In general a domestic Corporation means a corporation organized under the
Laws of the Commonwealth of Puerto Rico. Note that a limited liability company
defaults tax classification is a corporation. Thus, a limited liability company
created under Puerto Rico laws is taxed as a domestic corporation, unless
pass-through treatment is elected or otherwise mandated. For tax purposes, a
domestic corporation is one of the most favored vehicles for foreign business
since it provides certain promotional benefits and operates as a separate legal
entity for commercial law purposes. U.S. corporations, for example,
establishing a local presence through a domestic subsidiary are not, with some
exceptions and most notably the Subpart F income regime, subject to U.S.
taxation until profits are distributed or deemed repatriated.
A domestic Corporation is subject to
income taxes at a maximum rate of 30% on taxable income in excess of
$1,750,000. If certain economic, fiscal and budgetary thresholds of the
Government of Puerto Rico are met, then for taxable years 2014 onwards the
maximum corporate rate will be 25%.
In determining taxable income, the Corporation must take into consideration
all items of gross income on a worldwide basis regardless of whether or not the
income is effectively connected with the conduct of a trade or business in
Puerto Rico. A domestic Corporation is allowed to deduct its ordinary and
necessary expenses to the extent they are related to the operations. In
addition, a domestic Corporation would be entitled to deduct in the Puerto Rico
income tax return a reasonable allocation of overhead expenses incurred and
charged by the Parent Company or any Affiliate in a foreign country or the
United States to the extent they are directly related to the domestic
Corporation’s operations and subject to arm’s-length standard requirements. This
allocation is often challenged by the tax authority during an examination or
audit. Moreover, payments for services rendered outside Puerto Rico by a related
person are disallowed when computing the alternative minimum tax applicable to
A $750,000 deduction is available to a domestic Corporation in determining
the surtax component of its regular tax.
Dividends distributed by a domestic corporation to nonresident individuals,
foreign partnerships and corporate shareholders that are not engaged in a Puerto
Rico trade or business are subject to a 10% withholding tax upon distribution.
In the event of a shareholder that is a domestic Corporation or a foreign
corporation engaged in trade or business in Puerto Rico, no withholding is
imposed on dividend distributions. Such corporate shareholders will qualify for
dividend received deduction equal to 85% of the dividend received (100% in
certain cases), but the deduction may not exceed 85% of the shareholder’s
taxable income. Therefore, a foreign Parent Corporation that establishes an
office in Puerto Rico to provide management services to the domestic subsidiary
is not subject to the 10% withholding tax generally imposed on dividends paid to
a foreign corporation not engaged in trade or business in P.R. Under these
circumstances, the Parent Corporation income tax burden is limited to a
on the domestic subsidiary dividends.
To avoid triple taxation, said dividends are not subject to branch profit tax
in the hands of the foreign Parent Corporation. Dividends distributed by such
foreign Parent Corporation to its foreign stockholder would not be subject to
P.R. income and withholding taxes to the extent than the Parent Corporation's
Puerto Rico effectively connected income is less that 20% of its total gross
income for the three-year period ending with the close of the taxable year of
the Parent Corporation preceding the declaration of said dividend or
distribution, or for said part of said period as the corporation has been in
Long term capital gains recognized by a domestic Corporation on the sale or
exchange of capital assets qualify for a 15% tax rate.
During taxable year 2011 a domestic Corporation may elect to file the income
tax return for such year and each of the following four taxable years pursuant
to the provisions of the Puerto Rico Internal Revenue Code of 1994, as amended,
which otherwise has been repealed by the Puerto Rico Internal Revenue Code of
2011 now in effect. This election is irrevocable for those taxable years.
2013 Modifications to Income and Sales Taxes Regimes