On June 30, 2022, the Governor of Puerto Rico signed Act 52 of 2022 (Act 52), which introduced amendments to certain provisions of the Puerto Rico Internal Revenue Code of 2011, as amended (PR Code).
Such amendments are summarized as follows:
1. Substitute to the 4% Excise Tax on Foreign Affiliated Entities
Act 52 extends indefinitely the validity of the 4% excise tax (Excise Tax) imposed by Act 154 of 2010. However, incentive laws covering manufacturing activities (such as Act 135 of 1997, Act 73 of 2008, and Act 60 of 2019) were amended to introduce a new optional fixed tax rate in substitution of the Excise Tax and the special sourcing rules that apply to members of a controlled group that requires, in some instances, filing an income tax return.
To this end, exempt manufacturing entities may choose to pay taxes at an "alternate tax rate" of 10.5%, instead of the current income tax rate set forth in their tax exemption decrees. As of the effective date determined for the election, no member of a controlled group of the exempt business, who has chosen to pay taxes at the optional 10.5%, will be subject to the Excise Tax and the requirement of filing an income tax return.
2. Pass-through Entities
As of January 1, 2022, any corporation, limited liability company (LLC), or partnership may choose to be treated as a pass-through entity, even if such entity has only one (1) owner. It applies to both domestic and foreign entities.
3. Disregarded Entities
Act 52 introduces the "disregarded entity" concept into the Puerto Rico tax system, effective on January 1, 2022. A disregarded entity is deemed ignored as an entity separate from its owner solely for income tax purposes. Thus, the disregarded entity will not be subject to income tax filing requirements, and the owner shall report income derived by the entity in his/her income tax return as if the entity did not exist.
A domestic LLC may choose to be treated as a disregarded entity, as long as it has only one (1) member who is an individual, resident of Puerto Rico. This treatment is not available to corporations. An election must be filed on or before the date set forth to file the income tax return for the year of the election, including extensions.
The disregarded entity provisions do not apply for purposes of the Municipal Volume of Business Declaration nor the Personal Property Tax Return. The audit requirement will not apply to disregarded entities. However, said entity’s volume of business will be deemed attributed to the owner.
4. Optional Tax
The optional tax may now be paid on the filing date of the income tax return, without extensions. It will no longer be required that the optional tax has been paid through withholdings or estimated tax payments. This change is effective for taxable year 2022 in the case of individuals and for taxable year 2023 in the case of partnerships. It does not apply to corporations.
The requirement to pay estimated tax payments will apply when the estimated tax exceeds $1,000. For taxable year 2023 onwards, corporations with a tax exemption decree may choose to make the first estimated payment together with the second estimated payment that is due on June 15. Corporations that avail themselves to the 10.5% alternate tax that replaces the Excise Tax will not be subject to estimated tax payments during the 11-month transition period to the new tax regime.
6. Financial Statements
For taxable years 2020 onwards, entities that meet the following two criteria will be required to submit audited financial statements:
- belong to a group of related entities with an aggregate business volume equal to or greater than $10M,
- and that individually generates a business volume equal to or greater than $3M.
All other entities of the group will not be required to submit audited financial statements.
The PR Code requirement to file audited financial statements and supplemental schedules will apply for purposes of property tax and municipal license tax.
Act 52 clarifies that, for taxable years beginning after December 31, 2022, supplemental schedules must be filed only in the following cases:
- construction businesses, for contracts that exceed $1M,
- hospital units that operate under Law 168 of June 30, 1968, as amended,
- and financial institutions.
7. Remote Workers
As of taxable year 2022, a taxpayer will not be considered as engaged in a trade or business in Puerto Rico only because it maintains employees on the Island if, at no time during the taxable year:
- the taxpayer had an office or other local fixed place of business in Puerto Rico;
- the taxpayer had an economic nexus with Puerto Rico;
- the taxpayer was a registered merchant;
- the remote worker is not an officer, director, or majority shareholder of the taxpayer;
- the services provided by the remote worker are provided for the benefit of clients or businesses of the taxpayer that do not have a connection with Puerto Rico; and
- the taxpayer reports the income paid to the remote worker on a federal Form W-2 or Form 499R-2/W-2PR.
The mere fact of having remote workers in Puerto Rico will not be considered an economic nexus with Puerto Rico.
Remote workers may claim a credit for the taxes paid to a U.S. state or territory, on their salary earned in Puerto Rico, only when said state or territory has an income source rule in the case of salaries that is based on the residence of the employer or place where the employer conducts business.
As of 2022, foreign employers will not be subject to withhold Puerto Rico income taxes from remote workers nor will they have to register with the Department of the Treasury for payroll tax purposes. However, remote workers must pay estimated taxes on the wages earned from their foreign employer.
8. Foreign Financial Accounts
Puerto Rico resident individuals must file, with their individual income tax return, a declaration reporting financial accounts maintained outside of Puerto Rico or the United States with a value that exceeds ten thousand ($10,000) dollars. Crypto assets are included in the definition of financial accounts.
9. Sales and Use Tax (SUT)
Act 52 includes “digital products” as a taxable item under the P.R. Code.
Digital Products are defined as items acquired through streaming, either by purchase or subscription; video, pictures, applications for electronic equipment, games, music, computer programs or any other similar item delivered to the purchaser through electronic means or by digital transferring. Digital Products also include Specified Digital Products and Other Digital Products.
Specified Digital Products include any electronically transferred digital audiovisual work, digital audio work, or other similar products, to the extent a digital code is provided to the purchaser with the right to obtain the product, including non-fungible tokens (“NFT”).
Other Digital Products include greeting cards, images, games, video or electronic entertainment, memberships to electronic groups to download exclusive electronic content or audiovisual work, including theater products, musical products, such as concerts or videos, audiovisual adult materials, news and information products, digital storage devices, software applications for computers, and any other product that can be deemed as a digital product, whether digitally or electronically transferred, delivered or downloaded, or accessed.
Sourcing Rules on the Sale of Digital Products
The source on the sale of digital products will be the physical address of the purchaser. If the seller does not have the physical address of the purchaser, then the source will be the postal address of the purchaser. If the purchaser does not provide a physical or postal address to the seller, then the source of the sale will be determined by reference to the information of the purchaser’s bank account or credit card, or the location of the financial institution holding the bank account (branch of the bank) used by the purchaser to acquire the digital products. If the payment cannot be allocated to a branch or financial business location, then the source of the sale will be the headquarters of the financial institution.
Marketplace Facilitator and Marketplace Seller
Act 52 modifies the definition of Marketplace Facilitator to include a person that facilitates the sale of admission rights.
The definition of Marketplace Seller is modified to include a seller that makes retail sales of tangible personal property, specified digital products, admission rights, or taxable services.
Endorsement for Public Shows
The promoter of an event may begin the sale of admission tickets after filing the “Informative Return of Endorsement-Public Shows” through the digital platform SURI. Act 52 eliminates the requirement of filing such return 48 hours prior to starting ticket sales.
Bi-Weekly SUT Payments
The requirement imposed to certain merchants to pay the SUT in bi-monthly installments was effective until June 2022. Therefore, this requirement will not apply for the period of July 2022 onwards.
At RSM Puerto Rico, we can provide you with additional information and advice on this matter. Please contact our tax advisors at (787) 751-6164 | [email protected] for help or more information.