VIEQUES & CULEBRA INCENTIVES


The Government of Puerto Rico has a policy of promoting the economic development of the island municipalities of Vieques and Culebra. Accordingly, most of the recently enacted incentive laws provide greater benefits to entities establishing a business in Vieques and/or Culebra, than to businesses established in the main island. Some of these incentives laws and the special incentives designed for Vieques and Culebra that are contained therein are discussed below. Under most of the incentives laws, benefits provided are included in a tax exemption decree. 

Economic Development Incentives: Act No. 73 of 2008, known as the “Economic Incentives for the Development of Puerto Rico Act” (“Act 73”), provides that any eligible manufacturing business operating in Vieques or Culebra may avail for a period of 15 years from the tax exemptions and tax credits described herein.

Tax Exemptions: Act 73 provides the following tax exemptions: a) 100% tax exemption on income tax on industrial development income during the first 10 years of the businesses’ operation. For the remainder of the exemption period the exempt business will pay a fixed 2% income tax in lieu of any other tax; 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) 90% tax exemption from personal property taxes. The taxable portion will be subject to the regular tax rate, that currently can be up to 8.83%; therefore, after considering the 90% exemption, the effective tax rate would be up to 0.883%; f) 90% tax exemption from real property taxes. The taxable portion will be subject to the regular tax rate, that currently 
can be up to 10.83%; 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 provides various tax credits, including: a) 25% tax credit on purchases of products manufactured in Puerto Rico; b) 35% tax credit on purchases of products manufactured in Puerto Rico made from recycled materials; c) Tax credit for job creation during the first year of operations of $5,000 per job created in the municipalities of Vieques and Culebra; d) 50% tax credit on eligible research and development activity costs; and e) 12% tax credit for royalties paid to foreign entities with respect to intangible property used in the exempt business.

Incentives on Green Energy: Act No. 83 of 2010, known as the “Puerto Rico Green Energy Incentives Act” (“Act 83”), provides economic incentives, tax exemptions and tax credits to energy producers or energy facility operators engaged in eligible activities in Vieques or Culebra and applying for a 25-year tax decree, with a possible 10-year extension.

Tax Exemptions: Act 83 provides the following tax exemptions: 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) 90% tax exemption from personal property taxes. The taxable portion will be subject to the regular tax rate, which currently can be up to 8.83%; therefore, after considering the 90% exemption, the effective tax rate would be up to 0.883%; f) 90% tax exemption from real property taxes. The taxable portion will be subject to the regular tax rate, which currently can be up to 10.83%; 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 renewable energy equipment; and j) Accelerated depreciation – 100% first-year bonus depreciation, with ability to carry over to subsequent tax years until exhausted.

Tax Credits: Act 83 provides various tax credits, including: a) 25% tax credit on purchases of products manufactured in Puerto Rico; b) 35% tax credit on purchases of products manufactured in Puerto Rico made from recycled materials; c) Tax credit for job creation during the first year of operations of $5,000 per job created in the municipalities of Vieques and Culebra; d) 50% tax credit on eligible research and development activity costs; and e) 12% tax credit for royalties paid to foreign entities with respect to intangible property used in the exempt business.

Rebate Program Incentives: Act 83 also created a rebate program under the Green Energy Fund to stimulate the adoption of renewable energy production by the private sector, which provides investment-based incentives as follows:  a) Tier 1: Project Size: 1 - 100kW; Incentive: up to 60% (fixed at 60% for projects in Vieques or Culebra) of eligible project costs; Funds currently granted on a first-come, first-served basis; and b) Tier 2: Project Size: +100kW to 1MW; Incentive: up to 50% of eligible project costs; Funds allocated through a quarterly competitive tendering process.

Tourism Development Act: Act No. 74 of 2010, known as the “Tourism Development Act” (“Act 74”), provides that tourism businesses engaged in eligible activities in Vieques or Culebra may benefit from a 10-year tax exemption decree that can exempt them from various Puerto Rico taxes. This initial 10-year period can be extended for an additional 10-year term.

