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August 26, 2022

Puerto Rico’s Act 52 of 30 June 2022 amending various tax provisions analyzed

  • The Act’s key change is the new alternate optional tax regime for entities subject to the 4% excise tax on the purchase of products manufactured in Puerto Rico.

  • The Act also introduces the disregarded entity concept for income tax purposes.

  • It establishes a new exception from the definition of engaged in trade or business within Puerto Rico for nonresident companies that employ a remote worker.

  • Additionally, it includes provisions on the sourcing of personal property, the sale of partnership interests, and the sales and use tax.

  • With the new provisions and amendments, there are new filing requirements with which taxpayers must comply.

  • Act 52 also incorporates modifications to the rules related to the submission of audited financial statements, and a new tax credit management system.

The Governor of Puerto Rico signed Act 52 into law on 30 June 2022 (Act 52-2022). Act 52-2022 amends various provisions of the Puerto Rico Internal Revenue Code (PR Code), Puerto Rico Incentives Code (PR Incentives Code) and Puerto Rico Municipal Code. Unless otherwise indicated in the law, Act 52-2022 is effective upon enactment.

This Tax Alert addresses certain key amendments affecting income tax, tax incentives, municipal license tax and property tax. An EY Global Tax Alert, Puerto Rico enacts legislation allowing companies to replace 4% excise tax on foreign corporations with new, possibly creditable, tax on industrial development income was published on 8 July 2022, on the provision allowing some companies operating under industrial tax grants to elect to be taxed at a 10.5% tax rate instead of the 4% excise tax.

Changes to PR Code

Disregarded entities

Act 52-2022 introduces the disregarded entity (DRE) concept for income tax purposes. Under this provision, an entity treated as a DRE is not required to file a separate income tax return from its single member. Instead, the member must include the DRE’s income and expenses in its own tax return.

Under the general definition of limited liabilities companies (LLCs), the legislation states that DRE treatment is available to LLCs owned by Puerto Rico resident individuals for tax years beginning after 31 December 2021.

For tax years beginning after 31 December 2022, LLCs with one sole member that are taxed as DREs in the United States (US) or their place of organization outside of Puerto Rico will be disregarded in Puerto Rico and will not be eligible to be taxed as corporations.


Because the reference to Puerto Rico resident individuals is not expressly present in other provisions of the law, the Puerto Rico Treasury Department (PRTD) will have to issue additional guidance on how these DRE provisions apply. For LLCs that are organized outside of Puerto Rico and treated as DREs, effective for tax years commencing after 31 December 2022, the legislation seems to impose DRE treatment in Puerto Rico regardless of the residency of the single owner and whether the owner is an individual.

It seems that foreign LLCs must no longer be taxed as partnerships if: (1) they are DREs in the US or have their tax liability in a foreign country determined at the level of their owners; and (2) commence operations from 1 July 2022 to 31 December 2022.

Also, it seems foreign single-member LLCs that are currently subject to taxation as partnerships because of the statutory mandate will automatically be treated as DREs for Puerto Rico income tax purposes, effective 1 January 2023. The PRTD is expected to issue guidance on this new tax status and other options related to converting from partnership taxation.

Conversions from flow-through status to corporate taxation

Act 52-2022 allows entities to revoke a pass-through-entity election to return to corporate tax treatment. Under the new provisions, an entity revoking a pass-through-entity election is treated as if it contributed its assets and liabilities to a new corporation under the rules of Section 1034.04(b)(5) of the PR Code. The pass-through entity is deemed as then liquidating and distributing the shares of the new corporation to its partners under the rules of Section 1073.01 of the PR Code.

Engaged in trade or business definition (remote worker provisions)

Act 52-2022 establishes a new exception from the definition of engaged in trade or business within Puerto Rico (ETBPR) for nonresident companies that employ a remote worker.

