Act 60: Puerto Rico Tax Incentives

Puerto Rico's unique structure makes it a part of the US system but gives it autonomy over its own financial affairs. This allows it to grant unique incentives for investors.

All acts and incentives were combined into one act, Act 60, in July 2019. Act 60 has a number of chapters of incentives covering various aspects of the  economy, as well as sections on tax credits.

This is not intended as legal or tax advice. We are not accountants or lawyers. We do our best to give you enough information to get started and recommend you check everything with licensed professionals. If you are aware of any errors on the site, please let us know.

Chapter 4: Incentives for Financial and Insurance Services

SUBCHAPTER A – EXEMPTION ELIGIBILITY

Section 2041.01.- International Financial Entities.

An International Financial Entity shall be deemed to be an Eligible Business to apply for the benefits of this Chapter, insofar as it is any Entity incorporated or organized under the laws of Puerto Rico, the United States, or a foreign country, or a Unit of such Entity, authorized to do business in Puerto Rico, provided that it complies with the provisions of Subchapter D of this Chapter and the “International Financial Center Regulatory Act” applicable to said business.

Section 2041.02.- International Insurers, Segregated Assets Plans, and International Insurer Holding Companies.

Any International Insurer, Segregated Assets Plan, or International Insurer Holding Company shall be deemed to be an Eligible Business to apply for the benefits of this Chapter, insofar as it is any Entity incorporated or organized under the laws of Puerto Rico, the United States, or a foreign country, or a Unit of such Entity, authorized to do business in Puerto Rico, provided that it complies with the provisions of Subchapter D of this Chapter and Chapter 61 of the Insurance Code.

Section 2041.03.- Private Equity Funds and Puerto Rico Private Equity Funds.

A Private Equity Fund or a Puerto Rico Private Equity Fund shall be deemed to be an Eligible Business to apply for the benefits of this Chapter, provided that it complies with the provisions of Subchapter D of this Chapter that apply to said funds.

Section 2041.04.- Reserved.

Reserved.

SUBCHAPTER B – TAX BENEFITS

Section 2042.01.- International Financial Entities.

(a) Income tax.-

(1) The income derived by International Financial Entities holding a Decree granted under this Chapter, from the conduct of the activities or transactions allowed, pursuant to this Chapter, shall be subject to a four percent (4%) flat preferential income tax rate, in lieu of any other income tax, if any, imposed by the Puerto Rico Internal Revenue Code or any other law, except as provided in paragraph (2) of this Section.

(2) In the case of International Financial Entities operating as a bank Unit, the net income, computed in accordance with the provisions of Section 1031.05 of the Puerto Rico Internal Revenue Code, derived by International Financial Entities from the activities allowed by the “International Financial Center Regulatory Act” in excess of twenty percent (20%) of the total net income derived in the Taxable Year by the bank for which it operates as a Unit (including the income derived by such Unit) shall be subject to the tax rates established in the Puerto Rico Internal Revenue Code for corporations and partnerships.

(3) The interest, finance charges, dividends, or distributive shares in partnership interests earned by International Financial Entities holding a Decree granted under this Chapter and that comply with the provisions of the “International Financial Center Regulatory Act” shall not be treated as gross income from sources in Puerto Rico for the purposes of paragraphs (1) and (2) of subsection (a) of Section 1035.01 of the Puerto Rico Internal Revenue Code.

(4) The provisions of Section 1062.08 of the Puerto Rico Internal Revenue Code, which require the withholding of income taxes at the source in the case of payments made to Foreign Persons who are individuals, shall not apply to interest, finance charges, dividends, or distributive shares in partnership interests received from International Financial Entities holding a Decree granted under this Chapter and that comply with the provisions of the “International Financial Center Regulatory Act.”

(5) The provisions of Section 1062.11 of the Puerto Rico Internal Revenue Code, which require the withholding of income taxes at the source in the case of payments made to foreign corporations and partnerships not engaged in trade or business in Puerto Rico, shall not apply to interest, finance charges, dividends, or distributive shares in partnership interests received from International Financial Entities holding a Decree granted under this Chapter and that comply with the provisions of the “International Financial Center Regulatory Act.”

