Tax exemptions and incentives are afforded under the Economic Incentives for the Development of Puerto Rico Act (“Act”) for “Eligible Businesses” such as the manufacturing of products; performing services for markets abroad; recycling; value added activities, key supplier and others. The tax exemption period is 15 years.
The Act provides for (i) a fixed income rate of 4% with a withholding tax on royalty payments of 12%, or (ii) an optional fixed income rate of 8% with a withholding tax on royalty payments of 2%. However, pioneer products, would qualify for a fixed income tax rate of 1%, or of 0%, if the intangible property used in the exemption operation has been created or developed in Puerto Rico. Certain credits against the income tax are allowed: purchases of products manufactured in Puerto Rico; job creation; research and development, clinical trials, toxicology trials, infrastructure, renewable energy, and intangible property; investment in machinery and equipment for generation of energy; reduction in cost of energy; investment of transfer of technology (withholding tax on royalty payments creditable against fixed income tax liability); investment in strategic projects; and industrial investment.
Distributions out of earnings or profits or upon liquidations derived from the exempt operations are 100% tax-free in Puerto Rico.
The Act provides a 90% exemption from real property taxes and a total exemption from personal property taxes, as well as a 60% exemption from Municipal License Tax (75% for small and medium size businesses).
A 100% exemption from state excise tax and sales and use taxes is provided for raw materials, machinery and equipment, fuel used for the generation of energy, chemicals used in the treatment of waste water, and energy-efficient equipment.