For additional information, do not hesitate to contact our offices. Our address is:
Fiddler González & Rodríguez, P.S.C., P.O. Box 363507, San Juan, PR 00936-3507.
We welcome your questions and comments.
Myrna Y. Medina-Massanet
*Special Tax Counsel
On July 1, 2014, the Governor of Puerto Rico signed Act No. 77-2014, better known as the Tax System Adjustments Act. The following is a brief summary of certain provisions of the Act.
I. Amendments to the Internal Revenue Code of 2011 (“Code”)
a. Imposition of an Alternate Base Tax for Individuals (ABT)
i. New Tax Brackets. For years beginning after December 31, 2013, net income levels (brackets) applying under the ABT are reduced.
$150,000, but not over $200,000 --------------------------- 10%
(formerly, $150,000 but not over $250,000)
Over $200,000, but not more than $300,000 -------------- 15%
(formerly, in excess of $250,000 but not over $500,000)
In excess of $300,000 ---------------------------------------- 24%
(formerly, in excess of $500,000)
ii. Amendments to the ABT Credit.
1. Elimination of the Creation of Future Credits. No new credits may be generated for taxable years beginning after December 31, 2013.
2. Limitation of Credit. The ABT credit that can be claimed is limited to twenty five percent (25%) of the excess of the regular tax over the ABT.
b. Amendment to the special tax of 2% on the gross income of individuals rendering services or conducting a trade or business
The provision now excludes from the application of the special tax of 2%, the gross income derived from agriculture, special partnerships and corporations of individuals.
c. Increase in the special tax rate on long term net capital gains of individuals, estates, and trusts
Effective July 1, 2014, the special tax rate applicable to long-term net capital gains of individuals, estates and trusts is raised from ten percent (10%) to fifteen percent (15%).
d. Increase in the alternative tax on long-term capital gains of corporations
Effective July 1, 2014, the special tax rate applicable to long-term net capital gains of from fifteen percent (15%) to twenty percent (20%).
e. Increase in the holding period to determine long term capital gains and losses.
For sales or exchanges after July 1, 2014, the holding period of a capital asset for long term capital gain or loss is extended from to six (6) months to one (1) year.
f. Amendments to the capital loss deduction
i. New limitation
1. Corporations - Capital losses now can only be used to reduce up to 90% of capital gains.
2. Other taxpayers - Capital losses now can only be used to reduce up to 90% of capital gains, plus the net income of the taxpayer of one thousand dollars ($1,000), whichever is less.
ii. Increased carryover period
Effective from tax year 2014 and thereafter, the carryover period is increased from five (5) to seven (7) years. For net capital losses realized on taxable years commencing after December 31, 2005 and before December 31, 2012, the carryover period is ten (10) years.
g. Increase in the special tax on dividends distribution from certain Corporations
Effective July 1, 2014, the special tax rate applicable to an eligible distribution made by a corporation of an eligible person, was raised from 10% to 15%.
h. Changes to the additional tax on gross income (“Patente Nacional”)
- Before January 1, 2014. In general, the additional tax on gross income under Section 1023.10 (also known as “Patente Nacional”) remains unchanged for taxable years beginning before January 1, 2014.
- After December 31, 2013. However, for taxable years beginning after December 31, 2013, the additional tax on gross income will be governed by the new Section 1023.10A and will not be part of the Alternative Minimum Tax (AMT) applicable to corporations, being a separate and independent tax.
1. Tax paid is allowed as an income tax deduction. The amount of the additional tax on gross income can be deducted from the net income of the taxpayer, provided that the same has been paid on or before the due date for filing of the income tax return for that taxable year.
2. General Rates. The tax rate applicable are the following:
If the gross income is: ------------------------------------The rate will be:
From $3,000,000, but not more than $100,000,000 ----------0.35%
Over $100,000,000 but not more than $300,000,000 ---------0.50%
Over $300,000,000, but not more than $600,000,000 --------0.70%
Over $600,000,000, but not more than $1,500,000,000 ------0 .80%
Over $1,500,000,000 ---------------------------------------------1.00%
3. Rates applicable to taxpayers engaged in the retail sale of food. Taxpayers who are principally engaged in the retail sale of unprepared foods and provisions, with a gross revenue below four hundred million ($400,000,000) dollars during the taxable year, will determine the additional tax on gross income using the following rates:
If the gross income is: ---------------------------------The rate will be:
From $3,000,000, but not more than $300,000,000 ------0.20%
Over $300,000,000, but less than $400,000,000 ----------0.28%
4. Financial businesses. Financial businesses are subject to the same tax rate, credit and rules as those applicable for taxable years before January 1, 2014, discussed in our July 16, 2013, Vol. 2013, No. 3 Tax Watch.
5. Credits allowed against the gross income tax. The credits allowed against this gross income tax are limited those credits granted in Subchapter C of Chapter 5 of Subtitle A (in general credits for taxes paid or withheld), providing that credits generated or acquired by the taxpayer cannot be credited against the tax imposed under Section1023.10A.
i. Election to prepay income taxes on accumulated and non-distributed amounts in a variable annuity contract.