(6) The income derived by Foreign Persons who are individuals consisting of interest, finance charges, dividends, or distributive shares in partnership interests received from the “International Financial Center Regulatory Act” shall not be subject to the tax imposed under Section 1091.01 of the Puerto Rico Internal Revenue Code.

(7) The income derived by a foreign corporation or partnership consisting of interest, finance charges, dividends, or distributive shares in partnership interests received from International Financial Entities holding a Decree granted under this Code and that comply with the provisions of the “International Financial Center Regulatory Act,” shall not be subject to the tax imposed under subparagraph (A) of paragraph (1) of subsection (a) of Section 1092.01 of the Puerto Rico Internal Revenue Code.

(8) The provisions of Section 1092.02 of the Puerto Rico Internal Revenue Code shall not apply to International Financial Entities holding a Decree granted under this Chapter and that comply with the provisions of the “International Financial Center Regulatory Act.”

(9) Any Domestic Person who is a shareholder or partner of an International Financial Entity holding a Decree granted under this Chapter and that complies with the provisions of the “International Financial Center Regulatory Act” shall be subject to a six percent (6%) tax on the distribution of dividends or benefits of the net income of said International Financial Entity, including the alternate basic tax and the alternative minimum tax, insofar as they have been subject to the flat income tax rate provided in paragraph (1) of this subsection.

(b) Municipal Taxes and other Municipal Taxes.- The International Financial Entities shall have a fifty percent (50%) exemption from the municipal license taxes imposed under the “Municipal License Tax Act,” as well as any other tax, levy, fee, license, excise tax, duty, or tariff as provided under the “Autonomous Municipality Act.”

(c) Real and personal property tax exemption.- The International Financial Entities shall have a seventy-five percent (75%) exemption from the municipal property taxes imposed under the “Municipal License Tax Act,” which includes the real and personal property, tangible and intangible, belonging to such International Financial Entity.

Section 2042.02.- International Insurers and International Insurer Holding Companies.

(a) Income Taxes.-

(1) Every International Insurer holding a Decree granted under this Code shall be subject to a four percent (4%) tax on the amount of its net income in excess of one million two hundred thousand dollars ($1,200,000.00) computed without taking into account the exemption provided in the third paragraph of this subsection and without including for these purposes the income from Segregated Asset Plans that the International Insurer may have established.

(2) Likewise, every Segregated Asset Plan of an International Insurer other than a Class 5 Authority, as such term is defined in Section 61.020 of the Insurance Code, shall be subject to a four percent (4%) tax on the amount of its net income in excess of one million two hundred thousand dollars ($1,200,000.00), which shall be paid exclusively with the funds of such Segregated Asset Plan. The net income shall be computed as if the Segregated Asset Plan were an International Insurer. The Secretary of the Treasury shall prescribe by regulations, circular letter or other administrative determination or general communication, the forms or returns to be filed with respect to the aforementioned taxes. In the case of International Insurers with Segregated Asset Plans subject to taxation, the International Insurer shall report and pay the tax owed by each one of said Segregated Asset Plans.

(3) Except as provided in paragraphs (1) and (2) of this subsection, the income derived by the Segregated Asset Plan, the International Insurer, or by an International Insurer Holding Company that complies with Section 61.040 of the Insurance Code shall not be included in the gross income of such Entities or Segregated Asset Plans and shall be exempt from the taxes imposed under Sections 1000.01 et seq. of the Puerto Rico Internal Revenue Code. Income derived by the International Insurer or by an International Insurer Holding Company that complies with Section 61.040 of the Insurance Code by reason of the liquidation or dissolution of its operations in Puerto Rico shall be treated as income derived from the operations allowed both under this Chapter and the “International Insurers Act,” thus shall receive the same treatment, and shall not be included in the gross income of such Entities.

(4) The income derived from dividends and profit sharing, or in the case of a partnership, distributions in total or partial liquidation, or other income items similar thereto distributed or paid by an International Insurer, a Segregated Asset Plan, or an International Insurer Holding Company that complies with Section 61.040 of the Insurance Code, shall be exempt from taxation pursuant to Sections 1000.01 et seq. of the Internal Revenue Code and from the payment of municipal license taxes imposed by the “Municipal License Tax Act.”

