1. International Tax Treaties –The Basics – Puerto Rico FROM PRINCIPLES TO PLANNING

2. International Tax – The Basics Jerry De Córdova, CPA, Esq.

3. Puerto Rico Jurisdiction to Tax General Principles of Jurisdiction to Tax Taxation Based on Residence of Tax Person Residence of individual Place of incorporation Taxation Based on Source of Income Location of economic events Location of property Puerto Rico Taxes: The Basics

4. Principles of Puerto Rico Tax Jurisdiction Puerto Rico Resident Individuals & Corporations Taxable currently on worldwide income Relief under foreign tax credit regime Non-resident Corporations Gross withholding taxation of Puerto Rico-source income (29%) Net taxation of Puerto Rico-source business income Non-resident Individuals Taxation at a flat rate of : US Citizens -20%, Aliens- 29% Puerto Rico Taxes: The Basics

5. Residence of Individuals Bona fide Puerto Rico Residents Presumption of residency Individual present in Puerto Rico for at least 183 days during the year is presumed to be a resident. Residency Year: Income from sources without Puerto Rico is excluded from the taxpayer’s gross income solely to the extent it is attributable to the period before the establishment of the residence in Puerto Rico. Deductions allocable to excluded income are not deductible. Puerto Rico Taxes: The Basics

6. Residence of Individuals Nonresident US Citizens: Must file a return if the gross income from PR Sources (net of exemptions) exceeds $5,000. Are entitled to the same tax treatment as the residents of Puerto Rico. Entitled to deductions: Personal Deduction Exemptions Credit for Dependents Deductions not allocable to any particular of income are to be apportioned between Puerto Rico and non-Puerto Rico source income. Aliens are not entitled to deductions. Puerto Rico Taxes: The Basics

7. Residence of Individuals Nonresident US Citizens/Aliens: Withholding at source requirements: Puerto Rico Taxes: The Basics

8. Nonresident foreign corporations and partnerships: Generally subject to PR income tax on its gross income from PR sources at the following tax rates: A foreign corporation will be subject to the branch profit tax provision unless the foreign subsidiary derives 80% or more of its income from the Puerto Rico operations. Puerto Rico Taxes: The Basics

9. Foreign Tax Credit: Credit Subject to 2 limitations: Limited to qualifying taxes paid or accrued to the foreign country. Overall limitation The computed credit on the country-by-country basis may not exceed the qualified proportion of the total taxes that the net income from sources without Puerto Rico bears to the taxpayer’s entire net income. Net Income from PR Sources Net Income from PR Sources ________________________________________________ X PR Income Tax ________________________________________________ X PR Income Tax Net Income from All Sources Net Income from All Sources Excess foreign tax credits for a particular year are lost for either deduction or credit benefit. Puerto Rico Taxes: The Basics

10. Corporate Filing Requirements Puerto Rico Taxes: The Basics

11. Corporate Filing Requirements: Registration Puerto Rico Department of State: Foreign Corporation: Branch vs. subsidiary Authorization to do Business in Puerto Rico Close Corporation For Profit Corporation Limited Liability Company Professional Service Corporation Limited Liability Partnership Non-Profit Organization Puerto Rico Taxes: The Basics

12. Corporate Filing Requirements: Puerto Rico Department of State: Corporate Annual Report $150 due with the filing or extension of the return 60 day extension to file the return. Additional 30 day extension available ($30.00) Annual Fee $ 150 due on April 15 th Monthly interest charges of 1 ½ % Professional Corporation Annual Report Same as Corporate Annual Report Renewal Application of a Limited Liability Partnership Annual Renewal based on the original application filing date LATE FILING PENALTY = $750 Puerto Rico Taxes: The Basics

13. Corporate Filing Requirements: Registration Puerto Rico Treasury Department: Form SC 4809- Information of Identification Number – Organizations (Employers) 15 days after registration Sales and Use Tax Registration by each locality that is doing business in Puerto Rico Enacted Rate 7% ( 6% Treasury & 1% Municipality) Merchant Registry Certificate- Must be in display Licensing (i.e. Alcohol, Tobacco, etc.) Manufacturer Number Bonded Importer Number- Excise Taxes Puerto Rico Taxes: The Basics

14. Corporate Filing Requirements: Puerto Rico Treasury Department: Income Tax Annual Income Tax Return – Regular Corporations – Partnerships – Special Partnerships – Corporation of Individuals – Non-for Profit Corporations – Other Exempt Corporations – Corporations cover under Tax Exemption Grants – Individuals Income Tax Returns (Short or Long Form ) Maximum tax Rate – Corporations- 30% – Individuals – 33% Puerto Rico Taxes: The Basics

15. Corporate Filing Requirements: Puerto Rico Treasury Department: Income Tax Group of Related Corporations – Parent –Subsidiary – Brother-Sister – Combined Group Group of Related Entities – An entity that is part of a Group of Related Corporations – Considering the change in ownership percentage in the parent-subsidiary Group (From 80% to 50%) If the combined volume of business of the Related Group of Entities exceeds $3,000,000 each entity of the group is required to submit with the return consolidated or combined audited financial statements by a Puerto Rico licensed CPA. Puerto Rico Taxes: The Basics

