2023 Laws of Puerto Rico › TITLE THIRTEEN - Taxation and Finance (§§ 1 — 33423) › Subtitle 15 - Puerto Rico Industrial Incentives Generally (§§ 10001 — 10855) › PART II - Tax Incentives Act of 1998 (§§ 10101 — 10117) › Chapter 905 - Tax Incentives Act of 1998 (§§ 10101 — 10117) › § 10105 - Exemptions

(a) Exemption on municipal and commonwealth real and personal property taxes. — The real and personal property of the exempted business that holds a decree granted under this part used for the development, organization, construction, establishment or operation of the activity that motivates the exemption, as well as the property intended for industrial development, shall enjoy a ninety percent (90%) of exemption on the municipal and commonwealth property taxes for the corresponding period provided by subsection (d) of this section.
The real and personal property of an exempted business that is a service unit under the provisions of § 10101(i)(16) of this title, the operations of which cover the markets of Central America and South America (Latin American region), markets from North America to South America (hemispheric region), or world markets shall be fully exempted from the payment of property taxes provided in this subsection during the first five (5) years from the date operations commence, determined pursuant to subsection (i)(3) of this section. Once this period has expired, the provisions of the previous paragraph shall apply.
The property of an exempted business that holds a decree granted under this part shall also be fully exempted during the period authorized by the decree for the construction or establishment of said exempted business and during the first fiscal year of the Government of Puerto Rico in which the exempted business would have been subject to taxation on property for having been in operation as of the 1st of January preceding the commencement of said fiscal year except for the exemption provided herein. Once said full exemption period expires, the partial exemption provided in this subsection shall commence. Likewise, the property of said exempted business which is directly related to any expansion of the exempted business shall be fully exempted from property taxes during the period authorized by the decree for carrying out said expansion.
Notwithstanding what is provided herein, the intangible personal property whose nature is that of a patent or production license, or a trademark acquired by an exempted business that holds a decree granted under this part and used in its exempted operations, as well as the personal property used by service units such as stocks, bonds and other assets issued by juridical persons organized under the laws of Puerto Rico; stocks, bonds and other assets issued by juridical persons organized outside of Puerto Rico and belonging to juridical persons engaged in the business of investing, selling or brokering assets in Puerto Rico that enjoy exemptions under this part; and the stocks, bonds and other assets that belong to foreign entities or natural persons that enjoy exemptions under this part, shall be [fully] exempted from the payment of taxes on personal property.
Taxes on real and/or personal property shall be assessed, levied, notified and administered according to the provisions of the Property Tax Act in effect on the date of the assessment and levy of the tax.
(b) Exemption from municipal licenses, municipal excises and other municipal taxes. —
(1) Exempted business covered under this part shall enjoy a sixty percent (60%) exemption from municipal licenses, municipal excises and other municipal taxes imposed by any municipal ordinance during the periods established in subsection (d) of this section.
Exempted business described in § 10102(a)(2) of this title shall enjoy a seventy five percent (75%) exemption on said municipal licenses, municipal excises and other municipal taxes.
Exempted described in § 10102(a)(3) of this title shall enjoy a ninety percent (90%) exemption on said municipal licenses, municipal excises and other municipal taxes.
The taxable portion under this subsection shall be subject, during the decree’s effective time, to the tax type in force at the time the decree is issued, regardless of any later amendment to the decree to cover operations in other municipality or municipalities.
(2) The exempted businesses described in § 10101(i)(18) of this title that have been qualified by the Administrator as trading companies, shall enjoy an eighty percent (80%) tax exemption on municipal licenses, municipal excises and other municipal taxes.
(3) The exempt businesses that are service units under § 10101(i)(16) of this title that render their services to markets of Central America and South America (Latin American region), markets from North America to South America (hemispheric region) or to world markets, shall enjoy a one hundred percent (100%) exemption on municipal licenses, municipal excise and other municipal taxes during a period of five (5) years from the date when the determined exemption begins, in agreement with subsection (i)(4) of this section. Once said period has expired, the provisions of clause (1) of this subsection shall apply.