(5) Amounts received by a Foreign Person not engaged in trade or business in Puerto Rico as benefits or interest of any kind under a life insurance or annuity contract issued by an International Insurer, shall be exempt from income taxes in accordance with Sections 1000.01 et seq. of the Puerto Rico Internal Revenue Code and from the payment of municipal license taxes pursuant to the “Municipal License Tax Act.”

(6) Except as provided in paragraphs one (1) and two (2) of this subsection, the International Insurer or International Insurer Holding Company that complies with Section 61.040 of the Insurance Code shall not be required to file corporate, partnership, or insurance company tax returns, as provided in Sections 1061.02, 1061.03, and 1061.12 of the Puerto Rico Internal Revenue Code. An International Insurer or an International Insurer Holding Company that complies with Section 61.040 of the Insurance Code and is organized as a corporation of individuals, pursuant to the Puerto Rico Internal Revenue Code, shall not be required to file the returns and reports required under Section 1061.07 of said Internal Revenue Code. However, an International Insurer Holding Company that complies with Section 61.040 of the Insurance Code shall submit the certification required under Section 61.040(6) of the Insurance Code to the Secretary of the DEDC, the Insurance Commissioner, and the Secretary of the Treasury.

(7) The provisions of Section 1062.08 of the Puerto Rico Internal Revenue Code that impose the requirement to deduct and withhold at the source the income tax on payments made to Foreign Persons who are individuals shall not apply to an amount received on account of benefits or interests of any kind under a life insurance or annuity contract, or the interest (including original issue discount, letters of credit, and other financial guarantees), dividends, partnership interest, distributions in total or partial liquidations, or other similar income items received from an International Insurer or an International Insurer Holding Company, as applicable, that complies with Section 61.040 of the Insurance Code, provided that these individuals are not engaged in trade or business in Puerto Rico.

(8) The provisions of Section 1062.10 of the Puerto Rico Internal Revenue Code that impose the requirement to deduct and withhold at the source the income tax on payments made for an interest attributable to shareholders who are Foreign Persons on the income of a corporation of individuals shall not apply with respect to the attributable interest of the shareholders who are Foreign Persons of an International Insurer, or an International Insurer Holding Company that complies with Section 61.040 of the Insurance Code.

(9) The provisions of Section 1062.11 of the Puerto Rico Internal Revenue Code that impose the requirement to deduct and withhold at the source income tax on payments made to foreign corporations or partnerships not engaged in trade or business in Puerto Rico shall not apply to the amount of any benefit or interest of any kind received under a life insurance or annuity contract or the interest (including the original issue discount, letters of credit, and other financial guarantees), dividends, partnership interest, distributions in total or partial liquidations, or other similar income items, received from an International Insurer or an International Insurer Holding Company that complies with Section 61.040 of the Insurance Code.

(10) The income derived by a Foreign Person who is an individual, not engaged in trade or business in Puerto Rico, on account of benefits or interest received under a life insurance or annuity contract or interest (including the original issue discount, letters of credit, and other financial guarantees), dividends, partnership interests, or other similar income items, received from an International Insurer or an International Insurer Holding Company that complies with Section 61.040 of the Insurance Code, shall not be subject to the payment of the taxes imposed under Section 1091.01 of the Puerto Rico Internal Revenue Code.

(11) The income derived by a foreign corporation not engaged in trade or business in Puerto Rico, on account of benefits or interest received under a life insurance or annuity contract or interest (including the original issue discount, letters of credit, and other financial guarantees), dividends, partnership interest, or other similar income, received from an International Insurer or an International Insurer Holding Company that complies with Section 61.040 of the Insurance Code, shall not be subject to the taxes imposed under Section 1092.01 of the Puerto Rico Internal Revenue Code.

(12) The income derived by an International Insurer shall not be subject to the taxes imposed under Section 1092.02 of the Puerto Rico Internal Revenue Code.

(13) None of the provisions of this Section shall be construed as to limit the powers of the Secretary of the Treasury to apply the provisions of Section 1040.09 of the Internal Revenue Code to an International Insurer or an International Insurer Holding Company that complies with Section 61.040 of the Insurance Code.