For tax years beginning after 31 December 2021, a nonresident taxpayer is not considered to be ETBPR if it employs a remote employee who works from Puerto Rico, provided all the following conditions are met:

  • The taxpayer did not have, at any time during the tax year, an office or fixed place of business in Puerto Rico.
  • The taxpayer does not have economic nexus with Puerto Rico.
  • The taxpayer is not considered a merchant for sales and use tax (SUT) purposes.
  • The remote worker is not an officer, director or majority shareholder of the taxpayer.
  • The remote worker renders services for the benefit of clients or the taxpayer’s business that does not have nexus with Puerto Rico.
  • The taxpayer reports the remote employee’s income in a US Form W-2 or a PR Form 499R-2/W-2PR.

If these conditions are met, the nonresident taxpayer is not required to withhold income tax on the payments made to the remote employee as wages. Instead, the remote employee must pay estimated taxes to satisfy his/her individual tax obligation. Remote workers, however, may claim a foreign tax credit for any income tax or excess profits tax paid or accrued during the tax year to any US possession or any state of the US for services provided to the nonresident employer. The credit will be limited only to the taxes paid to the US states or possessions that consider the residency of the employer to determine the source of the income earned.


Although the amendments seem to be aimed at facilitating the relocation of nonresident individuals to Puerto Rico without creating tax reporting issues for their nonresident employers, some aspects of the statute’s wording may either need official interpretation by the PRTD or technical amendments by the Legislative Assembly. For example, given that having employees in Puerto Rico would likely cause a taxpayer to be considered a merchant for SUT purposes and economic nexus is not properly defined in the amendment, how the exception to the definition of ETBPR applies is unclear. The reporting obligation for the wages paid also needs to be addressed; while the employer is not required to withhold or report on the wages paid under Section 1062.01 of the PR Code, it seems the employer must report the wages paid to not be considered an employer engaged in trade or business in Puerto Rico. It seems the PR reporting obligation is not required if a US Form W-2 has been issued to that employee.

Additionally, remote workers should comply with all Puerto Rico individual income tax obligations. Failure to pay estimated income tax, as applicable, during the year may result in penalties. While Act 52-2022 allows the foreign tax credit for tax paid to states in the US and its possessions, it does not seem to allow a foreign tax credit for income tax paid in other countries.

Alternative minimum tax applicable to corporations

Under the previous alternative minimum tax (AMT) provisions, corporations with a volume of business of less than US$3 millionand corporations with a volume of business of $10 million or more were subject to a maximum AMT rate of 18.5%, while corporations with a volume of business equal to or higher than $3 million but less than $10 million were subject to a 23% AMT rate.

Act 52-2022 amends the AMT rate to impose the 23% rate solely on corporations with a volume of business of $10 million or more, while corporations with a volume of business of less than $10 million are subject to the 18.5% rate.


The amendment appears to be providing retroactive tax treatment to this change in rate, as it is effective for tax years commencing after 31 December 2018. Pending guidance from the PRTD, companies may need to evaluate whether they have to amend their returns for tax years 2019 and 2020.

Sourcing of personal property

Under the PR Code, gains from the sale of personal property are generally sourced at the seller’s residency or the seller’s place of organization.

Act 52-2022 incorporates an exception to the general rule for individuals, which allows the appreciation of the gain realized on the sale of personal property to be sourced outside of Puerto Rico. To qualify for this exception, the gains must be realized during the period the individual is living outside Puerto Rico and until the date the individual becomes a resident of Puerto Rico. This new rule applies to the sale of personal property acquired by an individual before becoming a Puerto Rico resident.

Sale of partnership interest

Act 52-2022 reenacts certain rules approved through Act 257-2018 and makes various technical amendments to Section 1035.08 of the PR Code pertaining to the sale of partnership interests by nonresidents.

Under the amendments, income derived from the sale of a partnership interest is deemed to be from sources within Puerto Rico to the extent the partnership would have generated income from sources within Puerto Rico had it sold all its assets at fair market value, regardless of the residency of the partner. For a nonresident individual or entity, the purchaser must withhold 15% on the portion of any gain deemed to be from sources within Puerto Rico. This rule applies only for periods beginning after 31 December 2018, but before 1 July 2022.

