RUM INDUSTRY INCENTIVES ACT


On December 1, 2010, Puerto Rico enacted Act No. 178 of 2010 (“Act 178”), which provides additional benefits to rum producers in Puerto Rico as part of the Federal Rum Excise Tax Cover-Over Program. These incentives are in addition to tax exemptions and tax credits available to certain rum distilleries under Act No. 73 of 2008, also known as the “Economic Incentives for the Development of Puerto Rico Act” (“Act 73”), as described herein.

Eligibility: To avail itself of the benefits under the Federal Rum Excise Tax Cover-Over Program, a rum distiller must make rum that is produced and bottled in Puerto Rico and sold in the United States mainland. Also, rum exported should be aged in Puerto Rico at least one year in oak barrels, unless a waiver is sought from the Secretary of the Treasury of Puerto Rico. 

Federal Rum Excise Tax Cover-Over Program: Section 6053.01(l) of the Puerto Rico Internal Revenue Code of 2011, as amended, provides a rebate to the rum industry of up to 25% of the amounts received from the Government of the United States by concept of the tax imposed on rum transported from Puerto Rico to the United States and sold to consumers in the United States, known as the Federal Rum Excise Tax Cover-Over Program. This section also gives the Governor of Puerto Rico the discretion to increase up to 46% the percentage of the monies to be set aside to support the local rum industry by Executive Order.  On June 27, 2012 the Governor of Puerto Rico signed Executive Order OE-2012-30 so stating.

Under the Federal Rum Excise Tax Cover-Over Program, the Government of Puerto Rico currently receives a refund of $13.25 per proof gallon from the $13.50 excise tax that is imposed upon every proof 
gallon of rum sold in the United States. These funds are used to provide incentives to the Puerto Rico rum industry to offset marketing, promotion and production costs. Currently, Puerto Rico is offering rum manufacturers incentives worth 46% of the rum rebate revenue generated from branded rum sales and 25% from bulk rum sales. Furthermore, the Government of Puerto Rico provides an additional 11% for bulk rum sales to be used as an incentive for the benefit of the third-party purchaser of bulk rum.  In return, rum producers that have currently signed agreements with the Government of Puerto Rico have agreed to maintain a minimum level of production in Puerto Rico for a period of twenty years. 

Tax Exemptions: Rum manufacturers that establish operations in Puerto Rico may benefit from Act 73, which provides the following incentives: a) 4% fixed income tax rate; b) 12% fixed income tax rate, withheld at source, on royalties paid to foreign entities with respect to intangible property used in the exempt business; c) 100% tax exemption on dividend distributions; d) 4% fixed income tax rate on gains derived from the sale of ownership interests or substantially all the assets of the exempt business, in lieu of any other Puerto Rico income tax imposed on such gains; e) 100% tax exemption for the first five years of operation from personal property taxes for certain types of businesses, and 90% tax exemption thereafter for the term of the tax exemption decree. The taxable portion will be subject to the regular tax rate, that currently can be up to 8.83%, so therefore, after considering the 90% exemption, the effective tax rate would be up to 0.883%; f) 100% tax exemption for the first five years of operation from real property taxes for certain types of businesses, and 90% tax exemption thereafter for the term of the tax exemption decree. The taxable portion will be subject to the regular tax rate, that currently can be up to 10.83%, so therefore, after considering the 90% exemption, the effective tax rate would be up to 1.083%; g) 60% tax exemption on municipal license taxes, with the first 3 semesters being 100% exempt. Any taxable portion will be subject to the regular tax rate, that currently can be up to 0.5%, therefore, after considering the 60% exemption, the effective tax rate would be up to 0.02%; h) 100% tax exemption on municipal construction taxes; i) 100% tax exemption on excise taxes and sales and use tax on raw material and certain machinery and equipment used in the production process; and j) Accelerated depreciation – 100% first-year bonus depreciation, with ability to carry over to subsequent tax years until exhausted.

