An Overview of Puerto Rico Corporate Tax

As a U.S. territory, Puerto Rico possesses a unique fiscal autonomy that allows it to maintain its own tax system, separate from the U.S. Internal Revenue Code. For corporations, this framework is designed to generate revenue for the commonwealth while also encouraging outside investment through targeted incentives. The result is a dual system where standard corporate tax rules exist alongside preferential tax regimes available to qualifying businesses. This distinct system has significant implications for tax planning and legal compliance.

The General Corporate Tax Framework

The standard corporate income tax in Puerto Rico applies to businesses that do not operate under a specific tax incentive grant. This system is built on a progressive structure, meaning the effective tax rate increases as income rises. The tax calculation begins with a normal tax of 18.5% on a corporation’s net taxable income, followed by a graduated surtax applied to “surtax net income.”

Surtax net income is calculated by taking the net taxable income and subtracting a $25,000 special deduction. The surtax rates are progressive, starting at 5% for surtax net income up to $75,000 and increasing to a maximum of 19% on income exceeding $275,000. This combination of the normal tax and surtax can result in a maximum nominal tax rate approaching 37.5%. Businesses structured as a controlled group of corporations are required to share a single $25,000 surtax deduction among all member entities.

Beyond the regular income tax, Puerto Rico employs an Alternative Minimum Tax (AMT) to ensure that corporations with significant income cannot use deductions to eliminate their tax liability entirely. The corporate AMT is subject to a flat rate of 18.5% on the “alternative minimum net income,” which increases to 23% for corporations with gross receipts of $10 million or more. A company must calculate its tax liability under both systems and pay whichever amount is higher. The AMT calculation does not permit the same range of deductions as the regular tax, limiting them to expenses like wages, rent, and depreciation.

Key Tax Incentives for Corporations

Puerto Rico’s economic development strategy is centered on the Puerto Rico Incentives Code, commonly known as Act 60, which consolidated numerous previous incentive laws into a single framework. This code is designed to attract investment and create jobs by offering substantial tax reductions to businesses in specific sectors. To access these benefits, a business must formally apply to the Office of Industrial Tax Exemption and receive a tax exemption decree. This decree is a binding contract between the business and the Puerto Rican government that outlines the specific tax benefits and commitments.

A prominent incentive under Act 60 is for Export Services, aimed at businesses that establish operations in Puerto Rico to serve clients outside the island. A qualifying business under this incentive benefits from a fixed corporate income tax rate of 4% on its export service income. The income must be derived from an eligible service, which includes:

• Research and development
• Consulting
• Advertising
• Call centers
• Investment banking
• Professional services, such as legal and accounting work

To qualify for the Export Services incentive, the service must be rendered for the benefit of non-resident individuals or foreign entities. The service also cannot have any direct connection, or “nexus,” with Puerto Rico. This means the work performed cannot relate to business activities, personal consumption, or revenue generation within Puerto Rico itself.

The benefits extend beyond the low income tax rate. Businesses operating under an Export Services decree also receive a 75% exemption from property taxes on property used in their eligible operations and a 50% exemption from municipal license taxes.

Additional Business Tax Obligations

Beyond income taxes, corporations in Puerto Rico are subject to other tax obligations. One of the primary local taxes is the Municipal License Tax, widely known as the “Patente Municipal.” This tax is not based on a company’s profits but is instead levied on its gross receipts or volume of business. The 78 individual municipalities collect this tax, and rates are capped at a maximum of 0.5% of gross receipts.

Another tax is the island-wide Sales and Use Tax (IVU), which functions similarly to sales taxes in the mainland U.S. The general IVU rate is 11.5%, composed of a 10.5% commonwealth rate and a 1% municipal rate. The IVU applies to a broad range of transactions, including the sale of tangible personal property, certain services, and admission fees. A lower rate of 4% applies to business-to-business and designated professional services.

The Patente Municipal is a tax on revenue, not profit, meaning a business could owe this tax even if it operates at a net loss. Similarly, the IVU is a consumption tax collected from the end-user. Both taxes represent distinct compliance and remittance obligations that must be managed separately from annual corporate income tax filings. Businesses are responsible for remitting IVU to the Puerto Rico Department of Treasury (Departamento de Hacienda).

Relationship with U.S. Federal Income Tax

For U.S. tax purposes, a corporation organized under the laws of Puerto Rico is treated as a “foreign” corporation. Consequently, income earned by a Puerto Rico corporation from its operations on the island is not subject to U.S. corporate income tax. This treatment is based on U.S. Internal Revenue Code Section 933, which governs income from sources within U.S. possessions.

When a Puerto Rican corporation distributes its earnings as dividends to a U.S. individual shareholder, those dividends are subject to U.S. federal income tax. The tax treatment for the shareholder depends on whether the dividends are “qualified.” If they meet the criteria, they are taxed at preferential long-term capital gains rates; if not, they are taxed at the individual’s ordinary income tax rates.

For a U.S. parent corporation with a subsidiary in Puerto Rico, the issue of double taxation becomes relevant. To prevent income from being taxed in Puerto Rico and again when repatriated to the U.S., the tax system allows for a foreign tax credit. U.S. corporations can claim a credit against their U.S. tax liability for the income taxes paid to Puerto Rico. The calculation and application of foreign tax credits are complex, making professional tax advice a necessity for structuring such operations.