better serve the interests of Puerto Rico, within the limits provided for in this chapter, and may, in his/her discretion, with the prior recommendation of the agencies that render reports on tax exemption, impose special employment requirements, limit the period and the percentage of the exemption, limit the taxes to be exempted, levy a fixed tax rate on industrial development income greater than that which is provided in § 10643(a) of this title, and require and provide any other term or condition as necessary to suit the industrial and economic purposes proposed under this chapter.
When the tax-exempt business that wishes to renegotiate its decree fails to meet the increased job or investment requirements provided for in this subsection, the Secretary of Development may, with the prior favorable recommendation of the Secretary of the Treasury and the Executive Director and of the agencies that render reports on tax exemption, levy a fixed tax rate on industrial development income which is greater than that which is levied under the tax-exempt business decree.
(B) The Secretary of Development may not grant a fixed tax rate on industrial development income which is less than four percent (4%) without the endorsement of the Secretary of the Treasury. Except in the case of businesses described in clauses (2) through (6) of § 10643(a) of this title, the fixed rate established in renegotiation under this clause of this subsection shall only apply with respect to the annual industrial development income, computed under this chapter, excluding the income originating from investments described in § 10642(j) of this title, which exceeds the base period income.
For purposes of this paragraph, “base period income” means the highest number which results from comparing the industrial development income in the last year before the date of applying for the renegotiation, excluding the income originating from the investments described in subsection (j) of Section 2 of the preceding applicable law, with the annual average of industrial development income, computed under the law that applies to the decree issued under preceding tax incentives laws, but excluding the income originating from the investments described in subsection (j) of Section from said preceding tax incentives laws, for the three (3) taxable years with greater industrial development income (excluding the income originating from the investments described in subsection (j) of Section 2 from said preceding laws) within the five (5) taxable years preceding the date on which renegotiation is applied for under this section, or the lesser period applicable. In the case of tax-exempt businesses that have been operating for a period of three (3) years or less as of the date the renegotiation is applied for, the base period income shall be the annual industrial development income average, excluding the income originating from the investments described in subsection (j) of Section 2 from said preceding tax incentives laws, earned during said period, computed under the law that applies to the preceding decree.
(C) An amount equal to the base period income shall be taxable each taxable year under the provisions of the decree issued under the preceding law and renegotiated under this subsection, including, but not limited to, taxes on industrial development profit distributions or dividends and the liquidation tax that applies under said preceding law, for the remainder of the exemption period of the preceding renegotiated decree, provided the industrial development income, excluding income originating from investments as set forth in § 10642(j) of this title for the taxable year, computed under this chapter, is greater than the base period income. If the industrial development income, excluding the income originating from investments as set forth in § 10642(j) of this title for any taxable year, computed under this chapter, is less than the base period income, the industrial development income shall be computed, excluding the income originating from investments as set forth in § 10642(j) of this title for said taxable year pursuant to the provisions of the law under which the preceding renegotiated decree was approved, and the resulting amount shall be taxable under the provisions of the preceding law, provided the same does not exceed the base period income.
Furthermore, the provisions of the preceding act which applies to the decree renegotiated under this subsection shall apply, for the remainder of the preceding renegotiated decree, over the industrial development income originating from investments as set forth in § 10642(j) of this title (“§ 10642(j) income”), up to an amount which does not exceed the 10642(j) income of the base period, including, but not limited to, taxes on industrial development profit distributions or dividends and the liquidation tax that apply to distributions of said 10642(j) income.
For purposes of this paragraph, “§ 10642(j) income of the base period” means the annual average of industrial development income originating from investments as set forth in subsection (j) of Section 2 of the law that applies to the decree issued under preceding laws, for the three (3) taxable years with the greatest income originating from such 2(j) investments from the five (5) taxable years preceding the date of the application for renegotiation under this section, or the lesser period that applies. In the case of tax-exempt businesses that have been operating for a period of three (3) years or less on the date of applying for the renegotiation, the 2(j) income of the base period shall be the annual average of the income originating from said investments, earned during said period, computed under the law that applies to the preceding decree.
