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July 8, 2022

Puerto Rico enacts legislation allowing companies to replace 4% excise tax on foreign corporations with new, possibly creditable, tax on industrial development income

The Governor of Puerto Rico has enacted Act 52 of 30 June 2022 (Act 52-2022), which allows companies to elect a 10.5% tax on industrial development income from sales of goods and services instead of the 4% excise tax on foreign corporations, which the latest United States (US) foreign tax credit rules do not consider creditable. In addition to changing the excise tax regime, Act 52-2022 amends the incentives laws and other statutes, including the Puerto Rico Internal Revenue Code of 2011, as amended (PR IRC).

This Alert provides a high-level overview of the Act. A detailed Tax Alert on Act 52-2022 is forthcoming.

New tax regime to replace the excise tax

Businesses electing the 10.5% tax rate must ask the Department of Economic Development and Commerce (DEDC) to amend their tax exemption decree to reflect the new tax regime under which the 10.5% tax rate will apply. The legislation authorizes the DEDC to determine whether granting the election will be in Puerto Rico's best interests. If the DEDC grants the election, the taxpayer may request to have its decree extended for an additional 15 years, beginning on the day following the expiration of its existing decree.

If the US amends the Internal Revenue Code to apply a corporate income tax rate of at least 15% to the income of a controlled foreign corporation, then a 15% rate will apply to the taxpayer's industrial development income, instead of the 10.5% rate. The industrial development income that will be subject to the opted 10.5% rate, or the automatically triggered 15% income tax rate, generally is eligible for various exemptions. Exemption eligibility depends on certain conditions, such as the amount of income, the number of employees, capital investments made, and the number of municipalities in which the business operates. Exemptions fall into the following tiers:

Tier 1: Taxpayers that average 1,000 direct employees or more and generate industrial development income of US$300 million1 or more in the prior tax year may exempt 20% of that income from tax. A 70% exemption may apply for each year in which the taxpayer's average industrial development income during the preceding three years exceeds 20% of the average taxable purchases of the controlled group that would have been subject to the excise tax, provided:

  • The US adopts a corporate income tax rate of at least 15%

  • The taxpayer averages less than $600 million in industrial development income in the three preceding tax years

  • The taxpayer operates as a manufacturer under a tax exemption decree in at least four Puerto Rican municipalities as of 30 June 2022

US adoption of a corporate income tax rate of at least 15% would reduce the average employment condition under Tier 1 from 1,000 to 100 direct employees.

Tier 2: Taxpayers that average 1,000 direct employees or more and generate industrial development income of $2.5 billion or more in the prior tax year may exempt 67% their industrial development income from tax.

Tier 3: Taxpayers that average 1,000 direct employees or more and generate industrial development income of $7.5 billion or more in the prior tax year may exempt 75% of their industrial development income from tax.

Tier 4: Taxpayers may exempt 85% of their industrial development income from tax if they (1) average 4,000 direct employees or more, and (2) paid royalties for the prior year that equaled or exceeded 90% of their industrial development income.

The Act amends the Incentives Code (Act 60-2019), as well as the predecessor incentives laws as applicable (Act 135-1997 and Act 73-2008), to incorporate these tiers.

Credit for businesses remaining under excise tax regime

The Act also provides a new credit mechanism to be applied against the excise tax for tax years commencing after 31 December 2022, for taxpayers that remain under the excise tax regime. Among the requirements, the taxpayer must be part of a controlled group with manufacturing facilities in four or more Puerto Rican municipalities as of 30 June 2022. The credit equals $8 million per each of the operating facilities, with an annual maximum of $32 million. A minimum excise tax $500,000 payment rule applies to each municipality to which the credit relates.

Withholding tax on royalties

Generally, taxpayers that elect to be subject to the 10.5% rate or the automatically triggered 15% income tax rate must continue applying a 12% withholding tax to royalties paid to corporations, partnerships, or nonresident persons that are not engaged in a trade or business in Puerto Rico for the use, or right to use, patents, copyrights, formulas, technical know-how and other similar property in Puerto Rico. Act 52-2022, however, reduces the withholding tax rate to 7.5% under certain circumstances.

Companies with 100 or more direct employees may exempt 37.5% of royalties subject to the 12% withholding rate. This exemption will not apply to Tier 1 or Tier 4 businesses. A 13% withholding tax rate will apply to royalties paid by Tier 4 businesses, but may decrease to 12% if certain conditions are met.

New process for evaluating requests to amend tax exemption decrees

Act 52-2022 introduces a new process for evaluating taxpayer requests to amend their tax exemption decree to reflect the new 10.5% tax. The process seems to be aimed at expediting the evaluation of the request and DDEC's final determination on granting the amendment.

New system for administering tax credits

The Act authorizes the Puerto Rico Treasury Department (PRTD) to create a system to administer tax credits. The PRTD must publish regulations or other administrative guidance on the implementation date of the new system.

The Act distinguishes between pre and post system credits (i.e., credits granted before or after the system’s implementation). Taxpayers would have three years from the system’s implementation to use pre-system credits; after those three years, unused pre-system credits will expire. 

Other tax changes

Act 52-2022 introduces multiple changes to the PR IRC’s provisions on income tax and sales and use tax, some of which are briefly addressed below. 

The PR IRC now recognizes the tax status of a disregarded entity for tax years beginning after 31 December 2021, if the entity meets certain requirements. The changes seem to apply only to a limited liability company with a sole member who is a Puerto Rico individual resident. The owner of the disregarded entity will recognize the disregarded entity’s activity on its income tax return. Under Act 52-2022’s amendments, a disregarded entity is not required to file an income tax return, but its owner must report income and expenses using the same tax year and accounting methods as the disregarded entity.

The Act also amends the PR IRC’s definition of being engaged in trade or business in Puerto Rico to prevent remote workers in Puerto Rico from creating nexus for nonresident businesses for income tax purposes. Various factors and conditions must be satisfied for the remote worker not to create a trade or business in Puerto Rico. These rules apply to tax years beginning after 31 December 2021. Withholding taxes do not apply to wages paid after 31 December 2021, to a remote worker as defined under the PR IRC for services rendered. The remote worker must, however, pay estimated taxes on the income realized for the services rendered.

The Act requires Puerto Rico resident individuals with financial accounts maintained outside of Puerto Rico or US to file a declaration detailing those accounts with their annual individual income tax return.


For additional information with respect to this Alert, please contact the following:

Ernst & Young Puerto Rico LLC, State and Local Taxation Group, San Juan



  1. Currency references in this Alert are to the US$.

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.


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