Puerto Rico Tax Credits
Eligible Tourism investments:
In the tourism sector, Act 60-2019 in Puerto Rico provides tax incentives for eligible activities to promote economic development. Such incentives include:
- Tax credit equal to the lesser of 10% of the total project costs, or 50% of the cash investment made by investors
- Tax credit equal to 40% of the eligible investment, the first portion of which is issued at the second year of operation, and the rest in subsequent years.
- Tax credit equal to 30% of the eligible investment, the first 10% percent portion upon obtaining finance, the other 20% percent the year that receive the first paying guest.
- 100% exemption on municipal construction excise taxes (75% in Vieques and Culebra)
- 100% exemption on sales and uses taxes
- 100% exemption on excise taxes and other municipal taxes for new projects or 90% exemption for existing projects
- 90% exemption on income tax, or 100% exemption if the project is located in the island municipalities of Vieques or Culebra
- Up to 90% exemption on personal and real property municipal taxes
Tax credits may be ceded, sold, or transferred, and are not taxable.
Purchase of products manufactured in Puerto Rico:
Specific provisions for tax credits related to the purchase of products manufactured in Puerto Rico. These incentives are designed to encourage the use of locally produced goods and support the island’s manufacturing sector. These tax credits include:
Sales & Use Tax Credit for Local Purchases
This credit is aimed at businesses that purchase goods manufactured in Puerto Rico, promoting the use of local products and supporting local industries. Typically, this can be a percentage of the amount spent on products manufactured locally. For example, the credit might cover a portion of the sales and use tax that would otherwise be payable. To qualify, the products purchased must be manufactured within Puerto Rico, and the purchasing business must comply with the reporting and documentation requirements.
Manufacturing Investment Credit
This credit encourages investment in manufacturing facilities and infrastructure within Puerto Rico. It may be a percentage of the investment made in manufacturing equipment, facilities, or other capital expenditures related to manufacturing. Generally, it requires that the investment be made in new or existing manufacturing operations and may involve maintaining a certain level of employment or meeting other economic development criteria.
Exemptions on Raw Materials
Act 60 provides exemptions or credits for the purchase of raw materials used in manufacturing products within Puerto Rico. This could involve exemptions from certain taxes, or a credit against taxes payable, depending on the amount spent on raw materials. Manufacturers need to demonstrate that the raw materials are used in the production of goods manufactured in Puerto Rico.
Research and Development (R&D) Tax Credit:
Act 60-2019 grants up to 50% of qualified investments made in R&D projects carried out in Puerto Rico. The credit can be utilized in two or more installments, allowing for flexibility in how the credit is applied over time.
The credit is available to businesses that qualify as “exempt businesses” under Act 60, which typically includes businesses engaged in eligible activities such as export services, manufacturing, or other priority sectors.
The investments must be directly related to R&D activities. This includes expenditures on research facilities, equipment, and other R&D-related costs.
Projects should be focused on advancing technology, developing new products, or improving existing processes. The R&D activities must take place in Puerto Rico and align with the goals outlined by the Act.
Film Industry Tax Credit under Act 60
The total amount of tax credits available for film production expenditures is capped at $100 million per year for the grant holder.
The credit can be used in two or more installments, providing flexibility in how the credit benefits are utilized. This credit applies to production expenditures made in Puerto Rico, excluding payments to foreign persons.
The 40% credit rate is for qualified production costs that do not involve payments to foreign entities. This typically includes expenditures on local crew, equipment, and other direct production costs within Puerto Rico.
Th 20% rate applies to expenditures involving payments to foreign persons, such as fees for international talent, consultants, or other foreign services utilized in the production.
Specifically for feature films, television series, or documentaries with production costs up to $4 million, a 15% credit rate applies to expenditures not involving payments to foreign persons for smaller-scale projects (feature films, TV series, or documentaries) with a maximum production budget of $4 million.
Opportunity Zone Investment Tax Credit:
Currently, 98% of Puerto Rico is designated as an Opportunity Zone.
