Foreign Branch

 A Branch of a Non-Puerto Rico Corporation will be subject to regular income tax and/or alternative minimum tax in a manner similar to a domestic (Puerto Rico) Corporation.  The tax benefit attributable to the lower rates below 39% is subject to a phase-out computed by multiplying taxable income in excess of $500,000 by 5%.  Such additional tax is subject to a cap at the point where the total tax determined is equivalent to 39% of the net taxable income.

In determining taxable income, the Branch will take into consideration items of income effectively connected with the conduct of a trade or business in Puerto Rico.  The branch will be allowed to deduct the  expenses directly allocable to the Puerto Rico business.  In addition, a reasonable apportionment of expenses not directly related to any item of income shall be allowed as a deduction.  Thus, the Branch would be entitled  to deduct in the Puerto Rico income tax return a reasonable allocation of overhead expenses incurred by the home office.

• Branch Profit Tax

A second level tax, "the branch profit tax" (BPT), is imposed to tax the Branch's operations as if it was a foreign subsidiary.  The purpose of a branch profit  tax is to treat as dividends the remittances of funds to the home office.  A foreign corporation is not subject to the branch profit tax in a taxable year if for the current and two preceding taxable years at least 80%  of its gross income was effectively connected with a Puerto Rico trade or business.

The BPT generally represents a 10% tax upon the "dividend equivalent amount".  Broadly speaking, the BPT would be imposed if the  earnings and profits derived by the Branch were not reinvested in Puerto Rico as of the end of the taxable year.  Comparing the net equity at the end of the taxable year and the net equity at the beginning of the taxable year  makes the determination whether the amount was invested or reinvested.  The BPT and the regular tax would represent a maximum effective tax burden of 45.10%.  The BPT, as well as the income tax burden, may be reduced through the reasonable allocation and apportionment of  overhead expenses.  Note, however, that the allocation of expenses may be questioned by the Puerto Rico tax authorities if considered unrelated to the Puerto Rico operations.