Tax Exemptions: Act 74 provides the following tax exemptions: a) 100% tax exemption on income tax. The entity should not be subject to any other taxes on its tourism development income derived from Puerto Rico sources if and until the income is repatriated to another jurisdiction imposing tax on such distribution; b) 100% tax exemption on alternative minimum taxes and additional income tax on corporations; c) Up to 90% tax exemption from personal property taxes. The taxable portion will be subject to the regular tax rate, that currently can be up to 8.83%; therefore, after considering the 90% exemption, the effective tax rate would be up to 0.883%; d) Up to 90% tax exemption from real property taxes. The taxable portion will be subject to the regular tax rate, that currently can be up to 10.83%; therefore, after considering the 90% exemption, the effective tax rate would be up to 1.083%; e) Up to 90% tax exemption on municipal licenses and other municipal taxes (100% tax exemption in the case of new business). Any taxable portion will be subject to the regular tax rate, that currently can be up to 0.5%; therefore, after considering the 90% exemption, the effective tax rate would be up to 0.05%; f) Up to 100% tax exemption on excise tax on imported goods; g) Up to 100% tax exemption on sales and use tax; and h) Up to 100% tax exemption on municipal construction excise tax.

Tax Credits: Under Act 74, any person who acquires an equity interest or contributes land to an entity that develops an exempt tourism business will be entitled to an investment tax credit equal to 50% of the cash paid for such equity investment or 10% tax credit on total project cost, whichever is lowest. The tax credit is to be taken in two installments. Half of the credit during the first year of the investment, while the remaining tax credit may be used in the second year. Any unused tax credits may be carried forward. The tax credits may also be assigned, transferred or sold. Puerto Rico has a healthy secondary market for the immediate sale of such credits. Many developers choose to inject such credits into the project, reducing the amount of equity required.

Export Services Act: Act No. 20 of 2012, as amended, known as the “Export Services Act” (“Act 20”), provides benefits for a 20-year period, with a possible 10-year extension.

Tax Exemptions: Act 20 provides the following tax exemptions: a) 4% fixed income tax rate; b) 3% income tax rate in the case of services considered strategic; c) 100% tax exemption on distributions from earnings and profits; d) 90% tax exemption from personal property taxes (100% tax exemption for the first five years of operation for certain types of businesses). The taxable portion will be subject to the regular tax rate, that currently can be up to 8.83%; therefore, after considering the 90% exemption, the effective tax rate would be up to 0.883%; e) 90% tax exemption from real property taxes (100% tax exemption for the first five years of operation for certain types of businesses). The taxable portion will be subject to the regular tax rate, that currently can be up to 10.83%; therefore, after considering the 90% exemption, the effective tax rate would be up to 1.083%; and f) 90% tax exemption on municipal taxes if business operates in the industrial development zone constituted by the municipalities of Vieques and Culebra. Any taxable portion will be subject to the regular tax rate, that currently can be up to 0.5%; therefore, after considering the 90% exemption, the effective tax rate would be up to 0.05%.

Film Industry Incentives Act: Under Act No. 27 of 2011, as amended, known as the “Puerto Rico Film Industry Economic Incentives Act” (“Act 27”), film producers engaged in eligible activities may benefit from the following exemptions for a film project filmed in Vieques and/or Culebra.

Tax Exemptions: Tax exemptions for eligible production businesses, including film producers and studio operators, are the following: a) 4% fixed income tax rate on income derived from the production (6% to 10% fixed income tax rate in the case of studio operators); b) 100% tax exemption on dividend distributions; c) 90% tax exemption from personal property taxes. The taxable portion will be subject to the regular tax rate, that currently can be up to 8.83%; therefore, after considering the 90% exemption, the effective tax rate would be up to 0.883%; d) 90% tax exemption from real property taxes. The taxable portion will be subject to the regular tax rate, that currently can be up to 10.83%; therefore, after considering the 90% exemption, the effective tax rate would be up to 1.083%; e) 100% tax exemption on municipal license taxes, construction taxes and other municipal taxes; and f) 100% tax exemption on excise taxes on articles imported by the grantee to be used in the eligible activities.