Every investor in an Opportunity Zone Fund is entitled to a minimum tax credit of 5% of their eligible investment. An additional 5% credit can be granted for each criterion met by the Exempt Business within the Opportunity Zone, up to a maximum total credit of 25%.
To qualify for the incremental credit, the investor or the Exempt Business must meet specific criteria established by the Committee for Opportunity Zones. These criteria generally aim to ensure that investments lead to substantial benefits for the community and contribute to the economic development of the Opportunity Zone.
Criteria Might Include:
- Job Creation: Demonstrating that the investment creates a certain number of jobs or stimulates significant employment opportunities in the Opportunity Zone.
- Economic Development: Showing that the investment contributes to the economic growth of the area, such as by developing infrastructure or supporting local businesses.
- Community Benefits: Ensuring that the investment addresses community needs, such as affordable housing or educational facilities.
- Environmental Impact: Complying with environmental standards or contributing to sustainability initiatives within the Opportunity Zone.
The credit is available for use in four installments, allowing the investor to claim a portion of the credit over multiple years.
Employee Reimbursement for Training:
The Workforce Innovation and Opportunity Act (WIOA) aims to assist job seekers by providing access to employment activities, education, training, and support services. This helps individuals succeed in the job market and matches employers with the specialized workers they need to compete in the global economy.
On June 12, 2018, the Federal Secretary of Labor approved a waiver for the Workforce Development Program (WDP) to increase employer reimbursement for On-the-Job Training (OJT) to up to 90% of participants’ wages. On December 14, 2018, WDP authorized the implementation of this waiver.
OJT is training provided by an employer where participants receive paid training while performing productive work at the workplace. This training should:
- Provide knowledge or skills necessary for the job.
- Be available through a program that reimburses the employer 50% of the participant’s wage, with potential for higher reimbursement as specified under Section 134(c)(3)(H) of the WIOA due to extraordinary costs for additional training and supervision.
- Be limited to the time needed to acquire job-related knowledge, considering training content, prior employment experience, and the participant’s service strategy.
According to the approved waiver, employers can receive up to 90% reimbursement of employee wages for OJT. The percentage is based on the number of full-time employees at the company:
- Employers with 50 or fewer employees can be reimbursed up to 90%.
- Employers with 51 to 250 employees can be reimbursed up to 75%.
- Employers with more than 250 employees can be reimbursed up to 50%.
Documentation required includes financial statements, organizational charts, and certification of employee count (“headcount”).
Employers hiring individuals with disabilities who are ready to work, and those with criminal backgrounds, can be reimbursed up to 90% of the participant’s wage, regardless of the company’s size.
In Puerto Rico, OJT programs are generally managed at the local level through the Puerto Rico Department of Labor and Human Resources and its various Workforce Development Programs. While the overarching framework for OJT is guided by federal regulations, including those under the Workforce Innovation and Opportunity Act (WIOA), individual municipalities may have specific implementations and adaptations based on local needs and resources.
Since detailed information about specific OJT programs vary by municipality, it would be best to contact the local offices of the Puerto Rico Department of Labor or the local workforce development boards.
How Are Tax Credits Sold?
Regulations under Act 52-2022, which introduced Section 1051.16 to the Puerto Rico Tax Code, establish a structured system for managing tax credits using the Tax Credits Manager (TCM), effective January 1, 2023.
Administrative Determiniation 22-11 outlines the operational guidelines for the TCM, including how to categorize and report tax credits.
Tax credits granted before January 1, 2023, when the TCM began operating, may be claimed for up to three taxable years following the implementation date of the TCM. Unused balances of Pre TCM credits after this period cannot be carried over or claimed in subsequent years.
Tax credits granted on or after January 1, 2023, when the TCM system became effective, must be registered with the TCM to be eligible for claiming against tax liability. Unregistered Post TCM credits cannot be utilized.
Credits under Section 1051.12(a)(4), (5), and (7) are subject to limitation on their use as established in Section 1051.13 of the Code. These sections cover development projects, R&D, and renewable energy projects, respectively.
It’s important for sellers and buyers to carefully follow these regulations and consider the tax implications when selling or purchasing Puerto Rico tax credits.