2023 Laws of Puerto Rico › TITLE THIRTEEN - Taxation and Finance (§§ 1 — 33423) › Subtitle 15 - Puerto Rico Industrial Incentives Generally (§§ 10001 — 10855) › PART I - Industrial Incentives (§§ 10001 — 10052) › Chapter 902 - Puerto Rico Industrial Incentive Act of 1963 (§§ 10012 — 10023) › § 10019 - Denial of tax exemption to successors of predecessor exempted business

(a) Denial or forfeiture of exemption in certain cases. — No person shall be entitled to any tax exemption under this chapter if:
(1) A predecessor exempted business, as defined in subsection (b) of this section, is dissolved, liquidated, or otherwise ceases to operate prior to the filing by such person of an application for tax exemption, or shall, at any time after the filing of such application but prior to the close of the tax exemption period otherwise applicable to such person, be dissolved, liquidated, or otherwise ceases to operate for more than six (6) consecutive months for any cause except strikes, war, action of a government or of the elements, or any other cause beyond the control of such predecessor exempted business; or if
(2) at any time after the filing of such application but prior to the close of the tax exemption period otherwise applicable to such person, the annual production, output, or the operations of a predecessor exempted business shall be diminished for any cause except strikes, war, action of a government or the elements, or any other cause beyond the control of such predecessor exempted business, by twenty-five percent (25%) or more as compared with its average annual production, output, or operations during the three-year period ending with the close of the taxable year of such predecessor exempted business preceding the filing of such application for tax exemption, or for such part of such period as may be applicable, or if
(3) such person, through the industrial unit or hotel established or to be established, uses or will use physical facilities including, but without limitation, land, buildings, machinery, equipment, inventory, supplies, trademarks, licenses, marketing outlets having a value of ten thousand dollars ($10,000) or more which have been previously used by the predecessor exempted business; Provided, however, That this clause shall not apply in cases where the Governor determines that the use of the physical facilities previously utilized by the predecessor exempted business will be in the best interest of the Commonwealth of Puerto Rico, in view of the nature of said physical facilities, the investment, the number of workers and employees involved, the amount of the payroll, the location of the project or other factors that in his judgment warrant such decision. Provided, That the provisions of this clause shall not apply to additions to a property devoted to industrial development, referred to in subsection (b) of this section and of § 10013(d)(4) of this title, even when said additions use physical facilities, including land, foundations and roofs of buildings, water, drainage and gas pipes, electric installations, and other services having a value of ten thousand dollars ($10,000) or more, and which are being used by the main property devoted to industrial development or have been used by the main property devoted to industrial development or predecessor exempted business.
(b) Definition. — For purpose of this section, a predecessor exempted business shall mean any business which:
(1) Is enjoying or has enjoyed tax exemption under either Act 184 of May 13, 1948, as amended, or §§ 10001—10011 of this title, or this chapter; and
(2) which, as the source of its industrial development income, produced a manufactured product or conducted hotel operations substantially similar to the manufactured product or hotel operations to be produced or conducted by the person filing the subsequent application for tax exemption, and
(3) which for the purposes of applying clauses (1) and (2) of subsection (a), but not subsection (a)(3) above, nor § 10020 of this title either, is or was owned to the extent of twenty-five percent (25%) or more of its outstanding stock or any other proprietary interest by such person filing the subsequent application for tax exemption or by any of its stockholders or proprietors owning stock or other proprietary interest to the extent of twenty-five percent (25%) or more, and said person filing the subsequent application for tax exemption or any of his stockholders or proprietors owning or who shall own twenty-five percent (25%) or more of the stocks or other proprietary interest in the subsequent application for tax exemption. Provided, however, That in those cases where the said ownership of stock is twenty-five percent (25%) or more, the Governor may determine that the provisions of this clause do not apply on the ground that the operation contemplated by the applicants will be in the best interest of the Commonwealth of Puerto Rico, in view of the nature of the physical facilities, the investment, the number of workers and employees involved, the amount of the payroll, the location of the project, or other factors that in his judgment warrant such use. For the purposes of this subsection, the ownership of stock or any other proprietary interest shall be determined in the manner provided by the rules concerning the ownership of stock of corporations or of participation in partnerships under the income tax laws in force in Puerto Rico. Provided, That if said person filing the subsequent application for tax exemption or any of its stockholders or proprietors or if any of the stockholders or proprietors of another exempted business or which was exempted, that is or can be affected by said rules may prove, to the satisfaction of the Secretaries of the Treasury, Justice, Labor and Human Resources and the Economic Development Administrator, that the capital invested or to be invested in the particular business is of his own, and is not derived directly or indirectly from his spouse, his ascendants or descendants in the direct line, or his brothers and sisters, said rules shall not apply, nor the provisions of this section.