Any individual who is the owner or beneficiary of a life insurance, endowment or annuity, that exchanges it (or makes an indirect transfer in exchange for it) on or before December 31, 2014, for an Eligible Variable Annuity Contract, may elect to prepay the income tax on the total amount accrued and not distributed in the contract transferred or cancelled that if distributed or paid would be subject to income tax. The tax rate applicable to the prepayment is 10%.
An Eligible Variable Annuity Contract is a variable annuity contract issued on or before December 31, 2014, by an insurance company organized under the laws of Puerto Rico, and which contractual terms provide that there cannot be any additional contributions after December 31, 2014.
j. Special tax for individuals, estates, and trusts upon the sale or tax prepayment on the appreciation of certain assets.
General Rule. Any individual, estate or trust may elect, during the period from July 1, 2014 to October 31, 2014, to pay the Special Tax on the sale of capital assets, and may also elect to prepay the special tax on all or part of the increase in the accumulated value of the certain assets held by any such person. Said special tax shall apply only in the case of assets held for long term.
Special Tax rate. The special tax provided by this section, shall be eight (8%) percent in the case of capital assets or fifteen percent (15%) in the case of Included Assets whose income is taxed as ordinary income.
Definition of Included Assets.
Included Assets are:
1. The shares of corporation stock, participations in limited liability companies or partnerships, whether domestic and foreign, including an option to acquire shares or units;
2. Real Property located within or without of Puerto Rico;
3. A fixed annuity contract; and
4. Participations in pension plans, whether qualified under Code Section 1081.01 or not.
Basis adjustment. The basis in the property will be increased by the amount upon which the prepayment is made. However, any increase due to the tax prepayment cannot be used for purposes of computing the depreciation expense.
k. Special tax for corporations upon the sale or prepayment on the appreciation of capital assets.
i. General Rule. Any corporation may elect, during the period from July 1, 2014 to October 31, 2014, to pay on the sale or prepay a special tax of 12% on all or part of the increase in the accumulated value of its capital assets. Such special tax shall apply only in the case of assets held for long term.
ii. Other assets subject to the prepayment:
1. Shares of corporate stocks or participations in partnerships, domestic and foreign;
2. Real property within or without Puerto Rico;
3. Intangible property, including but not limited to patents and goodwill.
l. Tax prepayment of individual retirement accounts.
i. General rule. Any individual who is the owner or beneficiary of an individual retirement account may elect to prepay, during the period between July 1, 2014 and October 31, 2014, a special tax of eight percent (8%), on all or part of any amount accrued, but not distributed in an individual retirement account.
ii. Inapplicability to taxable year 2014. The special rate will not apply to funds contributed to individual retirement accounts respective to the taxable year 2014 and thereafter.
iii. Early withdrawal penalty. Distributions of an individual retirement account to individuals before attaining 60 years old, for which the taxpayer prepaid the tax at 8% shall be subject to an early withdrawal penalty equal to thirty percent (30%) of the distributed amount, instead of the ten percent (10%) provided in Section 1081.02 of the Code.
iv. No early withdrawal penalty on distributions to pay the special tax. No penalty shall apply for distributions before the age sixty (60), provided that such distributions are to prepay the tax at the special rate of eight percent (8%).
m. Long term contracts
The Code was amended to allow developers of land or structures to be considered as having income from long term contracts, and use the accounting methods applicable to long term contracts, except for percentage of completion.
n. Alternative minimum tax (AMT) credit.
i. Elimination of the Creation of Future Credits. No new credits may be generated for taxable years beginning after December 31, 2013.
ii. Limitation of Credit. The AMT credit that can be claimed is limited to twenty five percent (25%) of the excess of the regular tax over the AMT.
o. Moratorium of tax credits
The Act amends the moratorium for the issuance of tax credits under Act No. 212-2002 by limiting the issuance of these credits, for fiscal years 2014-15 and 2015-16, to five million dollars ($5,000,000) the amount per project (before the amendment the limit was fifteen million dollars ($15,000,000) per project).
p. The earned income credit is eliminated for tax years commencing after December 31, 2013.
q. Reduction of the credit for persons of 65 years or more
In general, the credit is reduced for the years 2014 and thereafter to two hundred dollars ($200).
If a gross income test of the General Fund is met it could rise to four hundred dollars ($400) per credit.
r. New Deemed Dividend Tax of 10%
i. Imposition of Tax. For the tax years beginning after December 31, 2013, a ten percent (10%) tax is imposed upon deemed dividend amounts received by a foreign owner from a corporation (or entity taxable as a corporation).
ii. Applicability of the Tax. - The tax would be applicable only when it is considered that a deemed dividend is received by a foreign owner, which is defined as any person not resident of Puerto Rico or that is not engaged in trade or business in Puerto Rico, having, directly or indirectly, at least fifty percent (50%) of the interest, stock or units of a corporation.
iii. Amount subject to the tax. - The amount subject to the tax is deemed dividend, which is the lesser of:
1. the total average value of foreign assets as defined in Section 1062.13 of the Code, or
2. the earnings and profits (E&P) accrued at the end of the taxable year.