(14) The provisions of Sections 1111.01 through 1111.11 of the Puerto Rico Internal Revenue Code shall not apply to International Insurers.

(b) Estates and Gifts.-

(1) For purposes of Section 2010.01 et seq. of the Internal Revenue Code, the value of any amount payable by an International Insurer under a life insurance or annuity contract to a Foreign Person who is an individual, shall be exempt from the estate and gift taxes imposed under said Sections. Any Stock or partnership interest certificate of a partner of an International Insurer or an International Insurer Holding Company that complies with Section 61.040 of the Insurance Code which are owned by a Foreign Person who is an individual, and any bonds, notes, or other debt obligations of an International Insurer or an International Insurer Holding Company that complies with Section 61.040 of the Insurance Code that are owned by a Foreign Person who is an individual, shall be exempt from the estate and gift taxes imposed under said Sections.

(c) Municipal Licenses and other Municipal Taxes.-

(1) International Insurers or International Insurer Holding Companies that comply with Section 61.040 of the Insurance Code shall have a fifty percent (50%) exemption from the municipal license taxes imposed under the “Municipal License Tax Act,” as well as from any tax, levy, fee, license, excise tax, duty, or tariff as imposed under the “Autonomous Municipality Act.”

(d) Real and Personal Property Tax.-

(1) The real and personal property of an International Insurer or International Insurer Holding Company that complies with Section 61.040 of the Insurance Code shall have a seventy-five percent (75%) exemption from the payment of real and personal property taxes as imposed under the “Municipal Property Tax Act.”

Section 2042.03.- Private Equity Funds and Puerto Rico Private Equity Funds.

(a) Income Tax- The provisions applicable to partners of a partnership, as provided by Chapter 7 of Subtitle A of the Puerto Rico Internal Revenue Code, shall apply to Accredited Investors of a Private Equity Fund and a Puerto Rico Private Equity Fund (including taxable investors who have not contributed money or property in exchange for proprietary interests of said funds and who have an interest in fund profit). The Private Equity Fund and the Puerto Rico Private Equity Fund shall comply with all the information and tax withholding requirements provided for in the Puerto Rico Internal Revenue Code.

(1) Private Equity Fund and Puerto Rico Private Equity Fund.

(i) Income- A Private Equity Fund and Puerto Rico Private Equity Fund, as the case may be, shall be treated for tax purposes as a partnership under the applicable rules of partnerships in Chapter 7 of the Puerto Rico Internal Revenue Code, in which case it shall be understood that all references made to partnerships taxable under Chapter 7 of the Puerto Rico Internal Revenue Code include Private Equity Funds and Puerto Rico Private Equity Funds.

(2) Accredited Investors.- Resident Accredited Investors of a Private Equity Fund shall be responsible for the income taxes on their distributive share of the Private Equity Fund or the Puerto Rico Private Equity Fund income, except for the Economic Development Bank which shall be exempt from taxation in accordance with its organic act. In the case of Accredited Investors that are nonresident Accredited Investors, the Private Equity Fund and the Puerto Rico Private Equity Fund shall withhold at the source the applicable tax and shall remit it to the Department of Treasury. In both instances, the tax shall be paid according to the following rules:

(i) Distributive share from interests and dividends.- Accredited Investors’ distributive share of interest and dividends from the Private Equity Fund and the Puerto Rico Private Equity Fund shall pay, in lieu of any other tax imposed by the Puerto Rico Internal Revenue Code, including the alternate basic tax and the alternative minimum tax which shall not be applicable to Accredited Investors, an income tax to be computed using a flat rate of ten percent (10%). Exempt interests or dividends generated by the Private Equity Fund or the Puerto Rico Private Equity Fund shall maintain their exemption when held by the Accredited Investors. Likewise, Accredited Investors shall pay taxes in Puerto Rico at the income tax rates provided herein, unless: (i) the income tax rate applicable to such Investor under any other special law is lower than the one provided herein, or (ii) under the principles of the Puerto Rico Internal Revenue Code such investors are not required to pay income taxes in Puerto Rico. The operating expenses of the Private Equity Fund and the Puerto Rico Private Equity Fund (except capital gains) shall be allocated to the gross income amount of each class.