(c) Disclosure of facts. — The Office of Tax Exemption shall require every applicant for tax exemption to make full disclosure, under oath, of facts required or appropriate to determine whether or not the applicant’s operations or proposed operations shall be in violation of the preceding provisions of this section; furthermore, every grant of tax exemption under this chapter shall require that at no time during the life of the grant shall the grantee violate such preceding provisions.
(d) Penalties. — Any person or persons who shall willfully commit or attempt to commit, on their own behalf or on behalf of any other person or persons, a breach of the provisions of this section, shall be guilty of a felony, and, upon conviction, shall be subject to a fine of not more than ten thousand dollars ($10,000), or imprisonment for not more than five (5) years, or both, together with the costs of prosecution; furthermore, any tax exemption previously granted to any one or more of such persons shall be subject to mandatory revocation by the Governor of Puerto Rico, following for such purposes the procedure established by § 10016(d)(2) of this title, all net income theretofore reported or earned as industrial development income by such person or persons whether or not distributed and the distributions therefrom shall be subject to normal tax and surtax as of the date or dates when such taxes were otherwise due and payable; similarly, all other taxes exempted pursuant to § 10012 of this title shall become due and payable as of the date or dates when, but for such tax exemption, they would have become due and payable, all such taxes shall be assessed and collected in accordance with the provisions of the tax laws in force.
(e) Exceptions. —
(1) The provisions of subsection (a) of this section as to denial or annulment of the tax exemption, and the penalties provided in subsection (d) of this section, shall not be applicable, nor shall this section be deemed violated, if such person or persons (the term “such person or persons”, for the purposes of this section, is synonymous with and means “successor exempted business”, and hereinafter “such person or persons” shall be referred to as “successor exempted business”) performs the following, with authorization of the Governor of Puerto Rico of:
(A) Assigns to the predecessor exempted business—while the violation of this section subsists—such portion of its annual production, total output, or operations of the successor exempted business as may be necessary so that the annual production, total output or operations of the predecessor exempted business be maintained at or be equivalent to seventy-five percent (75%) of its annual production, total output or average operations during the period of three (3) years ending with the close of the taxable year of such predecessor exempted business, prior to the filing of the said application for tax exemption of the successor exempted business, or with respect to such part of said period as may be applicable. Provided, That such portion of its annual production, total output, or operations as the successor exempted business may assign to the predecessor exempted business in compliance with the foregoing, shall not be covered by the exemption of the successor business and the successor exempted business shall enjoy, with respect to said portion, the exemption which the predecessor exempted business would enjoy thereon if in fact such portion would have been its own annual production, total output, or operations. In the event that the exemption period of the predecessor exempted business has expired, then the successor exempted business shall pay taxes on such portion of its annual production, total output, or operations as it may assign to the predecessor exempted business under the provisions of this paragraph, and
(B) declares as not covered by its exemption, for the purposes of the property tax only, such portion of its physical facilities as may be necessary so that the investment on physical facilities of the predecessor exempted business be maintained at or be equivalent to not less than seventy-five percent (75%) of its total investment on physical facilities at the close of the taxable year of such predecessor exempted business, prior to the filing of the said application for tax exemption of the successor exempted business, less depreciation thereof as of the date the provisions of this subsection are availed of, and minus any decrease in the investment on physical facilities that may have occurred, prior to the date the provisions of this subsection are availed of, as a result of an authorization by the Governor of Puerto Rico to make use of same under the provisions of subsection (a)(3) of this section. Provided, That in those cases in which the tax exemption period of the predecessor exempted business has not expired, then the successor exempted business shall enjoy, with respect to such portion of its investment on physical facilities as, for the purposes of this subsection, it declares as not covered by its exemption, the exemption which the predecessor exempted business would have enjoyed if the same had in fact been used in producing its industrial development income.
The Governor may grant said authorization whenever he determines, after consultation with the Secretaries of the Treasury, Justice and Labor and Human Resources and the Economic Development Administrator, that the same is necessary and convenient to foster the economy and welfare of the Commonwealth of Puerto Rico, because:
(i) It will provide increased opportunities for work and will not affect the geographic distribution thereof and of the industries, in harmony with the industrial decentralization policy, and
(ii) will redound in a substantial contribution to the net income of the Commonwealth of Puerto Rico.