Tax Credits: Act 27 offers the following tax credits: a) 40% tax credit on all payments to Puerto Rico resident companies and individuals. Act 27 provides an annual limit of $50,000,000 of tax credits available for film projects. However, film projects may apply for up to $50,000,000 additional tax credits in excess of the $50,000,000 limit if any portion of its Puerto Rico production expenses are incurred within a Film Development Zone. An additional $150,000,000 will be available if the film project is produced within a Film Development Zone having a film studio with a cost of $200,000,000 or more. Act 27 provides that, after attaining the previous limits, additional tax credits in an amount of $100,000,000 will be available if the film credits program has conceded at least  $250,000,000 for two consecutive years; b) 20% tax credit on all payments to non-resident “Above-the-Line” talent, including actors, producers, directors and writers. No annual cap is established with respect to non-resident “Above-the-Line” payments. However, the grantee of a decree under Act 27 (or its representative) will be responsible for withholding, remittance and reporting to the Puerto Rico Treasury Department a 20% tax on payments to non-resident “Above-the-Line” talent. Some jurisdictions, as the United States have rules to avoid double taxation that may include foreign tax credit systems. Under a foreign tax credit system, the 20% tax withheld from payments made to non-resident “Above-the-Line” talent should be credited against the income tax liability determined with respect to such income in his/her primary tax jurisdiction. Each non-resident “Above-the-Line” individual should consult their own tax advisor; and c) 25% infrastructure tax credit on costs incurred in the development of a film studio or other eligible infrastructure project. Act 27 provides an annual limit of $10,000,000 of tax credits available for infrastructure projects. Excess credits not taken in a particular year may be rolled over to a subsequent year. These credits have a lifetime cap for all projects of $150,000,000. The minimum investment for individual infrastructure projects is $1 million.

Film Development Zones: Act 27 provides that the Secretary of the Department of Economic Development and Commerce of Puerto Rico (the “Secretary”) may designate certain geographical areas as Film Development Zones. The Film Development Zones will be designated by the Secretary on his own initiative or after considering an application made by a developer of an infrastructure project. In order to be considered, the application must include a Large-Scale Studio proposal. Under regulations issued by the Secretary, the island municipalities of Vieques and Culebra will be considered Film Development Zones; therefore, film projects developed in Vieques and/or Culebra and complying with certain filming parameters described in the regulations, will not be subject to annual tax credit limitations established by Act 27.

Municipal Economic Development and Tourism Incentives Act: Businesses engaged in eligible activities may elect to benefit from incentives provided by Act No. 118 of 2010, also known as the “Municipal Economic Development and Tourism Incentives Act” (“Act 118”). Act 118 provides incentives to projects developed in municipalities that are economically distressed, including Vieques and Culebra, that show a decrease in municipal business taxes. Act 118 establishes a Selection Committee, comprised by the Secretary of Economic Development and Commerce, the Secretary of the Treasury, the Executive Director of the Tourism Company, the Municipal Affairs Commissioner and a public interest representative named by the Governor of Puerto Rico, with the consent of the Senate of Puerto Rico. This Selection Committee selects the projects eligible for the benefits under Act 118. These projects must have at least three basic components: a) A world-class hotel that holds at least a four (4) star rating; b) Varied commercial and recreational establishments; and  c) Other entertainment facilities typical of a 4-star hotel, including a casino, as such facilities are defined in Act No. 221 of 1948, known as the “The Games of Chance Act”. The preferred income tax rate available to the tourism business on its tourism gaming net revenue will depend on the concessionaire’s total investment of private capital, as provided below:

a) Investments of $500,000,000 or more shall be granted a fixed, 25% tax rate;
b) Investments of $750,000,000 or more shall be granted a fixed, 15% tax rate;
c) Investments of $1,000,000,000 or more shall be granted a fixed, 10% tax rate; and
d) Investments of $1,250,000,000 or more shall be granted a fixed, 8% tax rate.

Once a project is selected for benefits, the Selection Committee will issue a tax decree providing full detail of tax rates and conditions mandated Act 118. This tax decree will be considered a contract between the Government of Puerto Rico and the developer, and will ensure the developer’s incentives for the term of the decree, irrespective of any changes in the applicable Puerto Rico tax laws. Any decree granted by the Selection Committee must be received within the first five years after the approval of the Act, which is the limit established for submitting proposals. The tax decree shall initially remain in effect for a period of 30 years, and developers would have a 10-year period to fulfill the investment and job creation commitments made. Any violation of the terms of the Act or the decree may result in the increase of the special tax rate imposed, up to 70%. Should the concessionaire undertake a substantial renovation or expansion of the project, the decree, at the discretion of the Selection Committee, may be renewed at any time during its life for two additional 10-year terms.

Act 118 also designates the area composed by El Yunque National Rain Forest, Vieques and Culebra as “The Green Triangle” to promote ecotourism and economic development in the area. Act 118 establishes a special fund to be funded from operations incentivized by Act 118, and which will provide funds for development of the infrastructure necessary to promote tourism in the Green Triangle. Specifically, Act 118 provides that ¼ of the funds are to be used in Vieques and ¼ of the funds are to be used in Culebra. These funds will be distributed by the Selection Committee.

