Act 73

Act 73

Economic Incentives for the Development of Puerto Rico

One of the most effective programs in promoting the economic development of Puerto Rico has been the industrial development incentives laws. Act No. 73 of 2008, as amended, known as the “Economic Incentives for the Development of Puerto Rico Act” (the “Act”), is the current industrial development incentives law in effect.

The Act provides economic incentives, tax exemptions and tax credits to businesses engaged in eligible activities in Puerto Rico. To avail from such benefits, a business needs to become an exempt business by applying for a tax concession and obtaining a tax exemption decree.

Eligibility

Eligible activities that may qualify for the benefits of the Act
include the following:
• Industrial units dedicated to the manufacture on a commercial
scale;
• Subcontracted services rendered in Puerto Rico that are
essential to a manufacturing unit that belongs to “a high
economic impact cluster,” as designated by the Puerto Rico
Industrial Development Company’s Executive Director in
consultation with the Puerto Rico Planning Board;
• Services rendered in Puerto Rico by key suppliers of exempt
businesses;
• Owners of property, real or personal, used by an exempt
business in its exempt operations, such as a lessor of real
estate used in operations of an exempt business;
• Operations engaged in the breeding of animals for
experimental use in laboratories for scientific and medical
research, and other similar uses;
• Recycling activities that involve: (i) a transformation of
recyclable materials into raw material or ingredients used
for the elaboration of a product (partial recycling), (ii) the
preparation of such recycled raw material for local sale or
use or for exportation, or (iii) the transformation of recycled
materials mainly collected in Puerto Rico into commercial
articles (total recycling);
• Operations engaged in the planting and cultivation
through the process of hydroponics;
• The development of licensed or patented software that
may be reproduced on a commercial scale;
• Operation of certain specified strategic projects;
• The licensing of intangible property, whether developed or
acquired by the exempted business that has a decree
under the Act;
• An industrial unit that produces bottled purified water;
• The construction of social interest housing and planning
and development of self-sustainable or partially sustainable
communities; and
• Certain research and development activities conducted
in laboratories.

Tax Exemptions

The Act provides the following tax exemptions:
• 4% fixed income tax rate;
• 1% fixed income tax rate for innovative firms introducing
“pioneer” activities or operations in Puerto Rico;
• A reduction of 0.5% in the fixed income tax rate, when the
business is located in an industrial area of low or
intermediate development (as determined by the Office of
Industrial Tax Exemption);
• 12% fixed income tax rate, withheld at source, on royalties
paid to foreign entities with respect to intangible property
used in the exempt business;
• 100% tax exemption on dividend distributions;
• 4% fixed income tax rate on gains derived from the sale
of ownership interests or substantially all the assets of the
exempt business, in lieu of any other Puerto Rico income
tax imposed on such gains;
• 90% tax exemption from personal property taxes. The
taxable portion will be subject to the regular tax rate, that
currently can be up to 8.83%; therefore, after considering the
90% exemption, the effective tax rate would be up to 0.883%;
• 90% tax exemption from real property taxes. The taxable
portion will be subject to the regular tax rate, that currently
can be up to 10.83%; therefore, after considering the 90%
exemption, the effective tax rate would be up to 1.083%;
• 60% tax exemption on municipal license taxes, with the first
3 semesters being 100% exempt. Any taxable portion will
be subject to the regular tax rate, that currently can be up
to 0.5%; therefore, after considering the 60% exemption,
the effective tax rate would be up to 0.02%;
Economic Incentives ACT 73 for the Development of Puerto Rico
• 100% tax exemption on municipal construction taxes;
• 100% tax exemption on excise taxes and sales and use tax
on raw material and certain machinery and equipment
used in the production process; and
• Accelerated depreciation – 100% first-year bonus depreciation,
with ability to carry over to subsequent tax years until
exhausted.

Tax Credits

The Act provides various tax credits, including:
• 25% tax credit on purchases of products manufactured
in Puerto Rico;
• 35% tax credit on purchases of products manufactured in
Puerto Rico made from recycled materials;
• Tax credit for job creation during the first year of operations
that ranges from $1,000 per job created in an industrial area
of intermediate development (as determined by the Office
of Industrial Tax Exemption) to $2,500 for jobs created
in an industrial area of low development. In the case of
businesses established in the municipalities of Vieques and
Culebra, this tax credit is $5,000 per job;
• 50% tax credit on eligible research and development
activity costs; and
• 12% tax credit for royalties paid to foreign entities with
respect to intangible property used in the exempt business.

Puerto Rico Income Taxes

An exempt business operating in Puerto Rico under the Act by means of a Puerto Rico entity should not be subject to any taxes (such as a dividend tax, tollgate tax or other similar taxes) on its income from its eligible activities in Puerto Rico, other than the Puerto Rico fixed income tax rate established in the tax decree, regardless if said income is distributed or retained by the entity.

Upon repatriation, the distributed income would be subject to the tax imposed by the jurisdiction in which the owners of the Puerto Rico entity reside, if any.

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