For sales of partnership interests occurring after 30 June 2022, income from the direct or indirect sale of partnership interests by a foreign nonresident corporation or a nonresident alien individual will be considered income that is effectively connected (ECI) with the conduct of a trade or business in Puerto Rico. The amount that will be considered ECI to the partner is the portion of the gain that the partnership would have generated had the partnership sold all its assets at market value on the date of the sale of the partnership interest, and the gain had constituted ECI. The gain will be subject to the 15% withholding tax at source to be effectuated by the purchaser.


Similar to other amendments introduced by Act 52-2022, it appears that some of the modifications made to this rule may be retroactively effective (i.e., modifications apply to tax years 2019, 2020, 2021 and tax year 2022 through 30 June).

Options to acquire corporate stock

Previously, Section 1040.08 of the PR Code did not deem stock options as qualified options (thus, not tax-deferable compensation) if the price of the option was less than the fair market value (FMV) of the underlying stock, provided the stock was traded in a recognized exchange market.

Act 52-2022, however, allows stock options to be lower than the FMV if the option is offered to an employee under an employee stock purchase plan organized under the provisions of US Internal Revenue Code Section 423.

SUT changes

Act 52-2022 amends various sections of the PR Code to incorporate the term digital products as a taxable item, and to establish the sourcing rules for the sale of digital products. Act 52-2022 also defines market facilitator, market seller, digital products, specific digital products and other digital products.

Additionally, Act 52-2022 amends the SUT provisions to eliminate the requirement for taxpayers to pay the sales tax on a bimonthly basis. Act 52-2022 establishes that the last month to comply with the requirement to pay the sales tax on a bimonthly basis was June 2022.


Merchants will not have to comply with the SUT bi-monthly deposits effective July 2022.

Changes to payment of estimated tax by corporations

Act 52-2022 establishes a new threshold of $1,000 for corporations to pay estimated tax. Under the new threshold, corporations with estimated tax of more than $1,000 must make estimated tax payments. Corporations with $1,000 or less of estimated tax are not required to pay estimated taxes during the year.

Act 52-2022 also amends the due date for paying the first installment of estimated tax for tax years commencing after 31 December 2022, for corporations operating under a tax grant pursuant to the PR Incentives Code or any similar previous or subsequent laws. These corporations may elect to pay the first installment of estimated income tax with the second installment on or before the 15th day of the sixth month of the tax year.

Act 52-2022 establishes a special rule for entities that have tax grants under the PR Incentives Code, Act 135-1997 and Act 73-2008 and are no longer subject to the sourcing rules or the 4% excise tax rules. Those entities will pay estimated tax on or before the 15th day of the month after the transition period begins and every month thereafter during the transition period. The transition period begins the first day of the first month that the corporation elects to be taxed at the 10.5% tax rate instead of the 4% excise tax, and ends on the last day of the 11th month after that first month.


Entities that have no tax liability, but have a minimum tax liability of $500 due to the AMT rules, will benefit from these changes because they will not be required to pay estimated income tax. The changes also fix the due date issues that corporations with tax grants had. With these changes, they can file income tax returns or extensions with the first and second installment of estimated income tax on the same date.

Audited financial statements requirement

Act 52-2022 amends the audited financial statements (AFS) requirement section of the PR Code as follows:

  • For a group of related entities with an aggregate volume of business equal to or greater than $10 million, only those members that individually have a volume of business of $3 million or more (increased from $1 million) must file AFS.
  • Disregarded entities will not be required to file AFS. The volume of business of a disregarded entity, however, should be attributed to its owner.
  • Act 52-2022 establishes a sunset to the requirement to file supplemental schedules for most types of entities. For tax years commencing before 1 January 2023, taxpayers that must file AFS or elect to file AFS must continue submitting the supplemental schedules. Effective for those tax years commencing 1 January 2023 and thereafter, the requirement to file supplemental schedules is limited to only three circumstances: certain construction businesses, hospital units operating under Act 168-1968, and certain financial institutions.


