Puerto Rico amends tax incentives laws and allows election out of the Act 154 excise tax of 4%

In brief

Puerto Rico (PR) Governor Pedro Pierluisi, on June 30 enacted Act 52-2022, to amend the PR manufacturing tax incentives laws and provide a framework for electing out of the income and excise tax regimes enacted under Act 154-2010, which applies to certain nonresident foreign entities. To achieve this transition, Act 52-2022 allows PR manufacturing businesses holding tax decrees under the various PR tax incentives laws to amend their tax decrees to increase their applicable PR corporate income tax rates to 10.5% (15% if certain conditions are met), in exchange for relieving such PR manufacturing businesses’ foreign related parties from being subject to the Act 154-2010 income and excise tax provisions.

Act 52-2022 addresses the potential noncreditability for US federal income tax purposes of the Act 154-2010 excise tax paid by US multinational entities (US MNEs) because of the foreign tax credit (FTC) regulations the US Treasury released in 2021, and which will become effective, as relevant to this issue, for tax years beginning on or after January 1, 2023. Additionally, Act 52-2022 introduces additional requirements for business operating under the Puerto Rico Incentives Code of 2019, as amended. 

Lastly, Act 52-2022 amends certain provisions of the PR Internal Revenue Code of 2011, as amended (PR-IRC). These amendments include treating single-member LLCs as disregarded entities as opposed to regarded pass-through entities; providing trade or business exceptions for foreign employers with remote workers in Puerto Rico; and setting the corporate AMT rate to 23% for taxpayers with gross income of US $10 million or more. A separate Insight will cover the amendments to the PR-IRC in more detail.

Actions to consider:  Analyzing whether these elections are beneficial to foreign members of a controlled group with PR manufacturing activities requires a fact-driven exercise. Therefore, taxpayers should consider whether electing to apply the new rules would benefit their US FTC positions.