PUERTO RICO Law and Practice Contributed by: Antonio Santos, Donald Hull and Paola Canino, Pietrantoni Mendez & Alvarez LLC
the property, as assessed (based on the replace - ment cost as of 1957) by the Municipal Revenues Collection Center ( Centro de Recaudacion de Ingresos Municipales , or CRIM) and is payable semi-annually on July 1st and January 1st of each year. Real property tax exemption may be available under certain Puerto Rico tax incentives legislation (eg, tax incentives covering manufac - turing, tourism and other eligible activities). Any for-profit entity engaged in a trade or busi - ness in Puerto Rico is subject to a municipal licence tax (a gross receipts tax or patente ) imposed on gross revenues generated within the municipalities in which the entity conducts its business. The municipal licence tax rate varies depending on the municipality, but ranges from 0.2% to 0.5% of gross revenues in the case of non-financial businesses. 8.4 Income Tax Withholding for Foreign Investors A foreign corporation that is not engaged in a trade or business in Puerto Rico is subject to Puerto Rico withholding income tax on its fixed or determinable annual or periodic gross income (eg, rental income) from Puerto Rico sources at a flat tax rate of 29%, which is fulfilled through withholding at source by the payor of the income. The foreign corporation may, however, elect to treat income derived from real estate located in Puerto Rico (whether the income is rent or gain from the sale or exchange of the property) as income effectively connected with a Puerto Rico trade or business (the “Election” ), which would allow the lessor to avoid being subject to the 29% flat tax regime. Instead, the lessor would be required to file a Puerto Rico income
tax return in order to declare the Puerto Rico rental income and claim all expenses associ - ated with the production of such income, with the net rental income subject to tax in Puerto Rico at regular corporate income tax rates (up to 37.5%). In the sale of real property located in Puerto Rico by a foreign corporation that is not engaged in a trade or business in Puerto Rico, the purchaser of the real property asset is required to withhold 25% of the excess of the selling price over the sum of the seller’s acquisition cost of the proper - ty plus certain other items specifically provided under the law. However, if the foreign corpora - tion has made the election, the gain from the sale of the real property would be taxed at: • gradual (up to 37.5%) income tax rates for real property considered inventory; or • preferential (20%) income tax rates if the real property is a trade or business asset or an investment property. 8.5 Tax Benefits Income from certain real estate owned by a REIT in Puerto Rico is subject to preferential Puerto Rican income tax treatment. In general, if the REIT makes dividend distributions in an amount equal to at least 90% of its net income during a taxable year, the REIT will not be subject to the regular Puerto Rican corporate income tax rates otherwise applicable. Taxable dividends distrib - uted by the REIT would be subject to a 10% Puerto Rican income tax withholding at source. Real property used in a trade or business or to produce income may be depreciated over its useful life.
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