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 904 - Puerto Rico Tax Incentives Act of 1987 (§§ 10038 — 10052) › § 10040 - Exemptions

(a) Exemption on industrial development income. — Exempted businesses shall enjoy tax exemption on ninety percent (90%) of their industrial development income during the entire corresponding period as provided and after the date of commencement of operations as determined under subsections (d) and (n) of this section, respectively.
The preceding provisions notwithstanding, exempted businesses which generate a total gross industrial development income of more than one million dollars ($1,000,000) during any taxable year shall pay a special surtax of 0.00075 of the sales volume of the exempted business, which shall never be greater than one-half of one percent (0.5%) of the net industrial development income, which shall be reported and remitted to the Secretary of the Treasury by certified check or separate bank draft together with their annual income tax return. The Secretary of the Treasury shall establish a special fund with the monies this special surtax generates. Until otherwise provided by law, the fund shall be administered and regulated by a Committee on Industrial Investments of the Commonwealth of Puerto Rico designated by the Governor of Puerto Rico.
The monies of the special fund herein created shall be exclusively used for the purposes and in the proportion indicated below:
(A) Two-thirds for scientific and technical research and the development of new products and industrial processes which may be conducted, among others, directly or in agreements with government agencies or with public or private universities or with any natural or juridical person with knowledge and experience, and for handling the programs covered by the Fund for Excellence in Public Teaching of Puerto Rico and the Program Yearly Awards for Experience for members of the Puerto Rico Police Department and the Industrial Incentives Program administered by the Puerto Rico Industrial Development Company in support of the industrial promotional efforts of the Economic Development Administration; Provided, That the use of said funds by the Industrial Development Company shall be limited to fiscal year 1993—94 for up to a limit of seven million five hundred thousand (7,500,000) dollars.
(B) One-third for the development and implementation of special programs directed to counteract the problems of persons or families which due to chronic unemployment or any other considerations, are financially distressed or underprivileged and for whose rehabilitation government action beyond the traditional services provided by the Executive Branch is required to integrate them into modern streams of socioeconomic development.
The Committee on Industrial Investment shall have the necessary and sufficient discretion to use the monies of the special fund, provided that such use leads to the achievement of the purposes provided above.
Every six (6) months the Committee on Industrial Investment of the Government of the Commonwealth of Puerto Rico shall submit a report to the Legislature containing an evaluation of the results obtained in the administration of the special fund which shall include a detailed breakdown of how the monies of the fund have been put to use, the amount used for scientific and technical research and the development of new products, specifying the programs, projects or activities to which subsidies, incentives or grants have been granted and the goals achieved. Said report shall also itemize the amounts allocated to the implementation and development of special programs for financially distressed or underprivileged persons or families, specifying their objectives, achievements and the short and long term plans and profections for the attainment of the goals and purposes of the special fund.
The corresponding Committee of each Legislative Body shall study and evaluate said reports and submit a report of its findings and recommendations no later than sixty (60) days following its receipt, and shall remit a copies thereof to the Governor of Puerto Rico, the Secretaries of State and the Treasury, the Administrator, and the Committee on Investments of the Government of the Commonwealth of Puerto Rico.
(1) Prior to computing the exemption provided in this subsection, an exempted business engaged in manufacturing whose net industrial development income in any taxable year is less than five hundred thousand ($500,000) and which has maintained an average employment of fifteen (15) persons or more during said taxable year may deduct the first one hundred thousand dollars ($100,000) of said income which shall be totally exempted from the payment of income taxes. An exempted business that avails itself of this provision shall not enjoy the deduction provided in clause (2) of this subsection.
Exempted businesses that are controlled by shareholders or corporations in common in more than fifty percent (50%) may decide, with the consent of the Secretary of the Treasury, the manner in which all or part of the preceding one hundred thousand dollars ($100,000) deduction shall be assigned to one or more of the controlled exempted businesses.
(2) An exempted business engaged in manufacturing which in any taxable year generates a net income from its exempt operations of less than thirty thousand dollars ($30,000) per production job may deduct fifteen percent (15%) of its production payroll up to fifty percent (50%) of its industrial development income before calculating its taxable industrial development income.
(A) The deduction provided herein shall be used only for the taxable year in which the industrial development income, against which the deduction is being taken, is generated.
(B) For purposes of this subsection, “production payroll” shall include the wages of the personnel directly related to the manufacture of the exempt product excluding executive’s salaries and any payment for personal services rendered to the exempted business by independent firms under contract. The net income per production job shall be obtained by dividing the net industrial development income derived from the exempted operation by the number of production jobs in the production payroll.
(C) Any exempted business that converts to the provisions of this chapter, under clauses (2) or (3) of subsection (i) of this section shall only enjoy the payroll deduction to which it would be entitled under any former act.
