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Puerto Rico: New Tax Code Is Signed Into Law

February 3, 2011 | No. 2011-49


Puerto Rico’s Governor Luis Fortuño this week signed into law a new tax code.

The new code effectively repeals the 1994 tax code as was generally in effect up to December 31, 2010, with certain exceptions. The new tax code contains many changes to the previous version, including the following items (that are major provisions affecting corporate taxpayers):

  • A reduction of the income tax rate for corporations from 39% to 30%
  • An amendment to the tax treatment of LLCs and partnerships, to provide a new tax regime that would provide and, in some cases, require pass-through treatment
  • A new component of alternative minimum tax—a 1% tax on purchases of tangible personal property from related parties by certain taxpayers
  • Small businesses can fully deduct the cost for purchase and installation of computer hardware
  • Transportation and “environmentally friendly” equipment (but not vehicles) can be depreciated over two-year period by certain businesses
  • Changes to the source of income rules on transportation income as well as on income from the sale of personal property
  • Provisions allowing for tax-free business spin-offs

The new tax code was proposed in late 2010 (for a discussion of the original proposal, see TaxNewsFlash 2010-558). The final version approved by the commonwealth’s legislature includes provisions that were added or amended during the legislative process. For example, a requirement for corporations to file audited financial statements with their income tax returns was changed to allow for consolidated financial statements to be filed in the case of commonly owned domestic entities, and is optional for commonly owned foreign entities operating as branches in Puerto Rico.

KPMG Observation

One provision of the new tax code allows taxpayers to elect to file returns and effectively be taxed under the 1994 Code for a period of generally five years. Therefore, corporations, LLCs, and partnerships may need to consider this option in light of their current, as well as expected, tax situation in the coming years.


The new tax code also includes changes to the individual income taxation, with most benefits aimed toward lower income taxpayers.

 

For more information, contact a KPMG tax professional in Puerto Rico:

Rolando Lopez, (787) 622 5340, rlopez@kpmg.com  

Carlos Molina, (787) 622 5311, cmolina@kpmg.com  

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The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

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