The following items are reduced from the E&P for purposes of this tax:
i. E&P from Act No. 73-2008 or any analogous law previous or subsequent (industrial incentives),
ii. E&P from Act No. 74-2010 or any analogous law; previous or subsequent (tourism),
iii. E&P from Act No. 83-2010, or any analogous law previous or subsequent (energy),
iv. E&P from a bona fide agriculture business, as long as the income is allowed as a deduction under Section1033.12 of the Code or is covered under the provisions of Act No. 225-1996.
v. E&P from international banking entities,
vi. The amount of the deemed dividend for which the tax imposed in this section has been paid.
iv. Exceptions. The tax does not apply to:
1. non-for-profit entities under Section 1101.01 if the PR Code.
2. an international insurer
3. an international financial entity.
4. any foreign corporation subject to the branch profit tax.
v. Obligation to pay or deposit the tax imposed by this section.
It is paid by the Corporation making the deemed dividend, with the income tax return of the year, in the corresponding established by the Secretary, on the due date of the return.
vi. Credit for taxes paid on deemed dividends
The tax imposed by this section will be creditable against the withholding tax applicable to non residents under sections 1062.08 and 1062.11 of the Code. Any unused credits under this section may be carried to future years.
s. Amendments to Branch Profit Tax (“BPT”)
This section is amended to exclude from computation of the BPT the following assets and liabilities: loans or credit transactions between offices or branches of a single entity, except for banks or when proceeds come from the sale or transfer of property.
This amendment excludes from the term “Assets in Puerto Rico” cash deposited in an institution engaged in the banking business or a brokerage house located outside of Puerto Rico that is not for the exclusive use of the branch in Puerto Rico.
t. Amendments to the license fee provisions for coin-operated machines and other amendments to the Games of Chance Act.
The Act amends increases the license fee from two thousand two hundred and fifty dollars ($2,250) to two thousand five hundred dollars ($2,500). It also includes other amendments to the license fee provisions and the Games of Chance Act to transfer certain the regulatory and enforcement powers from the Puerto Rico Treasury Department to the Tourism Company, among others.
u. Tax on alcoholic beverages
This Act adds the definition of finished products, which are the distilled spirits, wines or beers.
II. Amendments to Act No. 73-2008, better known as the "Economic Incentives Act for the Development of Puerto Rico” (Act 73)
a. Definition of Small and Medium Size Businesses [Section 2(i)]
The definition of small and medium size business was amended to establish that the requirement to be considered a small and medium enterprise (SME) of an average gross income limit of ten million dollars ($10,000,000) in the previous three (3) years, now is measured including the gross income of controlled group members.
Act 73 was also amended to include a definition of gross income, for purposes of the small and medium enterprise gross income test. The new definition of gross income includes sales of goods, products, and services; including all types of income, but without deducting the cost of goods or products sold.
b. Credit for Investment in Research and Development
i. The Act now incorporates a requirement in order to be entitled to the credit, that the exempt business must obtain, annually, a certificate issued by the Puerto Rico Industrial Development Company (PRIDCO) certifying the activities of the exempt business as eligible for research and development. This requirement was previously established by certain administrative pronouncement of PRIDCO.
1. The certificate must be requested on or before the filing date of the tax return, including extensions, of the corresponding taxable year for which the eligible investment was made.
2. The certification must be accompanied with the tax return for the entity to be able to take the credit.
ii. The credits that may be issued are now limited to three hundred million dollars ($300,000,000) in aggregate per year. Notwithstanding, the Executive Director, in those cases that may deemed necessary, in consultation with the Secretary of the Treasury, may certify credits in excess of such amount.
III. Amendments to Act No. 83-2010, better known as the "Green Energy Incentives Act of Puerto Rico."
Section 2.2 was amended to reduce the contributions to the Green Energy Fund. For fiscal years 2014-2020, the maximum amount paid to the Fund will be twenty million dollars ($20,000,000). Before this amendment, the maximum amount contributed to the Fund ranged from thirty million dollars ($30,000,000) to forty million dollars ($40,000,000) during the amended fiscal years.
If you have any questions in regards to the above, please do not hesitate to contact our offices so that we may explain the amendments to the provisions of the Code in more detail. Our address is: Fiddler González & Rodríguez, PSC, P.O. Box 363507, San Juan, PR 00936-3507. Fax (787) 754-7532. Our website is www.fgrlaw.com
***IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any United States federal tax advice in this communication (including any attachments) is not intended or written by Fiddler González & Rodríguez, P.S.C. to be used, and cannot be used, for the purpose of (i) avoiding any penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. **
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**©2014 Fiddler, González & Rodríguez, P.S.C. This Watch has been prepared by Fiddler, González & Rodríguez, P.S.C. for informational purposes only and does not constitute legal advice. This information does not create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers. Fiddler, González & Rodríguez, P.S.C. and its members assume no responsibility to inform you of additional changes in law or any other legal issues related to the matters advised in this e-mail.