(3) Notwithstanding the foregoing provisions of this clause as well as those of § 10042 of this title, an exempted business that is a subsidiary of a United States parent company which after consolidating the income of the exempted business shows a loss on its consolidated federal income tax return (applying the total amount of any operating loss carryover through accounting methods which are acceptable to the Secretary of the Treasury) for a specific taxable year, or which is under applicable federal bankruptcy proceedings may be granted an incentive in the form of credits against the payment of the tax on industrial development income and against the payment of the withholding tax at the source on distributions to the parent company of said income derived during the taxable year of the loss. Both credits shall not exceed the total amount of the tax corresponding to the taxable year of the loss. The credits shall be calculated by multiplying the corresponding tax by a fraction, the numerator of which shall be the average employment of the specific taxable year and the denominator of which shall be the employment required in the tax exemption decree.
For the purposes of this clause: (i) The consolidated loss shall be a truly incurred loss; (ii) the debts of the parent company shall exceed the fair market value of its assets during the last three (3) years, for which financial statements audited by a certified public accountant shall be submitted including, as supplementary information, the assets’ market value; and (iii) the exempted business shall post a bond to be fixed by the Secretary of the Treasury, which shall include those conditions that ensure its collection.
The incentive in the form of the tax credits to be recognized shall be limited to the amount of the loss in the consolidated operations at a federal level. In the event said loss is fully offset in a given taxable year by the consolidated operations, the exempted business shall be liable for the payment of the corresponding partial tax in the proportion that it exceeds the amount of said losses. The exempted business that wishes to avail itself of this clause shall request this incentive from the Secretary of the Treasury, through the Industrial Tax Exemption Office, by means of a sworn petition and shall have to show that the granting of the incentive is meritorious and in the best interests of the Commonwealth of Puerto Rico. Before granting the incentive, the following factors shall be taken into consideration, among others:
(A) The history of the exempted business in Puerto Rico, including its investment, the number of jobs and its location;
(B) the losses of the parent company, including the amount, how the losses occurred and how long the parent company is expected to take to absorb said losses;
(C) the taxes paid to Puerto Rico in the past and those projected for the future, and
(D) the possibility that the incentive shall be recaptured by Puerto Rico.
The Secretary of the Treasury shall have the power to approve and administer those regulations that may be necesary to acheive these purposes and shall include provisions so that the benefits of this incentive may be recaptured by Puerto Rico within a period which shall not exceed five (5) years as the parent company begins to show a profit and pay taxes thereon.
Notwithstanding the foregoing provisions, the Secretary of State may [excuse] the exempted business from the recapture requirement in whole or in part of the incentive granted in this paragraph, subject to those terms and conditions deemed convenient, in benefit of the best interests of Puerto Rico. When granting this dispensation, the Secretary of State shall take into consideration the history of the exempted business and of its employment, the capital investment in its industrial plant, the estimated amount of credit to be recaptured and the time it would take to do so, as well as the financial condition of the parent company and the commitments the exempted business may make with regard to its future employment, additional investment in the plant, machinery and equipment, and investment in research and development activities in Puerto Rico.
(b) Exemption from municipal and Commonwealth taxes on real and personal property. — The property of the exempted business used in the development, organization, construction, establishment or operation of the activity which gives rise to the exemption as well as the property devoted to industrial development shall enjoy a ninety percent (90%) exemption on municipal and Commonwealth taxes during the corresponding period as provided and reckoned from the date of the commencement of operations as determined under subsections (d) and (n) of this section, respectively. The property shall also be totally exempt during the period authorized by the decree to carry out the construction or establishment of the exempted business. The exemption shall commence on the first of January of the year in which the exempted business on such date owns such goods or uses property devoted to industrial development for the first time, and whose first property tax payment is due on the first of July following said first of January.
Notwithstanding the foregoing provisions, intangible personal property in the nature of a patent or production license or trademark acquired by an exempted business and used in its exempted operations as well as personal property used by service units in the nature of stocks, bonds and other securities issued by domestic corporations; stocks, bonds and other securities issued by foreign corporations belonging to juridical persons engaged in the investment, sale or brokerage of securities business in Puerto Rico, and those belonging to foreign entities or natural persons shall be totally exempt from the payment of taxes on personal property.
The personal and/or real property taxes shall be appraised, imposed, notified and administered pursuant to the provisions of the Property Tax Act in force on the date the tax is appraised and imposed.
(c) Exemption from license fees, excise and other municipal taxes. — The exempted businesses shall enjoy a sixty percent (60%) exemption on license fees, excise and other municipal taxes levied by any municipal ordinance during the periods provided in subsection (d) of this section. During the term of the decree, the taxable portion under this subsection shall be subject, to the tax rate that is in effect on the date the decree is signed. The exempted businesses and its contractors and subcontractors shall be fully exempted from any tax, levy, fee, license, excise, rate or tariff levied by any municipal ordinance on the construction of works to be used by the exempted business within the municipality, during the term authorized by the tax exemption decree.
(d) Tax exemption periods. — The exempt business shall enjoy the following tax exemption periods according to its location:
(1) High industrial development zone—ten (10) years.
(2) Intermediate industrial development zone—fifteen (15) years.
(3) Low industrial development zone—twenty (20) years.
(4) Vieques and Culebra—twenty-five (25) years.