(ii) Distributive Share from Capital Gains.- Accredited Investors’ distributive share of capital gains from the Private Equity Fund or the Puerto Rico Private Equity Fund shall be fully exempt from income tax and shall not be subject to any other tax imposed by the Puerto Rico Internal Revenue Code, including the alternate basic tax and the alternative minimum tax which shall not be applicable to Accredited Investors of said funds. Such gains shall be separately informed to the Investors in accordance with Section 1071.02 of the Puerto Rico Internal Revenue Code.

(iii) Sale of Ownership Interest- The capital gains realized by Accredited Investors of the Private Equity Fund or the Puerto Rico Private Equity Fund in the sale of their ownership interest in said funds shall be subject to income tax at a flat rate of five percent (5%) in the Taxable Year in which the sale occurs or income is earned in lieu of any other tax provided in the Puerto Rico Internal Revenue Code. If, within ninety (90) days as of the sale, the Accredited Investor reinvests the entire gross income in a Puerto Rico Private Equity Fund, the capital gains shall be exempt from income tax. Such gains shall be separately informed to the Accredited Investor in accordance with Section 1071.02 of the Puerto Rico Internal Revenue Code.

(iv) Distributive Share from Net Capital Losses- The Accredited Investors’ distributive share from the net capital losses incurred by the Private Equity Fund or the Puerto Rico Private Equity Fund may be taken as a deduction by Resident Accredited Investors of said funds in proportion to its distributive share in the fund’s losses to the extent that such losses are attributable to a corporation, or foreign or domestic limited liability company or partnership, which derives at least eighty percent (80%) of its gross income in the previous three (3) years from sources within Puerto Rico or from income effectively connected or treated as effectively connected to the conduct of a trade or business in Puerto Rico, in accordance with the provisions of the Puerto Rico Internal Revenue Code. The losses can only be used in the following manner:

(A) Against income from other Private Equity Funds or Puerto Rico Private Equity Funds to the extent that such losses are deemed capital losses at the level of said funds;

(B) to reduce any capital gain generated by the Resident Accredited Investor from other sources in accordance with the provisions of the Puerto Rico Internal Revenue Code;

(C) however, losses that may not be deducted might be carried over indefinitely.

(3) General or Managing Partners.-

(i) Distributive share from interests and dividends- The distributive share of the General or Managing Partners of the Fund from interest and dividends derived from the Private Equity Fund or the Puerto Rico Private Equity Fund shall be subject to income tax at a flat rate of five percent (5%) in lieu of any other tax imposed by the Puerto Rico Internal Revenue Code, including the alternate basic tax and the alternative minimum tax. The operating expenses of the Private Equity Fund or the Puerto Rico Private Equity Fund (except capital gains) shall be allocated in proportion to the gross income amount of each class.

(ii) Distributive share from Capital Gains- The distributive share of the General or Managing Partners of the Private Equity Fund or the Puerto Rico Private Equity Fund from the capital gains of said funds shall pay a flat income tax of two point five percent (2.5%) in lieu of any other tax imposed in the Puerto Rico Internal Revenue Code in the Taxable Year in which that sale occurs, including the alternate basic tax and the alternative minimum tax which shall not be applicable to Accredited Investors of the Private Equity Fund or the Puerto Rico Private Equity Fund. Such gains shall be separately informed to the Investor in accordance with Section 1071.02 of the Puerto Rico Internal Revenue Code.

(iii) The rules for the sale of ownership interest and net capital losses applicable to the Accredited Investors as described in subparagraphs (iii) and (iv) of paragraph (2) of subsection (a) of this Section shall apply to General or Managing Partners.

(4) RIA and PE-Firm.-

(i) Distributive share from interests and dividends.- The distributive share of an RIA and a PE-Firm of the Fund from interest and dividends derived from the Private Equity Fund or the Puerto Rico Private Equity Fund shall pay a flat income tax rate of five percent (5%) in lieu of any other tax imposed by the Puerto Rico Internal Revenue Code, including the alternate basic tax and the alternative minimum tax. The operating expenses of the Private Equity Fund or the Puerto Rico Private Equity Fund (except capital gains) shall be allocated in proportion to the gross income amount of each class.