(4) The exempted business that holds a decree granted under this part shall enjoy full exemption on municipal taxes or municipal licenses that apply to the volume of business of said exempted business during the semester of the fiscal year of the Government of Puerto Rico in which the exempted business commences operations in any municipality, pursuant to the Municipal License Tax Act in effect. In addition, the exempted businesses that hold a decree granted under this part shall be fully exempt from the municipal taxes or licenses on their volume of business for the two (2) semesters of the fiscal year or years of the Government of Puerto Rico following the semester in which their operations commence.
(5) Exempted businesses that hold a decree granted under this part and their contractors and subcontractors shall be fully exempt from any tax, levy, fee, license, excise, rate or tariff imposed by any municipal ordinance on the construction of works to be used by said exempted business within a municipality, without it being understood that said taxes include the municipal license tax levied on the volume of business of the contractor or subcontractor of the exempted business during the term authorized under the tax exemption decree.
(c) Exemption from Commonwealth excises. — In addition to any other excise exemption granted under Subtitle B of the Puerto Rico Internal Revenue Code, articles directly or indirectly introduced or acquired by the exempted businesses that are service units under § 10101(i)(16) of this title, whose operations are performed for Central America and South America (Latin American region), markets from North America to South America (hemispheric region) or world markets, and the following articles introduced or acquired directly or indirectly by a business holding a decree granted under this part:
(1) Any raw material to be used in Puerto Rico for manufacturing finished products, excluding hydraulic cement, crude oil, partially and [fully] processed oil products, and other hydrocarbon products. For the purposes of this subsection and the applicable provisions of Subtitle B of the Puerto Rico Internal Revenue Code, the term “raw material” shall include:
(A) Any product in its natural state derived from agriculture or mining.
(B) Any byproduct, residual product, or partially processed or finished product.
(C) Sugar in bulk or in units of fifty (50) pounds or more to be used exclusively in the manufacture of products.
(2) Machinery, equipment and accessories thereof, used exclusively in the manufacturing process or in the construction or repair of vessels within or outside the confines of a manufacturing plant; machinery, trucks or lifts used exclusively and permanently in hauling raw material within the periphery of the exempted business; machinery, equipment and accessories used to carry out the manufacturing process or those that the exempted business is bound to acquire by requirement of federal or Commonwealth laws or regulations for the operation of an industrial unit.
The above notwithstanding, the exemption shall not cover machinery, devices, equipment or vehicles used in whole or in part in the administrative or commercial operations of the exempted business, except in those cases in which these are also used in at least ninety percent (90%) [of] the manufacturing process or in the construction or repair of vessels, in which case they shall be deemed as being used exclusively in said manufacturing process.
(3) Any equipment and machinery that must be used by an exempted business to comply with environmental, safety and health requirements for its business to operate adequately, shall be fully exempted from the payment of Commonwealth excise taxes.
(4) Any equipment and machinery that must be installed in those businesses engaged in operating call centers or networks that establish their operations in Puerto Rico, regardless of the place in Puerto Rico where each employee performs his/her work.
(5) Machinery, equipment, parts and accessories used in research laboratories, including the preliminary phase of region exploration geared to the mineralogical development of Puerto Rico, and the dry docks and shipyards for the construction or repair of vessels.
(A) All construction materials and prefabricated buildings.
(B) All electrical materials and water pipes installed in the buildings.
(C) Lubricants, grease, waxes and paints not related to the manufacturing process.
(D) Lamp posts or spotlights installed in parking areas.
(E) Treatment plants and electric power substations.
(6) Fuel used by the exempted business in the cogeneration of electric power as well as the chemicals used by the exempted business in sewage treatment.
(7) Exceptions. — The following articles of use and consumption used by the exempted business, regardless of the area or place where they are located, or their use, shall not be deemed as raw material, machinery or equipment for the purposes of clauses (1), (2), and (3) of this subsection:
(d) Tax exemption periods. — An exempted business that holds a decree granted under this part shall enjoy the following tax exemption periods according to its location:
(1) High industrial development zone 10 years
(2) Intermediate industrial development zone 15 years
(3) Low industrial development zone 20 years
(4) Vieques and Culebra 25 years
Exempted businesses engaged in the activities described in subsections (d)(10) and (e)(24) of § 10101 of this title shall enjoy tax exemption for a period of twenty (20) years, regardless of the location of the business. Those eligible activities involving airport and seaport facilities shall enjoy tax exemption for a period of four (4) years regardless of the location of the business.