Regardless of the above, the exempt businesses engaged in the activities described in subsections (d)(11) and (e)(24) of § 10039 of this title, shall enjoy a tax exemption for a period of twenty (20) years, regardless of the location of the business.
(e) Designation of industrial development zones. — The Governor shall designate, from time to time, and through an Executive Order, those geographic areas to be included in the various industrial development zones with the prior recommendation of the Secretary of State, the Chairperson of the Planning Board, the Secretary of the Treasury, the Secretary of Labor and Human Resources and the Administrator. This designation shall be based on the need to establish industrial operations in the particular area, taking into consideration the nature and geographic location of the area, the availability of labor force, the existing infrastructure and any other factors affecting the economic and social development of the area or zone to be designated. The Governor shall also reclassify, with the prior recommendation of the aforementioned officials, any geographic area from one zone to another when the factors which justified the inclusion of the area in the former zone have changed. The reclassification shall not affect the exemption of exempted businesses already established in that area.
(1) A business that has applied for an exemption to establish its operations in a determined area, but which has not yet been established or which has obtained exemption prior to the date on which said area was reclassified from one zone to another that qualifies for fewer years of exemption, shall have the right to avail itself of the exemption period provided before its reclassification if it becomes established in said area within one (1) year from the date on which the area was reclassified. For the purposes of this chapter, the date of the first payroll for training or production 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 for in this chapter before April 1, 1987. Until then, those designations in effect on the effective date of this act as established under the provisions of §§ 10024 et seq. of this title shall be applicable to the exemption decrees.
(f) Flexible tax exemption. — Exempted businesses shall have the option of selecting the specific years to be covered under their decrees regarding their industrial development income when they so notify the Secretary of the Treasury, the Administrator and the Director on or before the date provided by law for filing their income tax returns for said year. Once an exempted business has opted to avail itself of this benefit, the exemption period corresponding to the exempted business shall be extended for the number of years it has not enjoyed it under the exemption decree, at the exempted business’ volition.
(g) Provisions applicable to the tax exemption of businesses for property devoted to industrial development. —
(1) The period during which a property devoted to industrial development belonged to any political subdivision, agency or instrumentality of the Commonwealth 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 purposes of this chapter as if it had not previously been devoted to industrial development.
(2) When the exempted business consists of property devoted to industrial development, the periods referred to in subsection (d) of this section shall not cover those periods during which the property devoted to industrial development is on the market to be leased to an exempted business, or is vacant or leased to a nonexempt business, except as provided below. Said periods shall be computed on the basis of the total period during which the property was available to an exempted business, provided the total number of years is not greater than that which is provided under said subsection (d) of this section, and the exempted business (property devoted to industrial development) notifies the Secretary of the Treasury, the Administrator and the Director, in writing, of the date on which the property is first leased to an exempted business and date on which the property is vacated and is again occupied by another exempted business.
This provision shall not apply with regard to the exemption referred to in subsection (b) of this section. In case the exemption of the exempted business of the property devoted to industrial development expires while it is being used under lease by an exempted manufacturing business, the exempted business which consists of property devoted to industrial development shall enjoy a fifty percent (50%) exemption on property taxes while the exempted manufacturing business continues using the property under lease.
(3) When the exempted business is one of property devoted to industrial development, the periods referred to in subsection (d) of this section shall continue their normal course, even when the exemption of the exempted business which is using said property expires before the period of exemption of the property devoted to industrial development as a result of the termination of its normal exemption period or by the revocation of its decree unless, in the case of revocation, it is established that when said property was made available to the exempted business the owners thereof had knowledge of the facts that subsequently caused the revocation.
(h) Renegotiation of decrees in effect. — Any exempted business may request the Secretary of State to consider renegotiating its decree in force if said exempted business can show that it will increase the average employment it has had during the past three (3) taxable years prior to the date of filing the application by twenty-five percent (25%) or more; or that it will make a substantial investment in its existing operation that will help to maintain the economic and labor stability of the industrial unit; or any other factor or circumstance that reasonably shows that the renegotiation of its decree shall be in the best social and economic interests of the Commonwealth of Puerto Rico.
Should the Secretary of State agree to the requested renegotiation, upon the recommendation of the agencies that issue the reports on tax exemption, he/she shall take into consideration the number of jobs of the exempted business, the place in which it is located, the added investment and employment, as well as the remaining period of its decree, the tax benefits already enjoyed by it and its financial standing, so that the exempted business may obtain a new decree with its tax benefits adjusted under this chapter.
The Secretary of State shall establish the terms and conditions he/she deems necessary and convenient to the best interests of the Commonwealth of Puerto Rico, within the limits provided in this chapter, as well as to impose special requirements for employment, limit the exemption period and percentage, the taxes to be exempted, and require and provide any other term or condition needed for the purposes of industrial and economic development proposed by this chapter. Notwithstanding the above, the rules for distribution that shall apply in these cases shall be those provided in clauses (5) and (6) of subsection (i) of this section, as appropriate, except that the Secretary of State, with the prior favorable recommendation of the Administrator and the Secretary of the Treasury, shall consider extending the special benefits provided in § 10042(a)(6) of this title to an exempted business that requests the renegotiation of its decree in effect, and makes the commitment to increase and maintain an average employment greater than fifty percent (50%) of the average employment of the last three (3) taxable years prior to the date of the renegotiation application. In order for this exemption to apply, it shall also be an indispensable requirement for the exempted business requesting the renegotiation to be of the special nature contemplated in said § 10042(a)(6) of this title, as well as the large investment of capital and manpower.