(2) In cases of violation of the provisions of this section while the tax [exemption] period of the predecessor exempted business has not expired, and the successor exempted business has not availed itself of the provisions of clause (1) of this subsection, the successor exempted business shall enjoy the exemption enjoyed by the predecessor exempted business, and for the purposes of the exemption, the successor exempted business shall be considered as a part of the industrial unit of the predecessor exempted business. Provided, That when the successor exempted business can show to the satisfaction of the Governor of Puerto Rico that the violation of this section by the predecessor exempted business has ceased, then the successor exempted business may enjoy the balance of its own exemption remaining as of said date.
(3) The provisions of § 10018 of this title and subsection (a) of this section shall not apply to any exempted business which has exhausted its original tax-exemption period or is to exhaust it on or before December 31, 1978, with respect to each taxable year commencing after December 31, 1973, if in such year:
(A) The exempted business is engaged in the manufacture of textile mill products, garment articles or any other product manufactured in fabric or similar materials or the exempted business is a hotel as the term is defined in subsection (f)(1)(2) of § 2 of this act.
(B) The annual production, total output, or operations of such exempted business are not reduced for any cause, except strikes, wars, action of the government or of nature, or any other cause beyond the control of the exempted business, by twenty-five percent (25%) or more, as compared with its annual production, total output or average operations during the period of three (3) years ending at the close of the taxable year of such exempted business before the date it applies for the tax benefits provided in § 10012(t) of this title.
(C) The annual production, total output, or operations of a predecessor exempted business which is producing in a commercial scale on the date the exempted business applies for the tax benefits provided in § 10012(t) of this title, are not reduced for any cause, except strikes, wars, action of the government or of nature, or any other cause beyond the control of the predecessor exempted business, by twenty-five percent (25%) or more, as compared with its total output or average operations during the period of three (3) years ending at the close of the taxable year of such predecessor exempted business before the date the exempted business applies for the tax benefits provided in § 10012(t) of this title.
(D) The annual production, total output, or operations of a successor exempted business producing in a commercial scale on the date it applies for the tax benefits provided in § 10012(t) of this title, are not reduced for any cause, except strikes, wars, action of the government or of nature, or any other cause beyond the control of the successor exempted business, by twenty-five percent (25%) or more, as compared with the annual production, total output and average operations during the period of three (3) years ending at the close of the taxable year of such successor exempted business before the date the exempted business applies for the tax benefits provided in § 10012(t) of this title, or such part of said period as is applicable.
(E) All or part of the conditions specified in paragraphs (B), (C) and (D) of this clause may be complied with by the exempted business applying for the benefits provided in § 10012(t) of this title, or which is already covered by same, by the predecessor exempted business or businesses, by the successor exempted business or businesses, or by one or more of such exempted businesses. In those cases where all or part of the conditions specified in paragraph (B) of this clause are being complied with by the successor or predecessor exempted business or businesses, or by one or more of them, the benefits provided under § 10012(t) of this title and this clause shall apply to that portion of the annual production, total output or operations being performed by such successor or predecessor exempted businesses, and they shall enjoy such benefits with respect to that portion of the annual production, total output or operations. In such cases where an exempted business is complying with the production requirement of another business exempted under the aforesaid circumstances, the physical facilities, including machinery and equipment of the latter, required to comply with the production requirement of same, may be transferred to the exempted businesses which are complying with said requirement and may be used by same.
(4) The Governor shall have authority to:
(A) Dispense with the conditions specified in paragraphs (B), (C) and (D) of clause (3) of this subsection, when he determines that it shall be for the best interest of the Commonwealth of Puerto Rico, in view of the nature of the physical facilities, of the investment, of the number of employees involved, of the amount of the payroll and of the location of the exempted business.
(B) Allow an exempted business to merge with another exempted business or eligible business; to divide itself or to carry out any reorganization, if such merger, division or reorganization is necessary to prevent a condition oppressive to such exempted business or to the group of associated exempted industries of which it is a part. Provided, That, if the exempted business is merged with another divided exempted business or eligible business, or a reorganization is carried out, and the Governor does not dispense the exempted business with the conditions required in paragraphs (B), (C) and (D) of clause (3) of this subsection, said exempted business shall make an appropriate adjustment on the annual average of production, total output or average operations required by said paragraphs.