Tax Credits: Act 73 also provides various tax credits, including: a) 50% tax credit on eligible investment made: (i) to acquire the majority of the stock or substantially all the assets of an exempt business in the process of closing its operations; (ii) to invest in machinery, equipment and improvements of an exempt business in the process of closing its operations; or (iii) to invest in an exempt business considered a small or medium sized business under the Act; b) 25% tax credit on purchases of products manufactured in Puerto Rico; c) 35% tax credit on purchases of products manufactured in Puerto Rico made from recycled materials; d) Tax credit for job creation during the first year of operations that ranges from $1,000 per job created in an industrial area of intermediate development (as determined by the Office of Industrial Tax Exemption) to $2,500 for jobs created in an industrial area of low development; e) In the case of businesses established in the municipalities of Vieques and Culebra, this tax credit is $5,000 per job; f) 50% tax credit on eligible research and development activity costs; and g) 12% tax credit for royalties paid to foreign entities with respect to intangible property used in the exempt business.

Tax Exemption Decree: To benefit from Act 73, a rum distiller needs to submit an application with the Office of Industrial Tax Exemption to obtain a tax exemption decree signed by the Secretary of Economic Development and Commerce of Puerto Rico, that will provide full detail of tax rates and conditions of the concession, and will be considered a contract between the Government of Puerto Rico and the rum distiller. Once the rum distiller obtains the tax exemption decree, the benefits granted will be secured during the term of the tax exemption decree, irrespective of any changes in the applicable Puerto Rico tax laws. The term of the decree will be 15 years. However, the rum distiller can benefit from a “flexible exemption” for income taxes – that is, the rum distiller can decide whether its income will be covered by the exemption on a particular taxable year. If it chooses not to be covered by the exemption on a particular year, the rum distiller may extend for one additional year its exemption period.

Puerto Rico Income Taxes: An exempt business under Act 73 operating in Puerto Rico by means of a Puerto Rico entity should not be subject to any taxes (such as a dividend tax, tollgate tax or other similar taxes) on its income from its eligible activities in Puerto Rico, other than the Puerto Rico fixed income tax rate established in the tax exemption decree, regardless of whether said income is distributed or retained by the entity. Upon repatriation, the distributed income would be subject to the tax imposed by the jurisdiction in which the owners of the Puerto Rico entity reside, if any.
Tax Exemptions: The Act provides the following tax exemptions:  a) 4% fixed income tax rate; b) 1% fixed income tax rate for innovative firms introducing "pioneer" activities or operations in Puerto Rico; c) 0% fixed income tax rate to the extent that the “pioneer” activities or operations described above are a result of research and development efforts that took place in Puerto Rico; d) A reduction of 0.5% in the fixed income tax rate, when the business is located in an industrial area of low or intermediate development (as determined by the Office of Industrial Tax Exemption); e) 12% fixed income tax rate, withheld at source, on royalties paid to foreign entities with respect to intangible property used in the exempt business; f) 100% tax exemption on dividend distributions; g) 4% fixed income tax rate on gains derived from the sale of ownership interests or substantially all the assets of the exempt business, in lieu of any other Puerto Rico income tax imposed on such gains; h) 100% tax exemption for the first five years of operation from personal property taxes for certain types of businesses, and 90% tax exemption thereafter for the term of the tax exemption decree. The taxable portion will be subject to the regular tax rate, that currently can be up to 8.83%, so therefore, after considering the 90% exemption, the effective tax rate would be up to 0.883%; i) 100% tax exemption for the first five years of operation from real property taxes for certain types of businesses, and 90% tax exemption thereafter for the term of the tax exemption decree. The taxable portion will be subject to the regular tax rate, that currently can be up to 10.83%, so therefore, after considering the 90% exemption, the effective tax rate would be up to 1.083%; j) 60% tax exemption on municipal license taxes, with the first 3 semesters being 100% exempt. Any taxable portion will be subject to the regular tax rate, that currently can be up to 0.5%, so therefore, after considering the 60% exemption, the effective tax rate would be up to 0.02%; k) 100% tax exemption on municipal construction taxes; l) 100% tax exemption on excise taxes and sales and use tax on raw material and certain machinery and equipment used in the production process; and m) Accelerated depreciation – 100% first-year bonus depreciation, with ability to carry over to subsequent tax years until exhausted. 