In the case of a total liquidation, the rules of subsection (i)(7) of this section shall apply when the renegotiation is carried out during the first twelve (12) months after January 24, 1987. Should the decree not be renegotiated within the term indicated above, the total liquidation shall be carried out pursuant to this chapter.
In the case of an exempted business that applies to renegotiate its decree in effect, or a new exempted business that commits itself to create and maintain a direct average employment of not less than five hundred (500) persons during any taxable year as of the taxable year that includes January 1, 1996, over and above the average employment of the last three (3) taxable years, prior to the renegotiation application of the decree in effect or for the taxable year applicable to the new exempted business, the Secretary of State, through the Industrial Tax Exemption Office, and with the prior favorable recommendation of the Administrator and the Secretary of the Treasury, may grant a credit against the applicable tax through the withholding at the source provided in § 10042(a) of this title, for the creation of additional employment, based on one percent (1%) for each one hundred (100) additional direct jobs over and above the five hundred (500) base jobs generated, up to a tax credit no greater than fifty percent (50%) of said tax.
(i) Conversion of businesses exempted under former acts. — Any business exempted under former acts may ask to avail itself of the provisions of this chapter subject to the limitations provided below if it shows that it is complying with all applicable legal provisions. The exemptions covered in the converted decrees shall not be greater than those provided under this chapter.
(1) Exempted businesses, including service units, whose decrees were granted after December 31, 1984, and which had not been enjoying exemptions prior to that date may apply to convert their decrees for the remainder of the period of time originally granted, in which case their exemptions shall be fixed on the basis of the percentage in effect in said decree for each of the taxes subject to the provisions of the first paragraph of this subsection, except for exempted businesses engaged in service industries whose exemptions shall be adjusted to the percentages provided in this chapter.
(2) Exempted businesses whose decrees were granted before January 1, 1985, may apply for said decrees to be converted for the remainder of the period of their exemption, in which case the exemption shall be fixed on the basis of the percentage in effect in such decrees for each of the corresponding taxes at the time of the application for conversion, subject to the provisions of the first paragraph of this subsection, provided [that] the Secretary of State determines, with the prior recommendation of the agencies which issue tax exemption reports, that the conversion of such businesses to the provisions of this chapter will be in the best social and economic interests of the Commonwealth of Puerto Rico.
(3) Exempted businesses already in operating in Puerto Rico under a decree on January 1, 1985, that thereafter obtained a new decree covering operations previously exempted on the basis of negotiations which took into consideration the special conditions of these exempted businesses, can apply for them to be converted to the provisions of this chapter, and their percentages of exemption shall be adjusted taking into consideration the facts and circumstances which gave rise to obtaining said negotiated percentages, provided that the Secretary of State determines, with the previous recommendation of the agencies which issue reports on tax exemption, that the conversion of such businesses to the provisions of this chapter shall be in the best social and economic interests of the Commonwealth of Puerto Rico.
(4) The Secretary of State, in considering any application for conversion under this subsection, shall establish the terms and conditions he/she deems necessary and convenient in the best interests of the Commonwealth of Puerto Rico, within the limits provided by this chapter, and shall impose special employment requirements or limit the percentage of exemption or the taxes to be exempted, or shall require and provide any other term or condition that may be necessary to acheive the industrial and economic development purposes provided by this chapter.
(5) Exempted businesses that convert their decree under the provisions of this subsection and which, as of the effective date of the conversion, were operating under §§ 10024 et seq. of this title, shall distribute the profits accrued or to be accrued pursuant to the tax treatment provided in said sections.
(6) Exempted businesses that convert their decrees under this subsection and which, as of the effective date of conversion, were operating under the provisions of §§ 10012 et seq. of this title, shall distribute the profits accrued or to be accrued pursuant to the tax treatment provided in said sections.
(7) Exempted businesses that have availed themselves of the provisions of this subsection shall be taxed, upon their total liquidation, with respect to industrial development income accrued after the effective date thereof in accordance with the provisions of this chapter. Any industrial development income accrued prior to conversion shall be taxed in accordance with the act under which the tax exemption decree was granted.
(8) The benefits of this subsection may be requested within twelve (12) months following the date this act is approved, and the effectiveness of its provisions may be fixed from the first day of the taxable year in which the same are requested and until the first day of the next taxable year, at the option of the exempted business.
(9) Any exempted business that requests the benefits of this subsection shall be subject to the other terms and conditions of this chapter that are not in conflict with its provisions.
(j) Extension of tax exemption. — Any exempted business may request an extension of its decree for ten (10) additional years under the provisions of this subsection. The application shall be made within the eighteen (18) months that end on the date prescribed by law for filing the last income tax return corresponding to the year when its decree would expire. Said application shall include such information, data and evidence that shows it has complied and shall continue to comply with all the applicable provisions of law, including the terms and conditions of its decree.
