Tax System in Puerto Rico
Forms of business operations – A foreign enterprise may operate in P. R. as a separate corporation, a branch of a separate corporation, a partnership, a special partnership, or as sole proprietorship.
Taxes – The major taxes imposed in Puerto Rico are income taxes, property taxes, municipal license taxes, excise taxes and payroll taxes. Entities doing business in Puerto Rico must comply with the requirements imposed by the different laws such as payments of the tax, withholdings on certain payments and filing different returns and reports with the different government agencies.
Income taxes – for individuals and businesses. The tax rate to an individual depends on whether he is a resident of PR or not. The tax rate applicable during the year 2007 for residents ranges from 6% to 33% on his taxable income considering his worldwide income. For determining the taxable income, the individual may claim the deductions and exemptions provided in the Puerto Rico Internal Revenue Code of 1994. Nonresidents are taxed only on their income from sources within P. R. or on income effectively connected with the conduct of a trade or business within Puerto Rico. The tax rate for nonresidents depends on the class of income and on whether or not the individual is engaged in trade or business in Puerto Rico.
The tax rates for corporations and partnerships organized under the current laws range from 20% to 39% on their taxable income. The taxable income is determined after the allowable deductions and credits. The rates for corporations and partnerships not organized under the laws depend on whether or not the entity is engaged in trade or business in Puerto Rico.
Property taxes – As a general rule, property taxes are imposed on the assessed value of real and personal property. The real property tax is imposed on the value of the property as assessed by the Municipal Revenue Collection Center. The tax is payable semiannually on July 1 and January 1 of each year.
The personal property tax is self-imposed upon the filing of a return by any natural or legal entity engaged in a Puerto Rico trade or business and that on January 1 owns personal property used in the trade or business. The tax rate depends on the place (municipality) in which the property is located. For the taxable year 2007-08 the personal property tax rates range from 4.33% to 7.08%. The real property tax rates are 2% higher.
Municipal license taxes – This tax is similar in nature to the gross receipts. It is imposed on all persons engaged in business based on the volume of business attributable to the corresponding municipality. The tax rate is not the same in every municipality. For determining the applicable rate, businesses are grouped in two categories: financial and non-financial. Financial businesses are subject to a maximum rate of 1.50% of the volume of business. Non-financial businesses are imposed a maximum tax of one half of one percent of the volume of business. The definition of volume of business is different for financial and non-financial businesses.
In order to conduct operations free of this tax for the semester a business commenced operations, every person who commences any industry or business is obliged to notify the Municipal Treasurer within 30 days of commencement of operations.
Payroll taxes – A business operating in P. R. must comply with the U. S. Federal Insurances Contribution Act (FICA), the U. S. Federal Unemployment Tax Act (FUTA), the P. R. unemployment and disability taxes provisions, the P. R. chauffeur’s social security, the P. R. workmen’s compensation insurance, and the P. R. Christmas Bonus Act provisions.
Annual report – Every corporation is required to file an annual corporation report with the Puerto Rico Department of State. A $100 annual fee is payable when filing the report. In addition, a corporation organized under the laws of Puerto Rico must file a balance sheet certified by a CPA licensed in Puerto Rico when the volume of business exceeds $1,000,000.
Financial Reporting
Every person whose volume of business exceeds $1,000,000 must file with the income tax return; the property tax return and the volume of business return financial statements certified by a CPA licensed in Puerto Rico. All foreign corporations must file a balance sheet certified by a CPA licensed in Puerto Rico together with the Annual Corporation Report without considering the volume of business.