(e) Designation of industrial development zones. — The Governor shall designate, from time to time and by executive order, the geographic areas to be included in the various industrial development zones after recommendation of the Secretary of State, the Administrator, the Chairperson of the Planning Board, the Secretary of the Treasury and the Secretary of the Department of Labor and Human Resources. This designation shall be based on the need for establishing industrial operations in a particular area, taking into consideration the nature and geographic location of the area, the availability of manpower, the existing infrastructure and any other factors that affect the economic and social development of the area or zone to be designated. The Governor may also reclassify any geographic area from one zone to another after recommendation of the officials mentioned above, when the factors that justified the inclusion of the area in the former zone have changed, including those eligible activities geared to airport and seaport facilities. The reclassification shall not affect the exemption of the exempted businesses already established in that area.
(1) A business that has applied for a tax exemption decree for its establishment in a specific area, but has not yet been established, or has obtained the exemption prior to the date said area was reclassified from one zone to another which qualifies for [fewer] years of exemption, shall be entitled to enjoy the exemption period established prior to reclassification if it becomes established therein within one (1) year from the date on which the area was reclassified. For the purposes of this part, the date of the first training or production payroll shall be deemed as the date of establishment of the business.
(2) The Governor shall designate the geographic areas to be included in the industrial development zones provided by this part before December 31, 1998. Until then, those designations in effect as of the effective date of this act, as established by the provisions of §§ 10038—10052 of this title, shall be applicable to the exemption decrees granted under this part.
(f) Flexible tax exemption. — Exempted businesses that hold a decree granted under this part shall have the option of choosing the specific taxable years to be covered under their decrees with regard to their industrial development income when they notify the Secretary of the Treasury, the Administrator and the Director not later than the date provided by law to file their income tax returns for said taxable year, including the extensions granted for said purpose. Once the exempted business opts for this benefit, the exemption period corresponding to said exempted business shall be extended at the will of said exempted business for the number of taxable years it did not enjoy said benefit under the exemption decree.
(g) Provisions that apply to tax exemption on businesses using property intended for industrial development. —
(1) The period during which a property intended for industrial development belong[s] to any political subdivision, agency or instrumentality of the Government of Puerto Rico shall not be deducted from the periods referred to in subsection (d) of this section and said property shall be deemed, for the purposes of this part, as if it had not been previously intended for industrial development.
(2) When the exempted business that holds a decree granted under this part is using property intended for industrial development, the period to which reference is made in subsection (d) of this section shall not cover those periods in which the property intended for industrial development is on the market to be leased to an exempted business, or is vacant, or is leased to a nonexempted business, except as provided below. Said period shall be computed on the basis of the total period during which the property was at the disposal of an exempted business, provided that the total number of years is not greater than that provided under said subsection (d) of this section, and the exempted business (property intended for industrial development) informs the Secretary of the Treasury, the Administrator and the Director, in writing, of the date on which the property is leased to an exempted business for the first time, and the date on which the property is vacated and is again occupied by another exempted business.
This provision shall not apply to the exemption to which reference is made in subsection (a) of this section. In the event that the exemption on property intended for industrial development in use by the exempted business which holds a decrees granted under this part should expire while it is being used under a lease by an exempted manufacturing business, the property intended for industrial development in use by the exempted business shall enjoy a fifty percent (50%) exemption on property taxes while the exempted manufacturing business continues to use said property under a lease.
(3) When the exempted business that holds a decree granted under this part uses property intended for industrial development, the periods referred to in subsection (d) of this section shall continue their normal course even when the exemption decree of the exempted business using said property as a result of the termination of its normal period or by revocation of its decree, elapses before the exemption period of the property intended for industrial development, unless it is established in the case of revocation, that at the time said property was made available to the exempted business, the owners thereof had knowledge of the facts that later caused it to be revoked.
(h) Interruption of the exemption period. — In the event that an exempted business which holds a decree granted under this part has ceased operations and later wishes to resume operations, the time during which no operations were conducted shall not be deducted from the corresponding exemption period, and the exempted business may enjoy the remaining exemption period while the tax exemption decree is in effect, provided that the Secretary of State determines that the ceasing of operations was justified and that reopening said exempted business shall be for the best social and economic interests of Puerto Rico.