(1) Every exempted business that avails itself of this provision shall enjoy tax exemption on seventy-five percent (75%) of its industrial development income in lieu of any other tax imposed by law, if any. Nevertheless, the income derived from investments under § 10039(j) of this title shall continue to be totally exempt.
(2) Every exempted business that avails itself of this subsection shall pay fifty percent (50%) of the corresponding real and personal property taxes as well as license fees, excise and other municipal taxes. The municipal license tax rate applicable during the term of the extension provided in this subsection, shall be effective as of the original decree’s date of signing.
(3) An exempted business which distributes dividends or profits from its industrial development income accrued during the period provided in this subsection, shall deduct and withhold five percent (5%) on said distributions from its shareholders and remit and pay that amount to the Secretary of the Treasury. In case the exempted business keeps no less than fifty percent (50%) of its industrial development income for each year, after payment of the corresponding taxes, invested in eligible activities under § 10039(j) of this title for a term of not less than five (5) years, then it shall only withhold and pay two percent (2%) on said distributions to the Secretary of the Treasury. If the corresponding investment is not maintained for the five (5) year period provided herein, the exempted business shall withhold and pay five percent (5%) on the entire distribution to the Secretary of the Treasury.
(4) Exempted businesses that avail themselves of the provisions of this subsection which as of the effective date of the extension have accrued profits consisting of industrial development income under §§ 10024 et seq. or 10012 et seq. of this title, may distribute such accrued profits at any future time in accordance with the tax treatment provided in claues (5) and (6) of subsection (i) of this section.
(5) Exempted businesses that have availed themselves of this subsection shall be taxed upon total liquidation with respect to industrial development income accrued after the effective date of the exemption in accordance with the provisions of this chapter. Any industrial development income accrued prior to the effective date of the exemption shall be taxed in accordance with the act under which their decree was issued.
(6) The exempted business shall maintain an average employment equivalent to not less than eighty percent (80%) of the average employment for the three (3) taxable years preceding the extension of the decree under this subsection. This requirement shall also apply to successor businesses of the exempted business.
The Secretary of State may adjust, waive or alter said average employment condition when the exempted business reasonably proves that special circumstances exist to adjust, waive or alter the same.
(7) The provisions contained in this subsection may be extended for ten (10) additional years if the Secretary of State, with the prior recommendation of the Secretary of the Treasury, determines that said extension is necessary and convenient for the social and economic enhancement of the Commonwealth of Puerto Rico.
(8) The remaining terms and conditions of this chapter that are not in conflict with the provisions of this subsection shall be applicable to exempted businesses covered hereby.
(k) Deductions and carryover of net losses. —
(1) Deduction for current losses incurred for activities not covered by an exemption decree. — If an exempted business incurs a net loss that is not from the operation that has been declared exempt, said loss shall be deductible and may only be used against income not covered by an exemption decree and shall be governed by the provisions of Act June 29, 1954, No. 91, as amended. The shares in losses of special partnerships that own or operate tourist businesses exempted under §§ 6001 et seq. of Title 23, known as the “Puerto Rico Tourist Development Act of 1993”, may be used against income covered by a tax exemption decree issued under this or previous acts up to an amount equal to the percent of its industrial development income that would have been taxable under the tax exemption applicable to the invested industrial development income[. It] may also be used against taxable operations income of exempted investment businesses, up to the above-stated limit, as provided by regulations.
(2) Deduction for current losses incurred in the operation of the exempted business. — If an exempted business incurs a net loss in the operation declared exempt under this chapter, said loss may be deducted up to an amount equal to the percentage that its industrial development income would have been taxable. The deductible portion of said loss may be deducted from the taxable portion of the industrial development income in operations covered by other exemption decrees under this chapter or former acts.
(3) Deduction of carryover losses of prior years. — A carryover deduction of losses from prior years shall be granted as provided below:
(A) The excess of the losses deductible under clause (2) of this subsection may be carried over and applied against the taxable portion of the industrial development income as provided and subject to the limitations set forth in said clause (2). The losses shall be carried over in the order they were incurred.
(B) Any net loss incurred in a year in which the election of subsection (f) of this section is in force may be carried over only against industrial development income generated by the exempted business under the decree in which the election of subsection (f) of this section was made. Such losses shall be carried over in the order they were incurred.
(4) Deduction for losses in capital investments in an exempted business. — When an individual suffers losses due to capital investment in an exempted business whose operations had been financed or secured by the Economic Development Bank for Puerto Rico or in which the latter had invested funds, said losses shall be allowed as a deduction under Act June 29, 1954, No. 91, in the taxable year in which it occurs, provided that the investment was authorized by the Economic Development Bank for Puerto Rico under its regulations. The Economic Development Bank for Puerto Rico shall determine at what moment the investment is lost.
Said deduction shall not exceed fifty percent (50%) of the taxpayer’s net income for the taxable year in which he claims it. The amount of the loss not deducted due to the above limitation may be claimed as a deduction in subsequent taxable years until it is exhausted.