Special Economic Development Zone: Act No. 153 of 2002, known as the “Act to create the Special Economic Development Zone of Vieques-Culebra” (“Act 153”), establishes that the Puerto Rico Planinign Board will demarcate the territory of the municipal island of Culebra and the territory under the Government of Puerto Rico in the island of Vieques as a Special Economic Development Zone (the “Zone”). 

Tax Exemptions: Businesses established in the Zone within a specified period of time after the creation of the Zone will be eligible for the following incentives: a) 50% tax exemption on net income derived from the sale of goods and services of touristic, cultural, industrial and agricultural nature. This benefit applies with respect to sales made within 30 years of the date on which a business applies for the benefits of Act 153; b) 50% to 100% tax exemption on property taxes, as determined pursuant to a municipal ordinance. The Municipal Revenue Collection Center will establish by regulation the procedure to apply for this exemption; c) A special deduction of an amount equivalent to 10% of the minimum salary applicable to every new job created. This exemption is available to the business for 5 years; and d) A special deduction of an amount equivalent to 10% of the rent paid by the business.

Tax Exemption Decree: To avail from most of these benefits, a business needs to become an exempt business by applying for a tax concession and obtaining a tax exemption decree. The decree will provide full detail of tax rates and conditions mandated by the applicable law and will be considered a contract between the Government of Puerto Rico and the applicant. Once the applicant obtains the tax exemption decree, the benefits granted will be secured during the term of the decree, irrespective of any changes in the applicable Puerto Rico tax laws.

Puerto Rico Income Taxes: An exempt business operating in Puerto Rico under Act 73, Act 83, Act 74, Act 20, Act 27 or Act 118 by means of a Puerto Rico entity should not be subject to any taxes (such as a tollgate tax or other similar taxes) on its income from its eligible activities in Puerto Rico, other than the Puerto Rico income tax rate established in the tax decree and taxes imposed on dividends to the exempt business’ shareholders, if any. 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.

MUNICIPAL ECONOMIC DEVELOPMENT AND TOURISM INCENTIVES ACT


On August 1, 2010, Puerto Rico enacted into law Act No. 118 of 2010, also known as the “Municipal Economic Development and Tourism Incentives Act” (the “Act”). This Act seeks to stimulate Puerto Rico’s tourism sector by facilitating the establishment of new tourism development projects that include gaming, hospitality and commercial components in different municipalities throughout Puerto Rico, particularly those that have been most affected by economic hardship.

Eligibility: A Selection Committee established by the Act will select, through the vote of a simple majority, which projects will be established. The Selection Committee is comprised by the Secretary of Economic Development and Commerce, who presides the Selection Committee; the Secretary of the Treasury; the Executive Director of the Puerto Rico Tourism Company; the Municipal Affairs Commissioner; and a public interest representative named by the Governor of Puerto Rico, with the consent of the Senate of Puerto Rico. The Act establishes that the eligible projects must comply with the following elements: a) A world-class hotel that holds at least a four star rating; b) Varied commercial and recreational establishments; c) Other entertainment facilities typical of a four star hotel, including a casino, as such facilities are defined in Act No. 221 of 1948, known as the “Games of Chance Act”; and d) The Act requires that the project be developed exclusively with private capital.

Projects should be developed in municipalities that are economically distressed, showing a decrease in municipal business taxes during the period covering fiscal years 2007 and 2008 as compared to the period of fiscal years 2002 and 2003.  Projects can also be developed in 
municipalities as determined by the Selection Committee. The Act also designates the area composed by El Yunque National Rain Forest, Vieques and Culebra as “The Green Triangle” to promote ecotourism and economic development in the area. The Act establishes a special fund to be funded from operations incentivized by the Act, and which will provide funds for development of the infrastructure necessary to promote tourism in The Green Triangle. Specifically, the Act provides that ¼ of the funds are to be used in Vieques and ¼ of the funds are to be used in Culebra. These funds will be distributed by the Selection Committee.

Tax Exemptions: The Government of Puerto Rico provides extremely attractive tax rates on its tourism gaming net revenues. The operative tax rate will depend on the concessionaire’s total investment of private capital, as provided below: a) Investments of $500,000,000 or more shall be granted a fixed, 25% tax rate; b) Investments of $750,000,000 or more shall be granted a fixed, 15% tax rate; c) Investments of $1,000,000,000 or more shall be granted a fixed, 10% tax rate; and d) Investments of $1,250,000,000 or more shall be granted a fixed, 8% tax rate.