Similar to other amendments introduced by Act 52-2022, the change in the volume of business threshold from $1 million to $3 million to require AFS for an individual member of a related party group seems to apply retroactively. The amendment is effective for tax years beginning after 2019. For tax years commencing after 31 December 2022, most entities will not be required to file supplemental schedules.

Foreign financial accounts

Act 52-2022 requires Puerto Rico resident individuals to report financial accounts that are held outside of Puerto Rico or outside of the US and had a balance over $10,000 during the tax year. Financial accounts include bank accounts, crypto asset accounts, certain insurance policies or investment accounts. Taxpayers with a financial interest in foreign financial accounts must report the name of the institution, maximum value of the account during the tax year and the account number. The Secretary of the PRTD may request additional information through regulations. The Secretary will issue the form taxpayers must use to report the foreign financial accounts. The Secretary, however, may issue regulations stating that the form filed with the Internal Revenue Service (IRS) to report financial accounts is acceptable.

Taxpayers should file the form with their income tax returns. Failure to report foreign financial accounts may result in a $10,000 penalty and a misdemeanor.

For purposes of determining a taxpayer’s tax liability, the Secretary may require a copy of any return, exemption request, form, requests, tax elections or any other document filed with the IRS related to the requirement of reporting foreign bank accounts.

Other provisions

Act 52-2022 amends other provisions of the PR Code as follows:

  • Defines pass-through entities and establishes special rules on the tax treatment of those entities
  • Eliminates the reference to a nonresident alien individual’s distributable share in a special partnership or limited liability company in the context of the 29% fixed, determinable, annual or periodic withholding tax
  • Adjusts the rules for partnerships with tax grants that elect the 10.5% tax rate in lieu of the 4% excise tax to pay monthly estimated taxes on behalf of their partners (instead of the regular quarterly payments) during the transition period related to the first year of the election
  • Requires the Secretary to certify outstanding debts for penalties for misdemeanors and felonies
  • Adds new whistleblower provisions to prohibit discrimination or retaliation against employees or agents of an employer or taxpayer if they provide information or assist in an investigation for noncompliance
  • Establishes the Unit of Large Taxpayers

Additional changes to PR Incentives Code

New credits system

Act 52-2022 authorizes the Secretary of the PRTD to create a tax credit management system (Tax Credit Manager or TCM) as part of the PRTD’s electronic platform. The TCM system will be implemented at a future date as determined by the Secretary. The intention of creating the TCM is to easily administer and monitor tax credits. There will be interagency coordination to register the tax credits in the TCM system. The Secretary also may request additional information or documentation to support the inclusion of tax credits in the TCM.

Under the new provisions, any unused tax credits granted before the TCM implementation date will be limited to a three-year use period after the TCM implementation date (unless the credits expire before that date). Tax credits granted after the TCM implementation date must be registered in the TCM for taxpayers to claim the credits.

Act 52-2022 also amends the provisions on nonrefundable tax credits as follows:

  • Eliminates the credit for investments in securities of a qualified business and the credit for donations to the patronage of the Palace of Santa Catalina
  • Requires the credits for increased investment, increased purchases of Puerto Rican farm products, purchases of products manufactured in Puerto Rico and donations to foundations of former governors to be used within three years of the TCM implementation
  • Limits the carryover period for most unused tax credits existing before the TCM implementation
  • Increases from $3 million to $15 million the amount available for granting tax credits under Act 183-2001 (PR Easement Act) for tax years 2019-2020 onwards
  • Changes the sunset for granting tax credits under Act 98-2001 (Housing Infrastructure Investment Tax Credit Act) from 2023-2024 to 2021-2022


Although implementing an electronic system to monitor and administer the tax credits seems like a positive step, there are some potential pitfalls for taxpayers. While taxpayers may carry forward most tax credits until exhausted, taxpayers could lose unused pre-TCM credits three years after the TCM’s implementation date. Also, taxpayers may need interagency coordination to receive a tax credit. There are some tax credits, such as the credit for purchases of products manufactured in Puerto Rico, that an eligible business may claim on its tax returns without having to confirm, or request an agency to grant, the tax credit. Act 52-2022 does not specify how taxpayers will register the credits in the TCM.