(l) Interruption of the exemption period. — In case an exempted business has ceased operations and later wishes to resume them, the time during which it was not operating shall not be deducted from the corresponding period of exemption, and it may enjoy the remaining exemption period while its decree is in effect, provided that the Secretary of State determines that said ceasing of operations was due to justified causes and that the reopening of said exempted business shall be in the best social and economic interests of the Commonwealth of Puerto Rico.
(m) Special option for the textiles, garment, leather, footwear and fish canning industries. — Any business that manufactures textiles, wearing apparel made from cloth or other materials, leather or imitation leather goods and shoes and/or is engaged in fish canning, may apply for the benefits of this subsection. In the case of exempted businesses the application may be filed at any time before the expiration date of the decree of the exempted business and shall include such information, data and evidence that shows it has complied, and shall continue to comply with the applicable provisions of law, including the terms and conditions of its decree.
Exempted businesses may choose to make the benefits of this subsection effective at the beginning of the taxable year in which they apply for it, and waive the balance of their decree’s tax exemption, or enjoy the benefits as an additional exemption after the end of the exemption period they enjoy under their decree.
(1) Every eligible business that requests the benefits of this subsection and complies with its provisions shall enjoy ten (10) years of exemption on the basis of ninety percent (90%) of its industrial development income, and of seventy-five percent (75%) on its Commonwealth and municipal real and personal property taxes as well as on license fees, excises and other taxes imposed by any municipal ordinance.
(2) Exempted businesses described in those subsections whose partial exemption decrees under §§ 10024 et seq. of this title, limit their exemption on industrial development income and on real and personal property to ninety percent (90%) for only five (5) years, may request to avail themselves of the provisions of this subsection prior to the date prescribed by law for filing their tax returns on their income for the fifth year of their current tax exemption, so that they may enjoy ten (10) additional years on the basis of a ninety percent (90%) exemption from said taxes and of a seventy-five percent (75%) exemption on license fees, excise and other municipal taxes, instead of the staggered tax exemption provided in their decrees under said sections.
(A) An exempted business that is already in its second period of partial exemption may similarly request to avail itself of the benefits of this subsection so that the exemption for ten (10) additional years at ninety percent (90%) shall be effective at the commencement of the current taxable year, as well as the seventy-five (75%) exemption on license fees, excises and other municipal taxes.
(B) In the event that an exempted business is enjoying an exemption of less than ninety percent (90%) during its first five (5) years of exemption under the above-stated sections as a result of negotiations that considered the special conditions of that particular exempted business, it may request to avail itself of this subsection so that the ten (10) additional years be extended to it at the same percentage of exemption agreed upon for the first five (5) years of its decree instead of the graduated exemption provided under the above-stated sections.
(C) In the case of fish canning businesses, the Secretary of State, by petition of the municipality involved, may approve through a resolution of the Municipal Legislature, the granting of an exemption larger than what is provided on license fees, excise and other municipal taxes.
(D) During the term in which the special option provided herein is in effect, the taxable portion under this subsection shall be subject to municipal licenses at the tax rate in effect on the date of signing of the original decree.
(3) The exempted business that distributes dividends or profits from its industrial development income accrued during the period provided in this subsection, shall deduct and withhold five percent (5%) of said distributions from its stockholders and remit and pay that amount to the Secretary of the Treasury. Under special circumstances the Secretary of State may grant total or partial exemption from these provisions pursuant to the provisions of § 10042(a)(7) of this title.
If the exempted business maintains an investment in Puerto Rico of not less than twenty-five percent (25%) of its industrial development income for each year, after payment of the corresponding taxes for a term of not less than five (5) years, it shall only withhold and pay two percent (2%) on said distributions to the Secretary of the Treasury. If the investment is not maintained for the period provided herein, the exempted business shall withhold and pay five percent (5%) on the entire distribution to the Secretary of the Treasury.
(4) Those exempted businesses which avail themselves of the provisions of this clause, and on the effective date of the option have accrued profits consisting of industrial development income under §§ 10024 et seq. or §§ 10012 et seq. of this title, may distribute said accrued profits at any subsequent time in accordance with the tax treatment provided by clauses (5) and (6) of subsection (i) of this section.
(5) Exempted businesses that avail themselves of the provisions of this clause that have profits from industrial development income accrued under former acts subject to taxation through withholdings as of December 31, 1986, may distribute them in total liquidation of the exempted business according to the tax treatment provided under the act which then granted tax exemption. The profits accrued after December 31, 1986, shall be taxed upon total liquidation under the provisions of this chapter.
(6) The exempted business shall maintain an average employment equivalent to the average employment of the preceding three (3) taxable years or to the applicable period, which it may not reduce to less than eighty percent (80%) without the express authorization of the Secretary of State. This requirement shall also apply to successor businesses of the exempted business. The Secretary of State may adjust, waive or alter said average employment condition when the exempted business reasonably proves that these are special circumstances to warrant adjusting, waiving or altering the same.