(i) [Setting] of the date for commencing operations and the exemption periods. —
(1) The exempted business that holds a decree granted under this part may select the date to commence operations for the purposes of § 10102(a) of this title by filing a sworn statement with the Director, with copies to the Secretary of the Treasury, and the Administrator, together with the filing of a sworn statement stating the unconditional acceptance of the grant approved for the exempted business under this part. The date of the commencement of operations for purposes of § 10102(a) of this title may be the date of the first training or production payroll of the exempted business that holds a decree granted under this part, or any date within a period of two (2) years after the date of the first payroll.
(2) The exempted business that holds a decree granted under this part may postpone the application of the fixed rate provided in § 10102(a) of this title for a period which shall not be greater than two (2) years from the date of commencement of operations fixed under clause (1) of this subsection. During the postponement period, said exempted business shall be subject to the applicable tax rate under Subtitle A of the Puerto Rico Internal Revenue Code.
(3) The partial tax exemption period provided in subsection (a) of this section on property intended for industrial development shall commence on the first day of the fiscal year of the Government of Puerto Rico following the last fiscal year in which the exempted business was filly exempted pursuant to the provisions of subsection (a) of this section; the partial exemption for said fiscal year shall correspond to the tax on the property owned by the exempted business on the 1st of January which precedes the beginning of said fiscal year.
(4) The partial exemption period provided in subsection (b) of this section for the purpose of exemption from municipal licenses and municipal taxes, shall commence on the first day of the first semester of the fiscal year of the Government of Puerto Rico following the expiration of the full-exemption period provided in subsection (b)(3) of this section.
(5) In the case of exempted businesses that hold a decree granted under this part which have been operating on a commercial scale before applying for the benefits of this part, the date of commencement of operations for the purposes of the fixed rate provided in § 10102(a) of this title shall be the date of filing an application with the Exemption Office, but the commencement date may be postponed for a term of not more than two (2) years from said date.
(j) Agricultural income not eligible for exemption. — For the years during which an exempted business that holds a decree granted under this part enjoys tax exemption under §§ 10401 et seq. of this title, known as the “Puerto Rico Agricultural Tax Incentives Act”, the exempted business may not avail itself of the provisions of this part on income derived from an agricultural activity exempted under said Agricultural Tax Incentives Act, or on the real or personal property used intensively in said agricultural business.
(k) Royalties and license fees. — Any legal provisions notwithstanding, in the case of payments made by exempted businesses that hold a decree granted under this chapter to nonresident corporations, partnerships or persons, for the use or the privilege to use patents, copyrights, formulas, technical skills and other similar property in Puerto Rico, they shall be subject to a fifteen percent (15%) tax in lieu of another tax levied by law, if any. The Secretary of the Treasury may recommend the imposition of a tax lower than fifteen percent (15%), but never to be under two percent (2%), provided he or she determines that said reduced tax shall work for the benefit of the best economic and social interests of Puerto Rico in consideration of the special nature of the particular exempted business, or of any other benefit or factor which in his or her judgment merits such a determination. The exempted business which makes said payment shall deduct and withhold said tax and report and remit the same to the Secretary of the Treasury pursuant to the provisions of the Puerto Rico Internal Revenue Code.
(l) Exemption on interest on loans to small and medium businesses. — Interest earned by financial institutions on loans of fifty-thousand dollars ($50,000) or less to small or medium businesses for their establishment or expansion, shall be fully exempted from income taxes, provided the loan meets the requirements established in the Community Reinvestment Act of 1977, as amended, P.L. 95-128, 91 Stat. 1147, and those requirements established by the Commissioner of Financial Institutions by regulation.
History —Dec. 2, 1997, No. 135, § 6; Dec. 17, 2001, No. 174, §§ 1, 2; Aug. 29, 2002, No. 225, § 2; Aug. 29, 2002, No. 226, § 2; Dec. 24, 2002, No. 289, § 2; Aug. 13, 2005, No. 49, § 2; May 13, 2006, No. 88, § 1.