Once the exemption period under the preceding decree expires, the fixed rate provided for in subsection (a)(1) of this section shall apply to any industrial development income earned by the tax-exempt business, excluding the income originating from investments as set forth in § 10642(j) of this title, which shall be entirely exempted from taxes.
(D) Tax-exempt businesses that renegotiate their decree under the provisions of this subsection and which, as of the date of renegotiation, were operating under §§ 10101 et seq. of this title, or under preceding laws, may distribute the profits accrued before the date of effectiveness of the renegotiation at a later time, but such distributions shall be made according to the tax treatment provided in the decree granted under each of said laws under which such profits were accrued.
(E) Tax-exempt businesses that renegotiate their decrees under this subsection shall pay taxes in total liquidation, as to their industrial development income, pursuant to the tax treatment provided for in each of the laws under which said profits were accrued.
(F) All other terms, conditions and benefits contained in this chapter which do not contravene the provisions of this subsection shall be applicable to tax-exempt businesses covered thereunder.
(2) Conversion of tax-exempt businesses under preceding laws. — Any of the following businesses exempted under preceding laws may apply for coverage under the provisions of this chapter, subject to the limitations provided henceforth, provided said business shows that it is complying with all applicable legal provisions. Exemptions granted under converted decrees may not be greater than those provided under this chapter.
(A) Tax-exempt businesses that on the date of effectiveness of this act have not begun operations, may request conversion for the remainder of the period originally granted, in which case, their exemption shall be adjusted pursuant to the provisions of §§ 10643, 10647—10650 of this title.
(B) Tax-exempt businesses whose decrees were granted on or before January 1, 2008, and which had not been enjoying an exemption prior to that date, except under said decrees, may apply for conversion, in which case their exemption shall be adjusted pursuant to the provisions of §§ 10643, 10647—10650 of this title. The fixed rate under § 10643(a) of this title shall apply to the industrial development income, as provided in § 10643(g) of this title.
(C) The Secretary of Development, with the previous recommendation of the agencies that render reports on tax exemption, when considering any application for conversion under this subsection, shall establish the terms and conditions that he/she deems necessary and convenient to serve the best interests of Puerto Rico, within the limits provided for in this chapter, as well as impose special employment requirements, and/or limit the exemption percentage, the taxes to be covered under the decree, provide a fixed tax rate on industrial development income greater than that which is provided in § 10643(a) of this title, but never greater than seven percent (7%), and/or require and provide any other term or condition as necessary and convenient pursuant to the purposes of this chapter.
(D) Tax-exempt businesses that convert their decrees under the provisions of this subsection and which, on the date of effectiveness of the conversion, had been operating under §§ 10101 et seq. of this title, may distribute the profits accrued before the date of effectiveness of the conversion at any later time, pursuant to the tax treatment provided for in said sections under which said profits were accrued.
(E) Tax-exempt businesses that have availed themselves of the provisions of this subsection shall pay taxes in total liquidation, as pertains to their industrial development income, pursuant to the tax treatment provided for in each of the laws under which said profits were accrued.
(F) The benefits of this subsection may be applied for within twelve (12) months as of the date of approval of this act, and the effectiveness of its provisions may be fixed from the first day of the taxable year in which they apply for the same, but never before July 1, 2008, and until the first day of the next taxable year, at the option of the tax-exempt business.
(G) All other terms, conditions and benefits contained in this chapter which do not contravene the provisions of this subsection shall apply to tax-exempt businesses covered thereunder.
(c) Denial of applications. —
(1) Denial when not beneficial for Puerto Rico. — The Secretary of Development may deny any application when he/she determines that the grant does not serve the best economic and social interests of Puerto Rico, after considering the nature of the physical facilities, the number of jobs, the total sum of the payroll and the investment, the location of the project, its environmental impact, or other factors that in his/her judgment warrant such a determination, as well as the recommendations of the agencies that render reports on tax exemption.