(ii) Distributive share from Capital Gains- The distributive share of an RIA and a PE-Firm of the Private Equity Fund or the Puerto Rico Private Equity Fund from the capital gains of the Fund shall pay a flat income tax rate of two point five percent (2.5%) in lieu of any other tax imposed in the Taxable Year in which that sale occurs, including the alternate basic tax and the alternative minimum tax which shall not be applicable to Accredited Investors of the Private Equity Fund or the Puerto Rico Private Equity Fund. Such gains shall be separately informed to the Accredited Investor in accordance with Section 1071.02 of the Puerto Rico Internal Revenue Code.

(iii) The rules for the sale of ownership and net capital losses applicable to the Accredited Investors as described in the subparagraphs (iii) and (iv) of paragraph (2) of subsection (a) of this Section shall apply to RIAs and PE-Firms.

(b) Property Taxes.-

(1) The Private Equity Funds and the Puerto Rico Private Equity Funds shall have a seventy-five percent (75%) exemption from property taxes imposed under the “Municipal Property Tax Act,” including the real and personal property, tangible and intangible, belonging thereto.

(2) The Private Equity Funds and the Puerto Rico Private Equity Funds shall be exempt from filing the appropriate personal property tax return as provided in Act No. 83-1991, as amended, known as the “Municipal Property Tax Act of 1991.”

(c) Municipal Taxes.-

(1) The income earned by the Private Equity Funds and the Puerto Rico Private Equity Funds and the distributions that those Entities make to their Accredited Investors, shall not be deemed to be “gross income” nor shall they be included in the definition of “volume of business” for purposes of the “Municipal License Tax Act.”

(2) The Private Equity Funds and the Puerto Rico Private Equity Funds shall be exempt from filling the appropriate volume of business declaration provided in the “Municipal License Tax Act.”

(d) Special deductions.-

(1) If a Private Equity Fund or a Puerto Rico Private Equity Fund has met the investment requirements provided for in this Chapter, every Resident Accredited Investor who invests in:

(i) A Private Equity Fund may deduct up to a maximum of thirty percent (30%) of the adjusted basis of its Private Equity Investment, as such adjusted basis is determined under the Puerto Rico Internal Revenue Code. The Resident Accredited Investor may use the deduction in the Taxable Year in which the Fund invested all or part of said investment and for the ten (10) following years. If the Fund invests the Private Equity Investment partially, the ten (10) year period relating to the invested portion shall begin to elapse from the year it was invested. If the investment is made after the close of the Taxable Year, but before the income tax return for said year is filed, as described in the Puerto Rico Internal Revenue Code, including any extensions granted by the Secretary of Treasury for the filing thereof, the Resident Accredited Investor may claim the deduction for said Taxable Year. The maximum deduction the Resident Accredited Investor may claim in a Taxable Year shall not exceed fifteen percent (15%) of his net income before such deduction.

(ii) A Puerto Rico Private Equity Fund may deduct up to a maximum of sixty percent (60%) of the adjusted basis of its Private Equity Investment, as such adjusted basis is determined under the Puerto Rico Internal Revenue Code. The Resident Accredited Investor may use the deduction in the Taxable Year in which the Fund invested all or part of said initial investment and for the fifteen (15) following years. If the Fund invests the Private Equity Investment partially, the fifteen (15) year period relating to the invested portion shall begin to elapse from the year it was invested. If the investment is made after the close of the Taxable Year, but before the income tax return for said year is filed, as described in the Puerto Rico Internal Revenue Code, including any extensions granted by the Secretary of Treasury for the filing thereof, the Resident Accredited Investor may claim the deduction for said Taxable Year. The maximum deduction a Resident Accredited Investor can claim in a Taxable Year shall not exceed thirty percent (30%) of his net income before such deduction.

(2) Deduction for Private Equity Investment.- The deduction on account of Investment that a Resident Accredited Investor may claim pursuant to paragraph (1) of this subsection may be used, at the discretion of the Resident Accredited Investor, against any type of income for purposes of determining any type of tax under Subtitle A of the Puerto Rico Internal Revenue Code, including the alternate basic tax applicable to individuals and the alternative minimum tax applicable to corporations. In the case of spouses who live together, file a joint return, and choose the optional tax computation provided by Section 1021.03 of the Puerto Rico Internal Revenue Code, they may, at their discretion, allocate between them the total amount of the claimable deduction on account of the investment made by each of them for each taxable period.

