Payments for services rendered in Puerto Rico

In general, payments made by the Government of Puerto Rico or any person in the conduct of a trade or business or for the production of income in excess of $500 to another person (individual or entity) for services performed within Puerto Rico are subject to a ten percent (10%) withholding. The amount withheld should be deposited with the Puerto Rico Treasury Department on or before the fifteenth (15) day of the month following the close of the month in which the tax was deducted. (Form 480.9A).

The following payments are exempted from this requirement:

  1. Payments made to hospitals, clinics, terminal patient homes, homes for the elderly and institutions for the disabled. The term “hospital or clinic” does not include the rendering of laboratory services, except when the laboratory forms an integral part of a hospital or clinic.
  2. Payments made to organizations that are exempt pursuant to the provisions of Section 1101.01 of the 2011 Internal Revenue Code of Puerto Rico (Code).
  3. Commission payments made to direct salespersons for the sale of consumer products. Direct salespersons are defined as an individual engaged in the sale or solicitation for sales, of use and consumer goods.
  4. Payments made to contractors or subcontractors for construction work. The term “construction work” does not include services for architecture, engineering, design, consulting and other services of a similar nature.
  5. Payments for services rendered by nonresident individuals or foreign corporations or partnerships that are not involved in an industry or business in Puerto Rico that are subject to the withholding requirements of Sections 1062.08  and 1062.011 of the Code.
  6. Payments of salaries subject to withholding under Section 1062.01 of the Code.
  7. Payments made to the Government of Puerto Rico, including its agencies, instrumentalities, public corporations and political subdivisions.
  8. Payments for services to individuals during the first three years of their commencement of rendering the service activities.
  9. Payments made to bona fide farmers that qualify for the deduction under Section 1023(s) of the Code.
  10. Payments made directly, or through an agent or representative, to an air or maritime carrier (eligible carrier). Eligible carrier is defined as a person whose principal trade or business is the air or maritime transportation or telephone communication services between Puerto Rico and other destination outside Puerto Rico.
  11. Payments made by an eligible carrier to a nonprofit entity engaged in the business of bookkeeping, registering, reporting and collecting sales for air or maritime transportation tickets and other related services, on behalf of or for the benefit of such eligible carrier.
  12. Payments for ecclesiastic services rendered by priests or other ministers of the gospel duly authorized or ordained, including Hebrew rabbis.
  13. Payments made to hospitals, clinics, clinical laboratories, homes for terminally ill patients, nursing homes and institutions for the disabled.

In the event that payments include both services and other activities (i.e., travel expenses, machinery and spare parts), the service provider should segregate the amounts on the bill in order for the recipient to determine the appropriate withholding amount.

For purposes of this withholding, services do not include insurance contracts, leasing of personal or real property, printing, sale of newspapers, magazines or other publications (including ad placements), and radio or television contracts.

Any in-kind payment is considered a payment for these purposes. Therefore, a person that transfers property in exchange for services must deposit the amount of the tax that would be withheld in the same manner as if a cash payment was made. The same obligation to deposit the tax arises when two persons provide services to each other.

The Code also provides that the withholding requirement may be reduced to a tax withholding of 6% in the case of payments for services to corporations that are current in their tax responsibilities with the Puerto Rico Treasury Department. If the corporation also has a volume of business of $1 Million or more and if other conditions are met, the withholding is eliminated, thus payments are not subject to the 10% withholding tax. In general, the corporations wanting to enjoy  either partial or total relief must obtain a corresponding certificate from the Puerto Rico Treasury Department (every calendar year) after presenting evidence that they have filed all their returns and they have no outstanding debts with the Puerto Rico Treasury Department.

The amounts withheld or deposited are creditable against the income tax liability of the service provider. An annual reconciliation statement (Form 480.6B.1) must be filed to report the payments made during the calendar year to each service provider, on or before February 28 of the following calendar year and a copy should be given to the service provider. Also, a quarterly expense reconciliation return must be filed. If for any reason, the informative return is not received by the service provider, the amounts withheld by the payor may still be claimed as a credit, given a sworn statement is included with their tax return. Such statement must include: the payor’s name, address, E.I.N., telephone number, amounts received and the corresponding tax withheld.

Other Salient Withholdings
Distributable share of partnership’s income if the partner is an individual, estate or trust. 30%
Distributable share of partnership’s income if the partner is a corporation. 30%
Distributable share of special partnership’s income if the partner is a domestic corporation or a resident foreign corporation. 30%
Distributable share of special partnership’s estimated net income if the partner is a resident individual, estate or trust. 30%
Distributable share of special partnership’s income if the partner is a nonresident alien individual, estate or trust. 33%
Proportional share of the estimated net income of a corporation of individuals if the shareholder is a resident individual. 30%
Dividend distributions to resident individuals or nonresident U.S. Citizens from domestic corporations and certain resident foreign corporations. 15%
Indemnification payments under a court sentence or extrajudicial claim. 10%
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