PUERTO RICO Law and Practice Contributed by: Dianette Rivera-Melendez, Oreste Ramos, Maria Trelles-Hernandez and Rosangela Sanfilippo, Pietrantoni Mendez & Alvarez LLC
9.2 Withholding Taxes on Dividends, Interest, Etc Dividends paid by a Domestic Entity to a non-Puerto Rican resident individual are subject to a 15% income withholding tax. If the dividend is paid to a Foreign Entity not engaged in trade or business in Puerto Rico, the withholding tax rate is 10%. Interest paid by a Domestic Entity to a US citizen not resident in Puerto Rico is considered non-Puerto Rican source income and, therefore, is not subject to Puerto Rican income taxes. Interest paid to a non-Puerto Rican resident indi - vidual who is not a US citizen or Foreign Entity not engaged in trade or business in Puerto Rico is exempt from withholding tax if the recipient of the interest is not related to the Puerto Rican payor/borrower. If the Puerto Rican borrower is related (which gener - ally includes direct, indirect or constructive control or common ownership, with control meaning more than 50%), a 29% Puerto Rican income withholding tax would apply. Puerto Rico is an unincorporated territory of the USA and does not have full sovereignty or authority to enter into treaties with other countries. However, tax treaties entered into by the USA may be made applicable to Puerto Rico as an unincorporated territory of the USA, so each tax treaty must be reviewed to determine its applicability to Puerto Rico. As a general rule, US income tax treaties currently in place do not extend to Puerto Rico. As a territory of the USA, there is no tax treaty between Puerto Rico and the USA. Instead, there is an imple - mentation agreement known as the Tax Co-ordination Agreement between the USA and Puerto Rico of 1989, which is designed to facilitate mutual assistance on tax matters, avoid double taxation and prevent the avoidance and evasion of fiscal laws. If the Domestic Entity or Foreign Entity is covered by a tax exemption decree, certain exemptions may apply to the payment of dividends and interest from income covered by the decree.
9.3 Tax Mitigation Strategies Puerto Rico promotes and encourages foreign invest - ment through various tax incentives. The Puerto Rican Incentive Code provides tax incentives, tax credits and other benefits to certain businesses, including: • manufacturing; • tourism; • green energy; • film; • private equity funds and other financial activities; • agricultural; and • certain export services and trade commerce activi - ties, among others. Analysing whether the activities may qualify for incen - tives is the first step when structuring an investment in Puerto Rico. A foreign investment structure via an asset deal gen - erally provides a better tax result for the investor/ buyer because it allows for a step-up in the basis of the assets acquired, which in turn results in a higher depreciation/amortisation deduction going forward. The acquisition of the membership interest of an enti - ty taxed as a conduit entity may provide the same tax result to the foreign investor/buyer, and generally results in a more tax-efficient structure for the seller. Puerto Rico does not allow for the filing of consolidat - ed returns. Notwithstanding this, taxpayers may enjoy the benefits of consolidation by investing through vari - ous flow-through/conduit entities wholly owned by a corporation/parent company. This way, flow-through gains and losses may be consolidated in the parent company’s corporate income tax return. 9.4 Tax on Sale or Other Dispositions of FDI Capital gains from the sale by a non-Puerto Rican resident or Foreign Entity of shares in an entity taxed as a corporation are treated as non-Puerto Rican source income exempt from Puerto Rican income taxes, regardless of the assets held by the Puerto Rican corporation. The capital gain from the sale of an ownership interest in an entity taxed as a conduit interest, however, may be subject to Puerto Rican income taxes if the conduit entity was engaged in trade or business in Puerto Rico and the seller is a
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