Withholding to Resident Recipients

In general, payments made after June 30, 1995  in the conduct of a trade or business or for the production of income in excess of $1,000 to another person (natural or juridical) for services performed within Puerto Rico are subject to a seven percent (7%) withholding.  The  amount withheld should be deposited with the Secretary of the Treasury on or before the fifteenth (15) day of the month following the close of the month in which the tax was deducted. (Form 480.9A)

The following payments are exempted from this requirement:

1. Payments made to hospitals, clinics, terminal patient homes, homes for elderly and institutions for the disabled.  The term "hospital or clinic" does not include the rendering of laboratory services,  except when the laboratory forms an integral part of a hospital or clinic.

2. Payments made to organizations that are exempt pursuant to the provisions of Section 1101 of the Code.

3. Commission  payments made to direct salespersons for the sale of consumer products.  Direct salespersons are defined as an individual engaged in the sale, or solicitation for sales, of use and consumer goods.

4. Payments  made to contractors or subcontractors for construction work.  The term "construction work" does not include services for architecture, engineering, design, consulting and other services of a similar nature.

5.  Payments for services rendered by nonresident individuals or foreign corporations or partnerships that are not involved in an industry or business in Puerto Rico that are subject to the withholding requirements of Sections 1147  and 1150 of the Code.

6. Payments of salaries subject to withholding under section 1141.

7. Payments for services to corporations that are current in their tax responsibilities.  The Secretary of  the Treasury will issue a Certificate of Relief to those taxpayers that are in good standing.

8. Payments made to the Government of Puerto Rico, including its agencies, instrumentalities, public corporations  and political subdivisions.

9. Payments for services to individuals during the first three years of their commencement of rendering the service activities.

10. Payments made to bona fide farmers that  qualify for the deduction under Section 1023(s)  of the Code.

11. Payments made directly, or through an agent or representative, to an air or maritime carrier (eligible carrier).  Eligible carrier is  defined as a person whose principal trade or business is the air or maritime transportation or telephone communication services between Puerto Rico and other destination outside Puerto Rico.

12. Payments made by an  eligible carrier to a nonprofit entity engaged in the business of   bookkeeping, registering, reporting and collecting sales for air or maritime transportation tickets and other related services, on behalf of or for  the benefit of such eligible carrier.

13. Payments for ecclesiastic services rendered by priests or other ministers of the gospel duly authorized or ordained, including Hebrew rabbis.

In the event that payments include both, services and other activities (i.e., travel expenses, machinery and spare parts), the service provider should segregate the  amounts on the bill in order for the recipient to determine the appropriate withholding amount.

The law specifies that the term services does not include insurance contracts, leasing of personal or real property,  printing, sale of newspapers, magazines or other publications (including ad placements), and contracts at radio or television.

The regulations provide that:

• The withholding is only applicable to payments made.  Therefore, when the service provider either discounts or credits the service against an amount that otherwise would be paid to the recipient, the latter is not  responsible for the withholding on certain items (i.e., insurance or travel agencies).  However, an informative return, as described below, must be made showing the amount of the service as if the payment were made.
   
• Any payment in kind, is considered a payment under these provisions.  Therefore, the person who transfers property in exchange for services, must deposit the amount of the tax that would be withheld  in the same manner as if a cash payment was made.  This is the same when two persons provide services among each other.

An annual reconciliation statement (Form 480.6B.1) must be filed to report the payments made during the calendar year to each service provider, on or before February 28 of the following calendar year and a copy  should be given to the service provider.  If for any reason, the informative return is not received by the service provider, the amounts withheld by the payor may still be claimed as a credit, given a sworn statement is  included with their tax return.  Such statement must include: the payor's name, address, E.I.N., telephone number, amounts received and the corresponding tax withheld.  It may be interpreted from the regulations that if  the sworn statement is filed after the extended due date for filing the tax return, the credit may not be claimed.

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