The applicant, after having been notified of such a denial, may request that the Secretary of Development reconsider, within sixty (60) days as of the date of receipt of the denial, by presenting the facts and arguments regarding its application that it believes are in order, including the offer of any consideration in benefit of Puerto Rico which it deems warrants its request for reconsideration.
In the event said application is reconsidered, the Secretary of Development may accept any consideration offered in benefit of Puerto Rico and may require and provide other terms or conditions as necessary to ensure that such a grant shall serve the best interests of Puerto Rico and meet the purposes of economic and industrial development intended by this chapter.
(2) Denial due to contravention of public interest or to replacement of or competition with established businesses. — The Secretary of Development may deny any application when he/she determines, based on the facts presented for his/her consideration and after the applicant has had the opportunity to offer a complete presentation concerning the issues in controversy, that the application contravenes the public interest of Puerto Rico for any of the following reasons:
(A) The applying business has not been organized as a bona fide business of a permanent nature, or in view of the moral or financial reputation of the persons that constitute the same, the plans or methods to obtain financing for the distribution and sale of the product to be manufactured or the services to be rendered, the nature and intended use of such product or services, or any other factor that might indicate that there is a reasonable possibility that granting the exemption would be harmful to the economic and social interests of Puerto Rico, or
(B) the product to be manufactured by the applicant would replace or compete with a substantial advantage for reason of the benefits provided for in this chapter, with products manufactured by industries established in Puerto Rico which are not eligible businesses. The preceding notwithstanding, the Secretary of Development may grant the decree when he/she determines that the applying eligible business shall yield a substantial benefit for the general economy of Puerto Rico, for reason of foreseen increases in production to supply markets outside of Puerto Rico, or to supply an existing substantial demand in Puerto Rico which has not been supplied before, and in consideration of the investment, the technology and the new employment opportunities involved.
Should a decree be granted to any industry under the circumstances indicated above, the Secretary of Development, by request of the interested party, may also grant decrees to existing industries that manufacture said commercial articles which, in his/her judgment, might sustain substantial harm for reason of the aforementioned replacement or competence.
(d) Tax-exempt business transfer. —
(1) General rule. — The transfer of a tax exemption grant, or of the stocks, property, or other property interest of a tax-exempt business that holds a decree granted under this chapter, shall be previously approved by the Director. If the transfer is carried out without being previously approved, the exemption grant shall be rendered null from the date the transfer took place, except in the cases listed in clause (2) of this subsection. The preceding notwithstanding, the Director may retroactively approve any transfer carried out without his/her previous approval, when in his/her judgment, the circumstances of the case so warrant, taking into consideration the best interests of Puerto Rico and the economic and industrial development purposes of this chapter.
(2) Exceptions. — The following transfers shall be authorized with no need for previous approval:
(A) The transfer of the assets of a deceased party to his/her inheritable estate or the transfer by bequeathal or inheritance.
(B) The transfer within the provisions of this chapter.
(C) The transfer of stocks or any share when such a transfer does not result, directly or indirectly, in a change in the command or control of a tax-exempt business that holds a decree granted under this chapter.
(D) The transfer of stocks of a corporation that owns or operates a tax-exempt business that holds a decree granted under this chapter, when said transfer takes place after the Executive Director has determined that any transfers of stocks from said corporation shall be allowed without his/her previous approval.
(E) The pledge, mortgage or other surety with the purpose of responding for a bona fide debt. Any transfer of control, title or interest by virtue of said contract shall be subject to the provisions of subsection (a) of this section.
(F) The transfer by operation of law, by a court order or by a bankruptcy judge to a trustee or fiduciary. Any subsequent transfer to a third party other than the aforementioned debtor or the bankrupt him/herself, shall be subject to the provisions of subsection (a) of this section.
(G) The transfer of all the assets of a tax-exempt business that holds a decree granted under this chapter, to an affiliated business. For purposes of this paragraph, affiliated businesses are those whose stockholders or partners jointly hold eighty percent (80%) or more of the issued and outstanding shares or stocks with voting rights of said tax-exempt business.