Tax Exemption Decree: The Selection Committee will issue a tax exemption decree providing 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 developer, and will ensure the developer’s incentives for the term of the tax exemption decree, irrespective of any changes in the applicable Puerto Rico tax laws. Any decree granted by the Selection Committee must be received within the first five years after the approval of the Act, which is the limit established for submitting proposals. The tax exemption decree shall initially remain in effect for a period of 30 years, and developers would have a 10-year period to fulfill their investment and job creation commitments. Any violation of the terms of the Act or the tax exemption decree may result in the increase of the special tax rate imposed, up to 70%. Should the concessionaire undertake a substantial renovation or expansion of the project, the tax exemption decree, at the discretion of the Selection Committee, may be renewed at any time during its life for two additional 10-year terms.

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 tollgate tax or other similar taxes) on its income from its eligible activities in Puerto Rico, other than the Puerto Rico income tax rate established in the tax exemption decree and taxes imposed on dividends to the exempt business’ shareholders, if any. 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.

CRUISE INDUSTRY INCENTIVES ACT


On July 4, 2011, Puerto Rico enacted Act No. 113 of 2011, also known as the “Cruise Industry Incentives Act” (the “Act”), to strengthen the integral link between Puerto Rico’s economy and its $3.6 billion tourism industry and its $250 million cruise industry. The Act establishes an annual promotional fund of $11 million designed to increase both homeport and transit cruise visits to Puerto Rico by providing several incentives, including the incentives described below.

Discounts on Port Tariff Incentive: The Act provides increasing benefits depending on the passenger volume in order to incentivize the cruise industry to increase passenger volume to Puerto Rico. The Puerto Rico Ports Authority’s (the “Ports Authority”) passenger tariff is currently $13.25 per passenger. For the first 140,000 passengers that a cruise line manages in Puerto Rico per year, a tariff discount or reimbursement of $4.95 is provided by the Ports Authority under the Discounts on Port Tariff Incentive. For passengers after 140,000, this incentive increases to $7.45, reducing the passenger tariff by more than half.

Cash Incentive for Homeport Embarks: Puerto Rico also provides increasing cruising incentives through the Ports Authority, depending on the number of homeport cruise embarks, as a way to increase home-porting in Puerto Rico.  The Cash Incentive for Homeport Embarks begins with $1.00 per passenger for cruise companies that homeport in any port in Puerto Rico’s jurisdiction. After the cruise company has reached its 20th embark in Puerto Rico, the incentive increases to $2.00 per passenger from visit 21 and thereafter. If the cruise company exceeds 120 embarks, the incentive payable increases to $4.00 per passenger for any embark in excess of the 61st Embark.


Cash Incentive for Time in Port: It is estimated that each cruise passenger on a transit ship spends $69.74 in Puerto Rico in restaurants, shops, transportation, excursions, among many others. A Cash Incentive for Time in Port was created to stimulate longer cruise ship stays in Puerto Rico ports in order to increase this expenditure. A cash incentive of $1.00 per passenger is provided by the Ports Authority to cruise ships that stop in any port in Puerto Rico’s jurisdiction for a minimum of 8 hours, thus incentivizing them to stay in Puerto Rico for at least that long.

Incentives for Purchases of Goods and Services: Puerto Rico has created Incentives for Purchases of Goods and Services that provide that any cruise ship that stops in any port in Puerto Rico’s jurisdiction will be eligible to receive an incentive equivalent to 10% of the cost of the purchase of provisions and/or the cost of maintenance services or repairs that may be done on the cruise ships in Puerto Rico, excluding the cost of materials, products or equipment that may be installed as part of the service provided. An additional 5% reimbursement applies to the purchase of products that are manufactured in Puerto Rico, as certified by the Puerto Rico Industrial Development Company, or agricultural products of Puerto Rico, as certified by the Department of Agriculture. This incentive will also benefit local distribution companies that supply food and beverage and other products to cruise ships, as well as service providers that serve this industry, such as mechanics, divers, and many others. This incentive is provided by the Puerto Rico Tourism Company (the “Tourism Company”). 