Tax Credits: The Act provides various tax credits, including: a) 50% tax credit on eligible investment made: (i) to acquire the majority of the stock or substantially all the assets of an exempt business in the process of closing its operations; (ii) to invest in machinery, equipment and improvements of an exempt business in the process of closing its operations; or (iii) to invest in an exempt business considered a small or medium sized business under the Act; b) 25% tax credit on purchases of products manufactured in Puerto Rico; c) 35% tax credit on purchases of products manufactured in Puerto Rico made from recycled materials;  d) Tax credit for job creation during the first year of operations that ranges from $1,000 per job created in an industrial area of intermediate development (as determined by the Office of Industrial Tax Exemption) to $2,500 for jobs created in an industrial area of low development; e) In the  case of businesses established in the municipalities of Vieques and Culebra, this tax credit is $5,000 per job; f) 50% tax credit on eligible research and development activity costs; and g) 12% tax credit for royalties paid to foreign entities with respect to intangible property used in the exempt business.

Tax Exemption Decree: To benefit from the Act, the eligible business needs to submit an application with the Office of Industrial Tax Exemption to obtain a tax exemption decree signed by the Secretary of Economic Development and Commerce of Puerto Rico, which will provide full detail of tax rates and conditions mandated by the Act. This tax exemption decree will be considered a contract between the Government of Puerto Rico and the eligible business. Once the eligible business obtains the tax exemption decree, the benefits granted will be secured during the term of the tax exemption decree, irrespective of any changes in the applicable Puerto Rico tax laws.  Under the Act, an eligible business can qualify for a 15-year tax exemption decree. Moreover, the exempt business can benefit from a “flexible exemption” for income taxes – that is, the exempt business can decide whether its income will be covered by the exemption on a particular taxable year. If it chooses not to be covered by the exemption on a particular year, the exempt business may extend for one additional year its exemption period.

Puerto Rico Income Taxes: An exempt business operating in Puerto Rico under the Act by means of a Puerto Rico entity should not be subject to any taxes (such as a dividend tax, tollgate tax or other similar taxes) on its income from its eligible activities in Puerto Rico, other than the Puerto Rico fixed income tax rate established in the tax exemption decree, regardless of whether said income is distributed or retained by the entity. Upon repatriation, the distributed income would be subject to the tax imposed by the jurisdiction in which the owners of the Puerto Rico entity reside, if any.

economic incentives for the development of puerto rico act


Act No. 73 of 2008, also known as the “Economic Incentives for the Development of Puerto Rico Act” (the “Act”), is the current industrial development incentives law in effect. The Act provides economic incentives, tax exemptions and tax credits to businesses engaged in eligible activities in Puerto Rico. To avail itself of such benefits, an exempt business must apply for a tax exemption decree.

Eligibility: Eligible activities for the benefits of the Act include the following: a) Industrial units dedicated to manufacturing on a commercial scale; b) Subcontracted services rendered in Puerto Rico that are essential to a manufacturing unit that belongs to “a high economic impact cluster,” as designated by the Puerto Rico Industrial Development Company's Executive Director in consultation with the Puerto Rico Planning Board; c) Services rendered in Puerto Rico by key suppliers of exempt businesses; d) Owners of property, real or personal, used by an exempt business in its exempt operations, such as a lessor of real estate used in operations of an exempt business; e) Operations engaged in the breeding of animals for experimental use in laboratories for scientific and medical research, and other similar uses; f) Recycling activities that involve: (i) a transformation of recyclable materials into raw material or ingredients used for the elaboration of a product (partial recycling), (ii) the preparation of such recycled raw material for local sale or use or for exportation, or (iii) the transformation of recycled materials mainly collected in Puerto Rico into commercial articles (total recycling); g) Operations engaged in the planting and cultivation through the 
process of hydroponics; h) The development of licensed or patented software that may be reproduced on a commercial scale; i) Operation of certain specified strategic projects; j) The licensing of intangible property, whether developed or acquired by the exempted business that has a tax exemption decree under the Act; k) An industrial unit that produces bottled purified water; and l) R&D conducted in laboratories.