(C) Deny the benefits of clause (3) of this subsection to any exempted business for any taxable year commencing after December 31, 1973, if in such taxable year the exempted business is required to pay to any country, political subdivision or tax authority thereof, any amount of taxes with respect to the industrial development income obtained in its operations during said taxable year.
(D) The benefits of clause (3) of this subsection shall not be denied to any exempted business for any taxable year commencing after December 31, 1973, if in such taxable year the exempted business is not under the obligation to pay to any country, political subdivision or tax authority thereof, taxes with respect to its total income, including its industrial development income obtained in its operations in Puerto Rico during said taxable year. In those cases in which the tax to be paid by the exempted business on its total income, including its industrial development income, is less than the tax that would be levied in Puerto Rico on its industrial development income, the benefits of clause (3) of this subsection shall apply with respect to that portion of the income tax leviable in Puerto Rico on said income which is equal to or less than the tax payable to any country, political subdivision or tax authority thereof. A person wishing to avail himself of the provisions of this paragraph, shall submit to the Secretary of the Treasury of the Commonwealth of Puerto Rico a translated, certified or authenticated copy in the Spanish or English language of the laws or regulation in force in said country, political subdivision or tax authority thereof, stating specifically the provisions of those laws or regulations applicable to his case. In those cases in which the proof shall depend upon showing that the exempted business has not had or shall not have to pay any tax on its total income, including its industrial development income obtained from its operations in Puerto Rico, due to the fact that it does not have or will not have net income subject to taxes in that particular year, or that said tax will be less than the tax that would be levied in Puerto Rico, then the tax exemption applied for under the provisions of clause (5) of this subsection, shall be granted, subject to the condition that the exempted business shall submit a copy of its income tax return as filed to the effect of paying to any country, political subdivision or tax authority thereof, taxes on its total income, including its industrial development income, during that particular taxable year. Provided, That in those cases in which the exempted business cannot produce the aforesaid proof upon filing its application under clause (5) of this subsection, it must do it within 180 days after the income tax return for that particular year has been filed.
(5) Any exempted business may avail itself of the benefits of § 10012(t) of this title, and of this clause by filing a duly sworn application to such effects with the Industrial Tax Exemption Office with respect to one or more of the total taxable years specified in said subsection, and until December 31, 1978, in the manner and under the conditions usually required by said Tax Exemption Office.
(6) Nothing contained in clause (3) of this subsection shall limit the powers conferred to the Governor by the provisions of this section or other provisions of this chapter.
(f) Obsolete product. — For the purposes of this section, it shall not be considered that a manufactured product is substantially similar to the manufactured product to be produced and for which a subsequent application for tax exemption is filed, if the applicant for such subsequent application for tax exemption requests to avail itself of this subsection and shows to the satisfaction of the Governor of Puerto Rico that the product which the first exempted business manufactures or manufactured has lost its market because it has become an obsolete product, that is, a product which, due to technical improvements or improved manufacturing process, has been substituted by the product (hereinafter identified as “improved product”) to be manufactured under the subsequent application for tax exemption and which performs the same functions. When the foregoing is proved to the satisfaction of the Governor of the Commonwealth of Puerto Rico, the said subsequent application for tax exemption for the “improved product” shall be entitled only to fifty percent (50%) of the exemption accruing to it under this chapter. The Industrial Tax Exemption Office shall prescribe rules for the application of the provisions of this subsection, and such regulations shall have the force of law upon their approval by the Governor, and shall be published in one or more newspapers of general circulation in Puerto Rico.
(g) Cases of facilities and industrial units used in common in accordance with the provisions of § 10013(h)(3) and (5) of this title. — The provisions of subsection (a)(3) of this section shall not apply to cases where facilities are used in common by two or more industrial units pursuant to the provisions of § 10013(h)(3) of this title, and the provisions of clauses (2) and (3) of subsection (a) of this section shall not apply to cases of industrial units pursuant to the provisions of § 10013(h)(5) of this title.
History —June 13, 1963, No. 57, p. 86, § 8; Mar. 26, 1970, No. 3, p. 7, § 1; June 5, 1973, No. 106, p. 446, § 1; July 23, 1974, No. 178, Part 2, p. 39, § 3; June 30, 1975, No. 104, p. 316, § 1; Nov. 20, 1975, No. 6, p. 929, § 2; June 2, 1976, No. 114, p. 333, § 1.