I.     INTRODUCTION

The Economic Incentives for the Development of Puerto Rico Act, Act No. 73 of May 28, 2008 (“Act 73”), is Puerto Rico’s most recent incentive law, substituting the Tax Incentives Act of 1998.  With this law, Puerto Rico has once again jumped to the forefront in offering world-class business conditions and benefits for manufacturers and service providers in Puerto Rico.

    II.     ECONOMIC INCENTIVES FOR THE DEVELOPMENT OF PUERTO RICO ACT

Beginning on July 1, 2008, Act 73 allows for a wide array of tax incentives and credits that enable local and foreign companies to operate successfully in Puerto Rico enjoying the benefits of operating within a U.S. jurisdiction, while taking advantage of a foreign tax structure since for U.S. tax purposes, Puerto Rico is treated as a foreign jurisdiction

Some of the provisions of the new law include:

• 4% fixed income tax rate on net taxable income
• Pioneer industries’ tax rate of 0% or 1%
• Combined floor of 3% for local business
• Credit of up to $5,000 per job created during the first year of operation, if the operation is located in the municipalities of Vieques and Culebra
• Up to 50% credit of qualified R&D expenses
• Credit for purchase of locally manufactured products
• Up to 10% credit of industrial energy consumption
• Special deductions for investment in structures, machinery and equipment
• Infrastructure incentives
• 90% exemption for personal and real property tax and 60% exemption for municipal taxes
• Training incentives
• Competitive financing options

  III.     ELIGIBLE BUSINESSES

Various types of business operations are eligible for the benefits provided under Act 73.  The first category of eligible businesses is industrial units dedicated to manufacturing on a commercial scale.  The second category of eligible businesses is services units for services for markets outside Puerto Rico, including the United States.  These designated services include:

• Commercial art and graphic services
• Assembling, packaging and bottling operations
• Trading companies
• Custom made software
• Marketing centers
• Certain educational services and training
• Medical /hospital services (reference labs and others)
• Strategic planning, distribution, and logistics
• Shared services centers
• Air & maritime ports facilities
• Electronic processing
• Repair and maintenance of air and maritime vessels, and machinery and equipment
• Engineering and architectural design and related services
• Consulting -  economic, environmental, technological, scientific, management, human resources, audit
• Corporate headquarters
• Mercantile distribution (include exporting of locally manufacturing goods)
•  Investment banking and other financial services
• Advertising and public relations

Also included under service units for purposes of Act 73 are businesses providing services in Puerto Rico to manufacturing units that belong to “Designated Clusters.”  Designated clusters are sectors or industries designated by the Executive Director as a high economic impact cluster.  In addition, services rendered in Puerto Rico by key suppliers of exempt manufacturers are also eligible for the benefits of Act 73. These key services include services that allow the manufacturer to concentrate its activities in the areas of its core competence.  Act 73 lists the following activities as qualifying key supplier services:

• Specialized storage
• Inventory management
• Logistics
• Insertion and distribution of printed material.
• Sterilization services for equipment, instruments, “clean rooms”
• Project engineering
• Quality control
• Validation
• Calibration and maintenance of equipment
• Repair and remanufacture of products
• Specialized training
• Development and reproduction of educational programs
• Programming

Finally, Act 73 includes the following activities as eligible business:

—  Leasing of personal and real property to exempt entities (property dedicated to industrial development)

—  Research and development labs

—  Breeding of animals for experimental and medical purposes

—  Satellites

—  Licensing of intangible property developed or acquired by the exempt business

—  Development of software reproduced on a commercial scale

—  Assembling of equipment for the generation of energy from renewable sources

—  Production of energy, whether or not on a commercial scale, using renewable sources

—  Recycling activities (partial or total)

—  Purified bottled water

—  Hydroponics, aquaculture, agricultural biotechnology, and milk pasteurization

—  Construction of certain affordable housing projects

—  Strategic projects, including:

—  Cleaning, recovery, conversion, and restoration of closed landfills

—  Construction of reservoirs and water dams and related infrastructure, water treatment plants

—  Construction of plants for the production of energy using renewable sources

—  Mass transit systems

—  Value added activities in various ports:

—  Las Américas

—  Roosevelt Roads

—  Mayagüez

—  Yabucoa

—  San Juan

—  Guayama

  IV.     TAX INCENTIVES

Act 73 provides for a 4% flat income tax rate imposed on net taxable income from eligible activities.  Additionally, a 12% royalty tax rate is imposed on amounts paid by eligible businesses to other entities.  However, the eligible business is allowed to make a non-revocable election that would subject the eligible business to an 8% flat income tax rate in exchange for a reduction of the royalty tax rate to 2%.  This irrevocable election must be made before commencement of the exemption period and approval must be secured.  Please note that eligible business that enjoys a lower tax rate under a previous tax incentives act can maintain its current tax rate if certain conditions are met.

Other income tax rates imposed by Act 73 are as follows:

While Act 73 does away with most special deductions provided for under previous tax acts, it does provides for a number of tax credits that the eligible business can claim, including:

• Purchase of products manufactured in Puerto Rico
• Job creation
• Research and Development (“R&D”)
• Industrial investment
• Credit for technology transfer
• Credit for investment in strategic projects
• Energy cost of energy
• Energy generation equipment

In regards to municipal and other special taxes, Act 73 provides similar benefits to previous tax incentives acts, including:

Any tax grant issued pursuant to Act 73 shall be for a 15-year period, generally from the date of application.  However, Act 73 does provide for flexibility in establishing of date of commencement of operations for exemption purposes similar to those under prior tax incentives acts.

    V.     APPLICATION PROCEDURE

Applications for tax grants under Act 73 must be submitted to the Office of Industrial Tax Exemption, which is now under the Department of Economic Development and Commerce.  Act 73 also states that the time frame within which to approve an application for tax exemption will be 80 days, which should results in a more streamlined application process than under previous tax incentives acts.  However, regardless of the time it takes to obtain the tax grant, it will be effective retroactively to the date of application. 

Once approved, the grant can only be questioned by the governor of Puerto Rico and the Secretary of Economic Development.  However, the Puerto Rico Industrial Development Company (“PRIDCO”) will be responsible for carrying out compliance audits every two years.  Act 73 became effective as of July 1, 2008 and does not have an expiration date.

March 2009

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By Ángel Marrero-Murga

Admitted in the Commonwealth of Puerto Rico,

U.S. Court of Appeals, First Circuit

Senior Associate of Goldman Antonetti & Córdova, P.S.C.