PUERTO RICO Law and Practice Contributed by: Dianette Rivera-Melendez, Oreste Ramos, Maria Trelles-Hernandez and Rosangela Sanfilippo, Pietrantoni Mendez & Alvarez LLC
9. Tax 9.1 Taxation of Business Activities
It is important to note that an LLC organised under the laws of a jurisdiction other than Puerto Rico (a “Non-Puerto Rican LLC”) that is treated as a partner - ship, disregarded entity or flow-through entity for US federal or foreign income tax purposes is treated by default as a conduit entity for Puerto Rican income tax purposes and cannot elect to be treated as a corpo - ration. Non-Puerto Rican LLCs with a single member may, however, elect to be treated as disregarded enti - ties for Puerto Rican income tax purposes. Domestic Entities and Foreign Entities doing business in Puerto Rico are also subject to other local taxes, such as: • a gross income tax payable to the municipalities where the business is conducted; • municipal excise taxes on construction work; • personal and real property taxes; • transfer taxes; and • payroll taxes, among others. In addition, Puerto Rico imposes an excise tax on certain products imported or manufactured in Puerto Rico and certain business activities and transactions. Finally, Puerto Rico has implemented a sale and use tax (SUT) system, which applies to the acquisition, use, consumption and importation of taxable items to Puerto Rico. The term “taxable items” generally includes tangible personal property, taxable servic - es, admission rights, digital products and combined transactions. The SUT rate is 11.5%, with 10.5% pay - able to the Puerto Rican Treasury Department (the central government portion) and 1% payable to the corresponding municipality (the municipal portion). Generally, the taxpayer is the person that acquires or uses the taxable item, but if there is a merchant, that merchant is required to collect the SUT and remit it to the Puerto Rican Treasury Department. It is important to note that if the Domestic Entity or Foreign Entity is covered by a tax exemption decree, the Puerto Rican income tax rate is generally reduced to 4%, and certain exemptions will apply in connec - tion with other applicable taxes.
Entities organised under Puerto Rican laws (“Domes - tic Entities”) are subject to Puerto Rican income taxes on their worldwide income, subject to certain exemp - tions, exclusions and deductions. For entities taxed as corporations (such as corpora - tions or LLCs that do not elect to be treated as con - duit entities), the applicable corporate income tax rate is 18.5% plus a progressive surtax that can go up to 19% for net taxable income subject to surtax in excess of USD275,000. Long-term capital gains, however, enjoy a preferential income tax rate of 20%. Entities organised under the laws of a jurisdiction oth - er than Puerto Rico (“Foreign Entities”) are subject to Puerto Rican income taxes only with respect to their income from Puerto Rican sources or effectively connected with a Puerto Rican trade or business. Foreign Entities engaged in business in Puerto Rico and taxed as corporations are subject to the same tax system as applies to Domestic Entities, plus a branch profit tax equal to 10%. The main difference is that the Puerto Rican income tax only applies to their net taxable income that is from Puerto Rican sources or effectively connected with the Puerto Rican trade or business. Foreign Entities not engaged in business in Puerto Rico are subject to a 29% tax, which must be withheld at source on the gross amount of any income from Puerto Rico sources (without deductions) by the payor. As a general rule, any Domestic Entity or Foreign Enti - ty, including corporations, can elect to be treated as a conduit entity for Puerto Rican income taxes, even if it only has one member or owner, or as a disregarded entity if it has only one member or owner. Conduit entities are not subject to Puerto Rican income taxes; the owners are instead responsible for the payment of the income taxes in their personal capacity on their distributable share of the conduit entity’s income and gains. A disregarded entity is ignored as a separate entity from its owner solely for the purpose of calculat - ing Puerto Rico income taxes.
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