(7) The provisions of this subsection can be renewed for ten (10) years if the Secretary of State, with the prior favorable recommendation of the Administrator and the Secretary of the Treasury, determines that said renewal is necessary and convenient for the social and economic development of Puerto Rico.
(8) The remaining terms and conditions of this chapter which are not in conflict with the provisions of this subsection shall be applicable to the exempted businesses covered thereby.
(n) Determination of the date of commencement of operations. — The date for exempted businesses to commence operations shall be determined by the Director with the joint recommendation of the Secretary of the Treasury and the Administrator. To such effect, the Director shall approve the regulations needed to fix, postpone or initiate the exemption period in consultation with the Administrator and the Secretary of the Treasury.
(o) Tax exemption for foreign export business. — Any person is hereby exempted from the payment of ninety percent (90%) of the tax on income arising from the exports to foreign countries of a product manufactured in Puerto Rico. For the purposes of this subsection, foreign countries shall mean any country excluding the United States, its territories and possessions. Likewise, a fifty percent (50%) exemption is hereby granted on Commonwealth and municipal taxes on real and personal property and on license fees, excises and other municipal taxes.
(1) This exemption shall be effective for a fifteen-year period after said person notifies the Secretary of the Treasury and the Director of his intention to avail himself of its benefits and shall remain in effect while exports to foreign countries continue. The notice shall be made no less than sixty (60) days prior to the close of the first taxable year that is to be covered under this subsection.
(2) The distributions of dividends or profits made by a person under this subsection shall be subject to the same terms and conditions as the distributions made of the industrial development income under this chapter, including the enjoyment of the benefits for eligible investments under § 10039(j) of this title.
(3) In case of the liquidation of a business that has received income exempted under this subsection, said income shall be subject to the terms and conditions provided for the liquidation of exempted businesses under this chapter.
(4) A business exempted under this chapter or under former industrial incentive acts may avail itself of the benefits of this subsection to cover the income derived from products manufactured in its operations and destined for export to foreign countries upon termination of the exemption period granted in its decree.
(5) The Secretary of the Treasury shall provide the regulations he/she deems appropriate to achieve the purposes of this subsection.
(p) Exemptions applicable to insurance or reinsurance businesses under the provisions of subsections (d)(10) and (o) of § 10039 of this title. —
(1) Exemption of industrial promotion income. — Pursuant to the provisions of § 10040(a) of this title, and from and after the starting date of operations, businesses exempted under subsections (d)(10) and (o) of § 10039 of this title shall enjoy tax exemption on their industrial promotion income during the corresponding period, subject to the following terms and conditions:
(A) They may invest in economic activities in or outside Puerto Rico pursuant to credit and other similar norms provided by the Special Board on Exempted Insurance Businesses created below. Notwithstanding the above, such businesses shall have no less than ten percent (10%) of paid in capital available to be invested in Caribbean Basin countries qualified under § 936(d)(4) of the United States Internal Revenue Code and, besides, they must also invest no less than ten percent (10%) of said paid in capital in eligible activities in Puerto Rico under § 10039(j) of this title in both cases, with an average term of maturity of not less than five (5) years. During the term that elapses for the investment in qualified Caribbean Basin countries to materialize, these funds shall be invested in activities eligible under § 10039(j) of this title without any time requirement. Investments in qualified Caribbean Basin countries, or their guarantors, must have a classification acceptable to the exempted business. Provided, That the exempted business shall not invest more than twenty percent (20%) of the paid in capital in investments that generate totally tax-exempt income, except in activities eligible under § 10039(j) of this title.
(B) They shall have to invest no less than twenty percent (20%) of their income available for common stockholders or partners, as if dealing with its paid in capital pursuant to the provisions of the preceding paragraph (A). The remainder of its income available for common stockholders or partners shall have to be invested in activities eligible under § 10039(j) of this title. Provided, That a maximum of five percent (5%) of that income may be invested in eligible activities under that section without any maturity term requirement and the balance shall have to be invested in eligible activities said section with a term of maturity of not less than one (1) year. For the purposes of this paragraph, “income available for common stockholders or partners” shall consist of the sum of the income on account of premiums plus income derived from investments reduced by:
(i) Operation expenses;
(ii) income tax;
(iii) claims paid, and
(iv) dividends to preferred stockholders.
For the purposes of businesses exempted under the provisions of subsections (d)(10) and (o) of § 10039 of this title the term “industrial promotion income” shall include the proceeds, increments, income, profits or benefits resulting from premiums derived from insurance or reinsurance of risks as contemplated in § 10039(o)(1) of this title as well as the proceeds, increments, income, profits or benefits resulting from the investment of funds and/or transactions in any type of stocks, obligations, shares, bonds, promissory notes, deposits and/or credits.
(2) Exemption with respect to certain investment activities. — Income obtained by the exempted business under subsections (d)(10) and (o) of § 10039 of this title, from the investment of eligible funds, including eligible funds contributed to its capital, in eligible activities covered under § 10039(j) of this title, and investments in Caribbean Basin countries qualified under § 936(d)(4) of the United States Internal Revenue Code, as well as securities that evidence such investments, shall be totally exempted from income taxes, property taxes, and licenses, excise taxes and other municipal taxes.
