The Impact of Act 52-2022 on Puerto Rico Taxes

On June 30, 2022, Puerto Rico enacted Act 52-2022, a significant piece of legislation that introduced a series of amendments to the Puerto Rico Internal Revenue Code. The primary objectives of this law were to provide tax relief to individuals and businesses, simplify certain complex areas of the existing tax structure, and modernize compliance procedures. It represents a comprehensive effort to adjust the island’s fiscal framework in response to both local economic conditions and changes in federal tax law.

The legislation recalibrates income tax rates for corporations and makes adjustments to alternative tax calculations. The Act introduces new concepts and elections, such as an optional tax for service providers, aimed at offering predictability and potentially reducing the tax burden for a large segment of the self-employed population and certain business entities. These changes are coupled with updated mandates for electronic filing and reporting.

Impact on Individual Income Taxes

The law introduced a new requirement for individual residents of Puerto Rico. Taxpayers must now file a statement with their income tax return detailing any financial accounts held outside of Puerto Rico or the United States that had a balance exceeding $10,000 at any point during the tax year. Failure to report such foreign financial accounts can result in a substantial $10,000 penalty and may be classified as a misdemeanor, underscoring the government’s focus on international tax compliance.

Impact on Business and Corporate Taxes

Act 52-2022 introduced substantial changes for businesses, most notably through adjustments to corporate income tax rates and the corporate Alternative Minimum Tax (AMT). The legislation aimed to create a more competitive tax environment for companies operating in Puerto Rico. A key change was the adjustment to the corporate AMT, which is a separate calculation to ensure companies pay a minimum level of tax regardless of deductions. The Act set the corporate AMT rate at 18.5% for corporations with a business volume of less than $10 million, while a 23% rate applies to those with a business volume of $10 million or more.

One of the provisions of the Act is the option for certain multinational corporations to elect a new tax regime. Previously, many of these companies were subject to a 4% excise tax on the purchase of products manufactured in Puerto Rico by related entities. Act 52-2022 allows these businesses to instead elect to be subject to a 10.5% tax on their industrial development income. This change was driven by U.S. foreign tax credit regulations, which did not consider the 4% excise tax a creditable foreign income tax. The new 10.5% income tax is designed to be creditable, potentially reducing the overall global tax burden for these corporations.

The law also introduced the concept of a “disregarded entity” (DRE) for income tax purposes. This allows a single-member limited liability company (LLC) owned by a Puerto Rico resident to be ignored as a separate entity for tax calculations. Instead, the LLC’s income and expenses are reported directly on the owner’s personal income tax return. This simplifies tax filing significantly, as the DRE is not required to file its own separate income tax return. The election to be treated as a DRE must be formally made with the Puerto Rico Treasury Department.

Furthermore, Act 52-2022 addressed the tax implications of remote work. It established a new exception from the definition of being “engaged in trade or business” in Puerto Rico for nonresident companies that employ a remote worker on the island. This provision, effective for tax years after December 31, 2021, prevents a nonresident business from creating a taxable presence, or nexus, in Puerto Rico solely because it has an employee working remotely there, provided certain conditions are met. This change acknowledges the rise of remote work.

The Optional Tax for Services Rendered

A central feature of Act 52-2022 is the establishment of an optional tax regime for individuals and entities providing services. This provision allows eligible self-employed individuals and certain partnerships or corporations to elect to pay a simplified tax on their gross services income, in lieu of the standard income tax rates. This option is designed to offer simplicity and predictability, particularly for independent contractors and professional service providers who render services to other businesses or merchants.

To be eligible for this optional tax, a taxpayer must meet specific criteria. The election is available to individuals who are self-employed and whose income is derived from rendering services. For the 2022 tax year, the law was amended to permit individuals to choose this option even if they have a tax balance due with their return, a change from previous requirements. For partnerships, the election is available for tax years beginning after January 1, 2023, and similarly allows the choice even if there is a tax liability with the partnership’s return. The income must be properly reported on Informative Returns by the client who received the services.

Making the decision to elect this optional tax requires careful consideration of one’s financial situation. A taxpayer would need to compare their potential tax liability under the standard, progressive income tax rates against the optional tax on gross income. This calculation involves forgoing all business-related deductions and expenses that would normally be used to lower net taxable income. For service providers with very low overhead and minimal expenses, the flat tax on gross receipts may be highly advantageous. Conversely, those with substantial deductible expenses might find it more beneficial to remain under the standard tax system.

The election is made directly on the annual income tax return. There is not a separate, standalone form required to make the initial election; rather, the taxpayer indicates their choice when filing. The law was updated to allow the payment of this optional tax to be made by the filing date of the income tax return, without extensions. This change simplifies the process and aligns the payment deadline with the general tax filing timeline, making it easier for taxpayers to manage their cash flow and compliance obligations.

Modifications to Sales and Use Tax (IVU)

Act 52-2022 introduced targeted amendments to Puerto Rico’s Sales and Use Tax, known as the IVU, by incorporating modern commerce into the tax base. The legislation expanded the scope of the IVU to explicitly include digital products as a taxable item. This amendment formally incorporates the sale of items into the sales tax system. The Act established sourcing rules to determine when the sale of a digital product is considered to have occurred in Puerto Rico, thereby making it subject to the IVU. This modernization of the tax code reflects the growing importance of the digital economy.

Taxable digital products include:

• Software
• E-books
• Streaming services
• Other digital goods

These IVU-related changes require businesses to review their sales practices and systems to ensure proper compliance. Businesses involved in the sale of digital products to customers in Puerto Rico must now register as withholding agents and begin collecting and remitting the 11.5% IVU on these transactions. The Puerto Rico Treasury Department provides guidance to help merchants understand their new obligations under these updated rules.

Updated Compliance and Filing Mandates

Act 52-2022 reinforces and expands the requirements for electronic filing and payment of taxes through the Puerto Rico Treasury Department’s online portal, known as SURI (Sistema Unificado de Rentas Internas). The law mandates that most tax returns, informational declarations, and related payments must be submitted electronically via this platform. This shift away from paper filing is intended to streamline tax administration, reduce processing times, and improve the accuracy of tax data. Taxpayers are required to create an account on the SURI portal to manage their tax obligations.

The process for filing through SURI involves completing the relevant electronic forms directly on the portal or uploading a file prepared with certified tax software. Once a return is submitted, the portal allows for electronic payment of any tax due via direct debit from a bank account or with a credit card, though credit card payments may incur a processing fee. The system provides an immediate confirmation of submission, which serves as proof of filing.

After filing, taxpayers can use SURI to track the status of their return, view their account balance, and receive official notifications from the Treasury Department. The portal serves as the primary channel for communication, replacing most traditional paper correspondence. Act 52-2022 also authorized the creation of a new tax credit management system within SURI to track and administer tax credits. This system will require taxpayers to register their credits to be able to claim them on future returns, further centralizing tax compliance within the electronic platform.