House Bill 1544—signed by the governor as Act 257 on December 10, 2018— introduces changes to the taxation of corporations and partnerships as well as definitions and information returns. Unless otherwise noted below, the changes will apply to tax years beginning after December 31, 2018.
The legislative changes for the taxation of individuals are summarized separately in TaxNewsFlash.
The corporate income tax rate is reduced from 20% to 18.5%. Thus, including a surtax, the highest income tax rate will be 37.5% (instead of 39%).
Alternative minimum tax (AMT)
Corporations with a volume of business of $3 million or more will be subject to a 23% AMT rate instead of the 30% rate under the law in effect prior to 2019. For corporations with less than $3 million in volume of business, the AMT will be the greater of $500 or 18.5%.
There are new limitations on the allowable expenses to compute the alternative minimum taxable income. Only the payments that are directly related to the trade or business and that are duly reported in informative returns will be allowed as deductions. However, taxpayers that file audited financial statements or have an “agreed under procedure” with the filing of the income tax return may calculate the alternative minimum taxable income claiming all ordinary and necessary expenses.
Optional tax for corporations engaged in rendering services
Corporations whose source of income substantially arises from the rendering of services subject to withholding may elect to pay their income tax at a flat rate on gross income, as noted in the following table:
|If gross income is:
||The tax will be:
|Not greater than $100,000
|In excess of $100,000 but not more than $200,000
|In excess of $200,000 but not more than $300,000
|In excess of $300,000 but not more than $400,000
|In excess of $400,000 but not more than $500,000
|In excess of $500,000
Credits and deductions
Act 257 includes measures concerning the following changes for tax credits and deductions for corporate taxpayers:
Extension of time to file the income tax return
For tax years beginning after December 31, 2016, the automatic extension is expanded from three months to six months.
Audited financial statements (AFS)
Taxpayers required to file AFS will have to submit an “Uncertain Tax Positions Schedule” with the return explaining any uncertain tax position taken under U.S. GAAP.
Net operating loss (NOL) limitation
The limitation percentage on the NOL carryover deduction is increased from 80% to 90%. A corporate partner holding 50% or more of the capital interest or profits from the partnerships cannot claim an NOL deduction against its distributable share of net income of such partnership. The limitation on the distributable net loss of a passthrough entity against the net distributable share of net income from other passthrough entities increases from 80% to 90%.
Limitation on allowance of partner’s share of loss—charitable contributions and foreign taxes
The amount allowed as a partner’s loss is limited to the adjusted basis of the partner’s interest in the partnership as of the close of the tax year in which the partnership loss occurred. Under the new law, the determination of any loss will be made considering the partner’s allocable share of charitable contributions or foreign tax expenses. As an exception, in the case of a charitable contribution of property having a fair market value exceeding the adjusted tax basis, the basis limitation will not be considered over the partner’s distributable share of such excess.
The sale or exchange of an interest in the partnership equal to 50% or more will no longer be considered a technical termination.
Substantial built-in loss in the transfer of partnership interest
A prior provision in the Puerto Rico tax law allowed an adjustment to the basis of partnership property upon the sale or exchange of a partnership interest, provided that the partnership had a “Section 1075.04 election” in effect, or when the partnership had a substantial built-in loss. The prior tax law established that a partnership had a substantial built-in loss with respect to the transfer of an interest in a partnership if the partnership's adjusted basis in all of its property exceeded the fair market value of such property by more than $250,000.
The new law (Act 257) expands the application of the substantial built-in loss by adding that a substantial built-in loss also exists if the transferee partner would be allocated a loss in excess of $250,000 upon a hypothetical disposition by the partnership of all the partnership’s assets in a fully taxable transaction for cash equal to the assets’ fair market value, immediately after the transfer of the partnership interest.
Sale of partnership interest
Gain on the sale of partnership interests after December 31, 2018, will be treated as Puerto Rico-source income to the extent a deemed sale of all assets at fair market value, regardless of the residence of the selling partner, generates Puerto Rico-source income. If the selling partner is a non-resident individual or foreign corporation not engaged in trade or business in Puerto Rico, the purchaser will be required to withhold a 15% income tax from the portion of the gain constituting Puerto Rico-source income.
Limited liability company (LLC)
Act 257 provides that only foreign LLCs that are treated as partnerships under foreign laws must be treated as partnerships for Puerto Rico income tax purposes. Thus, this allows Puerto Rico LLCs to be treated differently for Puerto Rico and non-Puerto Rico tax purposes. Also, the Act provides that the LLC election in connection with the tax treatment of the entity in Puerto Rico will be made at the time of the filing the income tax return of the year in which the LLC adopts the tax treatment.
Act 257 amends the definition of “large taxpayer” to include international insurers within the current requisite of insurance industry. Also, the Act clarifies that the aggregate volume of all related entities, as defined by the Puerto Rico Code, will be considered in determining whether an entity has a volume of business of $50 million or more for purposes of being considered to be a “large taxpayer.” Under a new measure, a taxpayer may request to be excluded from the category of “large taxpayer” by filing a petition for an Administrative Determination.
Engaged in industry or business in Puerto Rico
The term “engaged in trade or business in Puerto Rico” excludes the trading of securities by the taxpayer through a resident agent / broker / custodian or any other resident independent agent. The exclusion only applies if the taxpayer does not have an office in Puerto Rico to conduct such trading operations.
Group of related entities
Act 257 expands the definition of “group of related entities” to include LLCs, partnerships, special partnerships, and corporations of individuals.
Extension of time to file returns
For tax years beginning after December 31, 2016, the Act increases the period for the automatic extension of time to file a corporation or partnership income tax return from three months to six months. The information returns for partners of a partnership will be extended to six months if the entity has been granted an automatic extension of time to file its partnership information tax return.
Withholding taxes and informative returns
Note that the federally created Financial Oversight and Management Board (FOMB) has expressed concerns related to the fiscal balance of this measure as required by the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). Specifically, FOMB has requested that the government provide analysis regarding the impact of some provisions related to the licensing of video lottery machines (not discussed above) before certifying that the legislation is consistent with the approved fiscal plan. FOMB stated:
We reserve the right to take such actions as we consider necessary, consistent with Section 204(a)(5) [of PROMESA], including preventing the enforcement or the application of Articles 132 through 163 [related to the video lottery machines] of the New Tax Law. We will endeavor to keep you abreast of any implications on the applicability of this law resulting from any actions the FOMB takes in this respect.
For more information, contact a KPMG tax professional in Puerto Rico:
Rolando Lopez | +1 (787) 622-5340 | firstname.lastname@example.org
Carlos Molina | +1 (787) 622-5311 | email@example.com
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