The Tourism Development Act of 2010 (the “2010 TDA”) sets forth the public policy regarding the Puerto Rico tourism industry. In general, the 2010 TDA traces, but improves, the tax incentives regime of its predecessor legislation, the Tourism Development Act of 1993 (“1993 TDA”). Among the tax exempt eligible tourist activities are ownership and administration of hotels, condohotels, vacation clubs, tourist marinas and theme parks. New eligible activities are described further below.
Tourism Tax Exemption Benefits:
A. Income
- Tourist Activities Conducted in Vieques and Culebra – 100% exemption on (i) tourism development income and (ii) dividends, profits and liquidating distributions.
- Tourist Activities Conducted in Locations other than Vieques and Culebra – 90% exemption on (i) tourism development income and (ii) dividends, profits and liquidating distributions.
- Distributions out of tourism development income are taxed just once and they retain their nature and exempt character.
- Sale of Stock or Ownership Interest in a Tourism Business – 100% (Vieques and Culebra) 90% (other locations) if certain conditions are met.
- Additional Exemptions – 100% exemption from the alternative minimum tax, additional tax on corporations/partnerships, and the alternate basic tax on individuals.
- Withholding Tax and Fixed Tax on Royalties – 12% withholding tax on royalty payments made to foreign entities not engaged in trade or business in Puerto Rico for the local use of intellectual property related to tourist activities. Reduced 2.9% withholding tax on such royalties made to: (i) any entity or person not engaged in a trade or business in Puerto Rico that directly owns 50% or more of stock or ownership interest of the paying tourism business (a “Related Nonresident Person”); (ii) any entity or person not engaged in a trade or business in Puerto Rico that owns directly 80% or more of stock or ownership interest of a Related Nonresident Person (a “Controlling Holder”); or (iii) any entity or person not engaged in a trade or business in Puerto Rico which is 80% held (directly or indirectly) by a Related Nonresident Person or a Controlling Holder.
- Exemption on Certain Interest – 100% exemption from income and municipal license tax on interest, charges and other proceeds with respect to bonds, notes and other obligations of a tourism business for the development, construction, improvement or rehabilitation of a tourism business under the 2010 TDA, provided certain requirements are satisfied.
B. Property Taxes
90% exemption from municipal and state property (personal and real) taxes on properties dedicated to a tourist activity.
C. Municipal License Tax and other Municipal Taxes
New tourism businesses are 100% exempt from municipal license tax, excise and other municipal taxes with respect to their tourism development income, transactions, or events (or on the use) imposed by any municipal ordinance. The exemption for existing businesses is 90%.
D. Excise and Sales and Uses Taxes
Up to 100% exemption on excise taxes, sales and uses taxes imposed by the Puerto Rico Internal Revenue Code with respect to articles acquired or used by an exempt business related to a tourist activity. This exemption extends to articles acquired by a contractor or subcontractor to be used solely and exclusively by an exempt business in construction works related to a tourist activity.
E. Construction Excise Taxes
100% exemption from any tax, imposition, fee, license, excise, rate or tariffs levied by any ordinance for the construction of works to be dedicated to a tourist activity. This exemption also applies to contractors and subcontractors of an exempt business.
F. Volume of Business of Contractor and Subcontractor
For municipal license tax purposes, contractors and subcontractors that perform works for an exempt tourism business will determine their volume of business by deducting payments that they are obligated to make to subcontractors under the principal contract with the exempt business. This rule applies as well to subcontractors that employ other subcontractors. Certain certification requirements must be satisfied.
G. Tax Credits
50% of the tourism investment but not exceeding 10% of the total cost of the tourism project. The 2010 TDA provides a list of the expenditures counted toward the total cost of the project.
H. Exemption Periods
10 years. The exemption period may be extended for 10 additional years provided that the Tourism Company determines that the exemption is essential for the tourism industry based on the particular facts of the case, the nature of the facilities, the number of employees and reinvestment in the exempt business, among other factors.
I. Renegotiation of Concession
An exempt business under the 1993 TDA or its predecessor act may request a renegotiation of its tourism concession to enjoy the benefit of the 2010 TDA inasmuch as (i) it complies with the requirements of the 2010 TDA, including undertaking a substantial renovation; (ii) the Tourism Company determines that the renegotiation is in the best social and economic interest of Puerto Rico, subject to prior consent of the Treasury Department; and (iii) it surrenders the existing tourism concession.
Tourist Activities
The 2010 TDA includes the following new activities:
- (i) Agro-Accommodation – Accommodation facilities established in an agricultural exploitation with the purpose of lodging sojourners for contemplating nature and/or participating in activities related to agricultural or craft operations.
- (ii) Agro-Tourism – A group of activities specifically organized by a bona fide farmer complementary to its principal activities, to which the tourists are invited, and constitute “other services” for payment.
- (iii) Nautical Tourism – A group of services provided to tourists in contact with the water, including but not limited to: renting or chartering to tourists nautical tourism vessels for leisure, recreation or educational purposes, including excursions, renting small crafts, jet skis, sailboats or similar vessels to guests of a hotel, condohotel, vacation club and the like exempt businesses, and the operation of an integrated renting program of vessels.
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(iv) Medical Tourism – Medical facilities or installations accredited and certified in Puerto Rico that provide accommodations to patients and their companions that travel to Puerto Rico from other places with the intention of getting medical care and treatment.
All marinas in Vieques and Culebra will be deemed tourist marinas.
Tourism Activities conducted in Vieques and Culebra – 100% exemption on (i) tourism development income and (ii) dividends, profits and liquidating distributions.
