Linkedin
Facebook
Email
more
For entities organized outside of Puerto Rico (“foreign entities”) the concept of being "engaged in a trade or business" for Puerto Rico income tax purposes plays a pivotal role in determining tax obligations and benefits within the jurisdiction.
The taxation of foreign corporations in Puerto Rico depends on whether or not the foreign entity is engaged in a trade or business in Puerto Rico (“ETBPR”). The determination of whether or not an entity is deemed to be engaged in a trade or business depends upon the facts and circumstances surrounding the performance of the business activity.
Foreign corporations ETBPR are taxed on their net income from sources within Puerto Rico or other income considered to be effectively connected with the conduct of the trade or business. On the other hand, a foreign entity not ETBPR is taxed only on its Puerto Rico source fixed or determinable annual or periodical income (known as “FDAP”) and on capital gains derived from Puerto Rico sources. These items of income are generally taxed on a gross basis through a withholding mechanism.
Defining "Engaged in a Trade or Business"
The Puerto Rico income tax law and regulations do not provide a definition of the term “engaged in trade or business” and there are no significant judiciary decisions on this issue. Therefore, based on similar statutory wording under the Puerto Rico Internal Revenue Code (the “PR Code”) and the United States Internal Revenue Code, reference is made to US case law interpreting the term “engaged in a trade or business within the US” as persuasive authority in making the determination of whether or not a foreign entity is ETBPR.
Some elements to be considered in the ETBPR Determination are:
Nature of Business Activities
As a general rule, courts in the United States have disregarded activities which are ministerial and clerical in nature in determining whether activities constitute the carrying on of a trade or business. Also, for these purposes, activities that are deemed of little economic importance in light of the foreign entity's total economic activity have been disregarded.
Therefore, to be considered engaged in a trade or business, the foreign entity must generally perform services considered more than just clerical or ministerial. To the contrary, the activities must be:
1. regular and continuous;
2. with a business objective (not only planned to save taxes);
3. active in nature, and;
4. substantial in relation to the total income earned
Among other factors considered in the determination of whether an entity is ETBPR is whether it has a permanent establishment through (i) an office or other place of business in Puerto Rico, (ii) employees or (iii) agents; whether is registered to do business in Puerto Rico; and whether there is regular passage of title of articles in Puerto Rico. No single factor is determinative in reaching a conclusion.
De Minimis Activities
The phrase “engaged in trade or business within Puerto Rico” does not include the rendering of personal services in representation of a foreign entity, not otherwise ETBPR, by one or more nonresident individuals present in Puerto Rico for a period or periods not exceeding 90 days during the taxable year. In these circumstances, the activities of said nonresident individuals shall not have the effect of considering said entity as ETBPR, without regard if the person or persons that render the services are employees of such entity or are acting in accordance with any other kind of express or implied agency relationship.
We know that grasping the intricacies of the concept of being "engaged in a trade or business" for Puerto Rico income tax purposes is crucial for foreign entities considering entering into business activities with Puerto Rico. The elements included in this article are meant to illustrate the most significant considerations in an ETBPR analysis. However, this is not an exhaustive list as other elements and circumstances could be relevant. The analysis of the different elements to be considered ETBPR plays a determining role in the applicable Puerto Rico tax obligations and often requires the application of statutory subtleties to the specific facts of the client.