Incentives fund

In addition, Act 52-2022 amends the economic incentives fund regime to limit the amount that will be deposited in the fund to $125 million per calendar year.

Compliance Certificates

Act 52-2022 expands and clarifies the existing compliance rules under Act 60-2019. The Department of Economic Development and Commerce (DDEC), as part of the monitoring of whether tax incentive grantees comply with the terms of the tax grant, will issue a Compliance Certificate. The certificate will be valid for two years and will be the only legal document that will validate that the taxpayer has complied. If the taxpayer does not have a valid Compliance Certificate, the taxpayer’s tax grant will be suspended until the taxpayer can satisfy the requirements highlighted by the DDEC. If the taxpayer cannot satisfy the requirements, the grant will be terminated.

This provision establishes the concept of the compliance professional who would be the person responsible for issuing the Compliance Certificate under regulations issued by the DDEC.

On or before 30 September of each year, the DDEC will publish a report detailing all the incentives requested and approved under the PR Incentives Code. Two times per year, the Secretary of the DDEC will submit to the legislature, and other government agencies, a report detailing the incentives requested and granted and the tax credits granted.


Taxpayers that benefit from a tax grant should be on the lookout for guidance from various government agencies on the requirements for complying with a Compliance Certificate.

Research and development investment credits

For tax years commencing after 31 December 2021, Act 52-2022 allows taxpayers to only claim half of the research and development investment credits for green energy and science and technology in the year in which the Compliance Certificate is issued. Previously, taxpayers could claim half of the credit in the year the eligible investment was made. To request these tax credits and other credits, the taxpayer must comply with the provisions of Section 6030.01 of Act 60-2019.

Changes to the Municipal Code

Personal property tax return

Act 52-2022 amends the Municipal Code to eliminate the requirement to submit audited financial statements (AFS) audited by a CPA licensed in Puerto Rico with the filing of the personal property tax return (PPTR). The amendment will be effective starting on 1 January 2023. Before Act 52-2022, the obligation to submit AFS was triggered when the taxpayer generated a volume of business of $3 million or more.

Additionally, Act 52-2022 amends the requirement to submit supplementary information to align the Municipal Code with the rule under the PR Code, which eliminated, with the exception of certain schedules, the supplementary information schedules for tax years commencing on or after 1 January 2023.
With this amendment made by Act 52-2022, the requirement to include AFS with the personal property tax return is also modified for periods before 1 January 2023. Under Act 52-2022, the AFS requirement is the same as the AFS requirement when filing the income tax return under the PR Code.


Taxpayers who must submit or voluntarily submit AFS with their Puerto Rico income tax return must submit AFS with the PPTR for periods before 1 January 2023. At this time, it is unclear if the reference to “before 1 January 2023” was meant to be on or after 1 January 2023, since a similar amendment, which aligns the filing of the volume-of-business declaration for municipal license tax purposes with the one for income tax purposes, applies on or after 1 January 2023.

Volume of business declaration

Act 52-2022 modifies the requirement to include AFS with the filing of the volume-of-business declaration. Under Act 52-2022, a taxpayer must submit AFS with its volume-of-business declaration, if it had to submit or voluntarily submitted AFS audited by a CPA licensed in Puerto Rico to the PRTD for the filing of the income tax return under the PR Code. Before this amendment, the AFS requirement was triggered when the taxpayer had a volume of business exceeding $3 million.

Additionally, the taxpayer must, regardless of the volume of business, include copies of the pages or schedules in which gross revenue and expenses were identified as filed with the PRTD with the volume-of-business declaration (before Act 52-2022, this was only required for taxpayers whose volume of business was $3 million or less). If a business is carried out in Puerto Rico through a DRE, Act 52-2022 requires the DRE to file with its volume-of-business declaration copies of certain documents filed with the income tax return of its owner.


Taxpayers who must submit or voluntarily submit AFS with their Puerto Rico income tax return must submit AFS with the volume-of-business declaration and the documentation supporting the gross income and expenses as included in the 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$.

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