Coop Marketing Program: The Act also creates a Coop Marketing Program to increase awareness of Puerto Rico as a homeport and to position Puerto Rico as the primary port of the Caribbean. The incentive creates a fund in which a cash incentive of $1.00 per passenger will be provided for marketing programs developed jointly with the Tourism Company and cruise companies to promote Puerto Rico as a homeport. ​

Incentive for Vacation Packages and Incentive for Tour Transportation Providers: The Act also creates an Incentive for Tour Transportation Providers that provides an incentive of $1.00 for every passenger that buys an excursion on board the cruise ship. The incentive has an annual cap of $500,000, and is regulated by the Tourism Company, which has been working on an expanded on-board tour offering program. As an additional incentive, the Tourism Company is working with local travel agents to promote cruise vacation packages that include hotel nights in Puerto Rico as part of its Incentive for Vacation Packages. This incentive should result in higher revenues for cruise ships in Puerto Rico ports and therefore increased transit visits.
Tax Exemptions: a) Up to 90% tax exemption on income tax (100% tax exemption if business is located in Vieques or Culebra). The taxable portion of the income will be taxed at the income tax rates effective at the date of the Act’s approval, which in the case of corporations was 39%, so therefore, after considering the 90% exemption, the effective tax rate could be as low as 3.9%; b) Up to 90% tax exemption on dividend distribution tax (100% tax exemption if business is located in Vieques or Culebra). The taxable portion of the dividend distribution will be taxed at the dividend distribution tax rates effective at the date of the Act’s approval, which in the case of corporations was 10%, so therefore, after considering the 90% exemption, the effective tax rate could be as low as 1%; c) 100% tax exemption on alternative minimum taxes and additional income taxes on undistributed income; d) 90% tax exemption from personal property taxes. 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%; e) 90% tax exemption from real property taxes. 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%; f) Up to 90% tax exemption on municipal licenses and other municipal taxes (100% in the case of new business). Any taxable portion will be subject to the regular tax rate, that currently can be up to 0.5%, so therefore, after considering the 90% exemption, the effective tax rate could be as low as 0.05%;  g) Up to 100% tax exemption on excise tax on imported goods; h) Up to 100% tax exemption on sales and use tax; and i) Up to 100% tax exemption on municipal construction excise tax.

Tax Credits: Under the Act, any person who acquires an equity interest or contributes land to an entity that develops an exempt tourism business will be entitled to an investment tax credit equal to 50% of the cash paid for such equity investment or 10% tax credit on total project cost, whichever is lowest. The tax credit is to be taken in two installments: half of the tax credit during the first year of the investment, while the remaining tax credit may be used in the second year. Any unused tax credits may be carried forward. The tax credits may also be assigned, transferred or sold. Puerto Rico has a healthy secondary market for the immediate sale of such credits. Many developers choose to inject such credits into the project, reducing the amount of equity required.

Tax Exemption Decree: To benefit from the Act, the eligible business needs to submit an application with the Puerto Rico Tourism Company to obtain a tax exemption decree signed by its Executive Director, 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 10-year exemption that can be extended for an additional 10-year term. 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. The date of commencement of the exemptions is fixed pursuant to the Act. However, to provide the exempt business more flexibility, the effective dates can be postponed for up to 3 years.

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 tollgate tax or other similar taxes) on its income from its eligible activities in Puerto Rico, other than the Puerto Rico income tax rate established in the tax exemption decree. 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.

tourism development act


The Government of Puerto Rico has many incentives for the tourism sector of the economy, including the Tourism Development Act, the Cruise Industry Incentives Act, the Municipal Economic Development and Tourism Incentives Act, and incentives for Vieques & Culebra. We will discuss them all, beginning below with the Tourism Development Act.

On July 10, 2010, Puerto Rico enacted Act No. 74 of 2010, also known as the “Tourism Development Act” (the “Act”), to provide incentives that will allow for substantial growth of Puerto Rico’s tourism industry and all infrastructure related thereto. The Act provides tax exemptions and tax credits to businesses engaged in eligible activities in Puerto Rico. To avail from such benefits, a business needs to become an exempt business by applying for a tax concession and obtaining a tax exemption decree.

Eligibility: Eligible activities that may qualify for the benefits under the Act include the following: a) Ownership, operation and/or hotel administration, timeshares or vacation club programs, condohotels, guest-houses, theme parks, golf courses, marinas for tourism purposes, port facilities, agrohospices, agrotourism, medical tourism, nautical tourism and other facilities that are a source of active, passive or recreational entertainment and that are a stimulus to internal or external tourism; b) Ownership of a lease made to a business with a tax exemption decree under the Act or predecessor tourism incentive laws. This includes the leasing of real property and whatever improvements have been made to the property, such as machinery and equipment, furniture and fixtures. Financing leases are not eligible activities; c) Development and administration of natural resources such as caverns, forests, canyons, natural reserves and lakes; and d) The purchase of existing hotels or other eligible activities, if a substantial renovation or expansion to the existing business is made. If the substantial renovation or expansion costs exceed the purchase price, the acquiring investors would also qualify for the tax credit described below.