(3) Notice. — All transfers included in the exceptions of the subsection of this section shall be notified to the Director by the tax-exempt business that holds a decree granted under this chapter, with a copy to the Executive Director and the Secretary of the Treasury, within thirty (30) days, except those included in clause (2)(D) of this subsection which do not turn into a stockholder [sic] into a holder of ten percent (10%) or more of the capital issued by the corporation, as well as those included under clause (2)(G) of this subsection, which shall be notified by the tax-exempt business to the Director, with a copy to the Secretary of the Treasury, prior to the date of the transfer.
(e) Procedures for allowable and mandatory revocation. —
(1) Allowable revocation. —
(A) When the grantee fails to comply with any of the obligations imposed on him/her by this chapter or the regulations thereunder, or by the terms of the exemption decree.
(B) When the grantee fails to begin or fails to complete the construction of the facilities necessary for the manufacture of the products he/she intends to manufacture, or for rendering the services he/she intends to render, or when he/she fails to begin producing said products or rendering said services within the period fixed for those purposes in the decree.
(C) When the grantee fails to produce on a commercial scale or suspends his/her operations for more than thirty (30) days without the express authorization of the Secretary of Development. The latter may authorize such suspensions for periods greater than thirty (30) days when these are motivated by extraordinary circumstances.
(D) When the grantee fails to comply with his/her tax responsibility under the Puerto Rico Internal Revenue Code and other taxation laws of Puerto Rico.
(2) Mandatory revocation. — The Secretary of Development shall revoke any decree granted under this chapter when the same has been obtained by means of false or fraudulent representation concerning the nature of the eligible business, or the nature or extension of the manufacturing process or of the production carried out or to be carried out in Puerto Rico, or the use that has been given or that shall be given to the property devoted to industrial development, or any other facts or circumstances which in whole or in part motivated the granting of the decree.
Furthermore, when any person commits, or attempts to commit, pro se or on behalf of someone else, a violation of the provisions relative to succeeding businesses or preceding tax-exempt businesses, such an action shall be grounds for revocation under this clause.
In the event of this revocation, all of the computed net income, previously reported as industrial development income, whether distributed or not, as well as all distributions thereof, shall be subject to the taxes levied under the provisions of the Puerto Rico Internal Revenue Code. Furthermore, the taxpayer shall be deemed to have filed a false or fraudulent tax return with the intention of evading payment of taxes, and consequently, shall be subject to the criminal provisions of the Puerto Rico Internal Revenue Code. The taxes owed in such a case, as well as any other taxes that were until then exempted and not paid, shall become due and payable from the date such taxes would have become due and payable were it not for the decree, and shall be assessed and charged by the Secretary of the Treasury, pursuant to the provisions of the Puerto Rico Internal Revenue Code.
(3) Procedure. — In the event of the revocation of a decree granted under this chapter, the grantee shall have the opportunity to appear before and be heard by the Director or any Special Examiner of the Tax Exemption Office designated for such a purpose, who shall report on his/her conclusions and recommendations to the Secretary of Development, with the prior recommendation of the agencies that render reports on tax exemption.
(f) Limitation of benefits for production for export. — The Secretary of Development, from time to time and after consultation with the agencies that render reports on tax exemption, may designate from among eligible products, those to which the benefits of this chapter shall be granted only on production for export, when he/she determines the existence of the following factors:
(1) That the production of these in Puerto Rico for the local market already meets the existing demand and that the capacity of such local production can meet the demand foreseen for a period of five (5) years, or
(2) that in Puerto Rico there is active competition in the production and marketing of the particular product. Products that although similar in name, appearance and use, are differentiable as to their quality, size, price, or other factors that affect the products’ market, and consequently, their demand, shall be deemed to be distinct manufactured products.
When the aforementioned conditions no longer exist, the Secretary of Development, after consultation with the agencies that render reports on tax exemption applications, may cease the imposition of said limitation or resume its designation when the aforementioned conditions reoccur.
This limitation shall apply to tax exemption applications not granted on the date of effectiveness of said limitation.
History —May 28, 2008, No. 73, art. 1, § 13, eff. July 1, 2008.