(3) Tax on exempted businesses’ capital contributions to insurance and/or reinsurance businesses. — Capital contributions made by exempted businesses to businesses engaged in the insurance and/or reinsurance of risks related to exempted businesses shall be subject to and shall pay five percent (5%) tax through withholding at the source, as if it were a distribution of dividends or profits from industrial promotion income of the exempted investor business.
(4) Exemption from other applicable taxes; tax on dividends, redemption of shares and total liquidation; tax credits. — The provisions of subsections (b) and (c) of this section shall be applicable to any business engaged in the insurance or reinsurance of risks related to exempted businesses. A five percent (5%) tax shall be levied, withheld and paid to the Secretary of the Treasury on any distribution of dividends or profits, or the redemption of stocks or shares in exempted insurance or reinsurance businesses which is essentially equivalent to the distribution of a dividend or of profits.
In the case of the total liquidation of a business engaged in the insurance or reinsurance of risks related to exempted businesses, said business shall pay the Secretary of the Treasury a tax of five percent (5%) on the assets to be distributed, before such a liquidation is carried out.
The tax paid on the capital contributions of exempted businesses described in the preceding clause (3) may be taken as a credit against the tax levied by this clause by its investors or stockholders that are exempted businesses. Those distributions described in this clause shall retain their nature as industrial development income and the subsequent distributions thereof to any person shall not be subject to taxation. The credit established in this paragraph shall be available from the year in which the distributions are made. Said credit shall not give rise to any reimbursement, but may be carried over indefinitely to later years.
(5) Special Board on Exempted Insurance Businesses. — A Special Board on Exempted Insurance Business which shall be composed of the Secretary of the Treasury, who shall be its Chairperson; the President of the Government Development Bank; the Administrator; the Commissioner of Financial Institutions and the Insurance Commissioner of Puerto Rico, is hereby established. Subject to the provisions of clause (1) of this subsection, this Board shall establish the norms or regulations under which the activities of exempted businesses devoted to the insurance or reinsurance of risks shall be carried out, requiring the maintenance of appropriate reserves. It may also establish requirements for the granting of licenses and provide penalties, including the revocation of the license granted. The Board may use the facilities, resources, equipment and documents relative to the business engaged in the insurance or reinsurance of risks related to exempted businesses in possession of the Insurance Commissioner that are available for public inspection, or of the other dependencies represented on the Board, in order to guarantee that the abovementioned activities are properly supervised and overseen.
(A) The provisions of the Insurance Code of Puerto Rico, §§ 101 et seq. of Title 26, shall not apply to businesses engaged in the insurance and/or reinsurance of risks covered under this chapter, except for those provisions established by said Code pertaining to the maintenance and verification of economic solvency, for which the Insurance Commissioner shall exercise his powers of investigation, requirement, supervision and liquidation. Provided, That the insurance and/or reinsurance business authorized under subsections (d)(10) and (o) of § 10039 of this title shall not fall within nor be subject to the provisions of §§ 3801 et seq. of Title 26. The exempted risks insurance and/or reinsurance business shall not carry out other activities related to insurance not covered by this chapter unless they meet the provisions of Title 26.
(B) When carrying out the functions established herein, the Board shall consider any factor related to the economic, fiscal and social development of the Commonwealth of Puerto Rico as well as the needs of the industry and of the island’s economy in harmony with its interest in advancing the Caribbean Basin’s development.
(C) The Board may authorize exempted businesses to make capital contributions to the risk insurance and/or reinsurance business even when they do not arise from eligible funds, provided that the reasons for which the investing exempted business does not have eligible funds available for such a contribution are fully justified, in which case the contributions shall be considered as eligible funds. These contributions shall be subject to and will pay a six percent (6%) [tax] through withholding at the source, as if it were a distribution of dividends or industrial income profits of the exempted investing business in lieu of the five percent (5%) tax provided by the preceding clause (3). The six percent (6%) tax may be taken as a credit by the investors or stockholders that are businesses exempted against the tax levied by clause (4) above.
(6) The remaining provisions of this chapter that are not in conflict with the provisions found in subsections (d)(10) and (o) of § 10039 of this title and this subsection shall be applicable to the business engaged in the insurance and/or reinsurance of risks related to exempted businesses.
(q) The taxable industrial development income of any new, converted, renegotiated or extended exempted business pursuant to the provisions of this subtitle shall be subject to the payment of the income tax calculated on the basis of the tax rates in force on the date of approval of this act.
History —Jan. 24, 1987, No. 8, p. 949, § 3; Aug. 10, 1988, No. 158, p. 680, § 2; July 20, 1989, No. 29, p. 109; Nov. 21, 1990, No. 6, p. 1443, § 1; July 24, 1993, No. 29, § 1; Nov. 19, 1993, No. 94, § 1; Jan. 8, 1994, No. 7, § 1; Sept. 27, 1994, No. 110, § 2; Jan. 20, 1995, No. 14, § 3; Oct. 27, 1995, No. 218, § 2; Sept. 12, 1996, No. 212, § 2.