16. Corporate Filing Requirements: Puerto Rico Treasury Department: Income Tax Exception to the Combined or Consolidated Financials Requirement: Each entity with Volume in excess of $1,000,000 must submit audited financial statements on a stand-alone basis. Such financials must include a note listing the related entities that are members of the group. Entities with a volume of business less than $1,000,000 are not required to file audited financials with the return. This is an annual determination made by the Puerto Rico Treasury Secretary. Puerto Rico Taxes: The Basics

17. Corporate Filing Requirements: Puerto Rico Treasury Department: Income Tax Monthly Filings or deposits: – Sales and Use Tax Return – Excise Tax Returns – Deposits of Payroll tax Quarterly Filing: – Payroll Tax Returns Other Filing – Annual Informative Returns for income subject and not subject to withholdings (Forms 480.6A, 480.6B, 480.6C, and 480.6D) Puerto Rico Taxes: The Basics

18. Corporate Filing Requirements: Municipality: Municipal License Tax- Is generally imposed on the gross volume of business realized by a company in a particular municipality. Commencement of Operation Notice: 30 days after the commencement of operation within a PR Municipality. Provisional Municipal License Certificate – will exempt the corporation from the payment of the tax for the semester corresponding to that in which such activity is commenced. – Within fifteen days of commencement of the next semester, the corporation has to file the declaration of volume of business and, at the same time, pay the corresponding license tax. Puerto Rico Taxes: The Basics

19. Corporate Filing Requirements: Municipality: Volume of Business: the gross income that is received or earned from the rendering of any service where the main organization keeps its offices. Volume in excess of $3,000,000 requires certified financial statements by a Puerto Rico licensed CPA. Declaration: – Based on taxpayer’s accounting year. – Must be filed on or before the fifth working day after April 15 with each municipality within which the company transacted business during such preceding year. – Tax Rates: » 1.5% in the case of financial institutions » and not in excess of.5% for all others The tax, is due by semester on July 1 and January 1 and is payable in advance within the first 15 days of each semester. Puerto Rico Taxes: The Basics

20. Corporate Filing Requirements: Personal Property Taxes: Self-assessed tax based on certain personal property (inventory, fixed assets and other) of the corporation. The assessment date is January 1, The value of the inventory owned by the corporation should be determined on an annual average basis. A personal property tax return must be filed on or before May 15 each year regardless of the accounting year of the taxpayer. If the volume of business regarding Puerto Rico operations exceeds $3,000,000, the property tax return must be reviewed by a Puerto Rico licensed CPA and accompanied by financial statements certified also by a Puerto Rico licensed CPA. Puerto Rico Taxes: The Basics

21. Corporate Filing Requirements: Sales and Use Tax: 7 % tax on consumption, use and storage of taxable items in Puerto Rico. All individuals and businesses making sales are required to register with each municipality and the Puerto Rico Department of Treasury to obtain a Merchant’s Registration Certificate and Exemption Certificates. Also, any merchant with a sales volume equal or greater than two hundred thousand ($200,000) dollars a year shall remit via electronic transfer the sales tax withheld and the return. Failure to register with the Puerto Rico Department of Treasury in the manner prescribed by Act No. 117 can result in penalties in the amount of ten thousand dollars ($10,000). Puerto Rico Taxes: The Basics

22. Corporate Filing Requirements: Payroll Taxes: Federal Social Security and Medicare Tax on Wages Federal Unemployment Puerto Rico Unemployment Each employer established in Puerto Rico must pay unemployment taxes for the first seven thousand dollars ($7,000) of salaries paid to each employee during the calendar year, if they have one or more employees during that period. Workmen’s Accident Compensation Insurance Insurance for Non-Occupational Disability Puerto Rico Taxes: The Basics

23. Individual Investors Act 22 of January 27, 2012 Puerto Rico Taxes: The Basics

24. Individual Investors- Act 22-2012 Objective: Promote that wealthy individual investors establish their residency in Puerto Rico. – Individual Investor Domicile- Presumption of the 183 days Has not been a resident of Puerto Rico within the last 15 years. Will become a Puerto Rico Resident prior to December 31, 2035. Puerto Rico Taxes: The Basics

25. Individual Investors- Act 22-2012 Benefits: 100% income tax exemption on: Interest and dividend income (from all sources) Including: Registered Investment Companies & International bank entities Requirement: Income must be earned by the individual after becoming a Puerto Rico resident and before January 1, 2016. Net Capital Gain: Preferential tax rate of 5% Related to the appreciation in value of the investment held by the individual if: The appreciation occurs prior to the relocation to Puerto Rico & the gain recognized after the 10 year of becoming a Puerto Rico Resident an prior to January 1, 2036. Appreciation after the individual becomes a Puerto Rico Resident: 100% exempt if recognize prior to January 1 st, 2036. Puerto Rico Taxes: The Basics

26. To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. IRS Circular 230 Disclosure

27. Questions?

28. Contact Information Jerry De Córdova, Partner A QUINO D E C ÓRDOVA A LFARO & C O. LLP jdecordova@adacpa.com