SUBCHAPTER C – REQUIREMENTS FOR GRANTING EXEMPTIONS

Section 2043.01.- Requirements for Decree Applications.

(a) Any Person who has established or intends to establish an Eligible Business in Puerto Rico under this Chapter shall apply for the benefits of this Code by filing the appropriate Decree application with the Secretary of the DEDC as provided in Subtitle F of this Code.

(b) Any Person may apply for the benefits of this Chapter provided that the eligibility requirements of Subchapter A of this Chapter are met as well as any other criteria prescribed by the Secretary of the DEDC in the Incentives Regulations, an administrative order, a circular letter, or any other general communication, including as an evaluation criteria, the Eligible Business’ contribution to the economic development of Puerto Rico.

Section 2043.02.- International Insurers and International Insurer Holding Companies Decrees.

(a) International Insurers shall apply for a tax exemption Decree that shall state in detail the entire tax treatment, as provided in the Sections applicable to such businesses in this Chapter.

(b) As a requirement to obtain a Decree and, as provided in the Incentives Regulations, the Secretary of the DEDC, with the approval of the Insurance Commissioner, may impose additional conditions to the International Insurer in connection with jobs or economic activities. The tax exemptions thus stated, including the income tax rates provided in subsection (a) of Section 2042.02 of this Chapter, shall be deemed to be a contract by and between the International Insurer, its shareholders, partners, or owners and the Government of Puerto Rico during the effectiveness of the Decree and said contract shall be the law between the parties.

Decrees shall be effective for fifteen (15) years, beginning on its date of issue, unless the certificate of authority of the International Insurer is revoked, suspended, or not renewed before the expiration date thereof, in which case the Decree shall be rendered ineffective on the date of revocation or failure to renew, or during the suspension period, as the case may be.

(c) Likewise, they shall hold a certificate of authority in effect issued by the Insurance Commissioner, in accordance with Section 61.050 of the Insurance Code in order to be granted a Decree under this Section.

(d) The decree shall be non-transferrable; however, it shall continue in effect upon a change in the control of the Shares of an International Insurer, or the merger or consolidation thereof, or the conversion of an International Insurer to a stock-based or mutual insurer, as the case may be; provided, that the change of control, merger or consolidation, or conversion, as the case may be, is authorized by the Secretary of the DEDC, pursuant to this Chapter.

SUBCHAPTER D – SPECIAL PROVISIONS.

Section 2044.01.- International Financial Entity.

(a) An International Financial Entity shall comply with the provisions of the “International Financial Center Regulatory Act,” as applicable, to obtain the benefits provided in this Chapter.

(b) Confidentiality.- The information furnished to the Secretary of the DEDC pursuant to this Chapter and the Incentives Regulations, shall be kept confidential, except:

(1) When disclosure of such information is required by law or judicial order;

(2) Upon a formal petition of a domestic or foreign government agency in the exercise of its supervisory function, when the Secretary of the DEDC deems it to be in the best public interest. In such case, the information shall be delivered under a binding agreement with the DEDC in order to maintain the confidentiality of said information. This exception shall under no circumstances be extended to include information regarding clients of the International Financial Entity.

(3) In any other case, as required under the “International Financial Center Regulatory Act.”

(i) The Secretary of the DEDC may also disclose information when such disclosure has the purpose of assisting the Secretary of the DEDC, the Financial Institutions Commissioner, or other authority in the discharge of their regulatory duties.

(4) Pertaining to this Section, the Incentives Regulations shall be drafted in consultation with the Financial Institutions Commissioner.

(5) The Secretary of the DEDC may delegate to the Financial Institutions Commissioner the drafting of regulations, the review of transactions, and the compliance with the provisions applicable to International Financial Entities in this Code as well as any other responsibility established in this Chapter with respect to such entities, provided that the Secretary of the DEDC believes that the Financial Institutions Commissioner has the necessary expertise to assume said responsibilities.

Section 2044.02.- International Insurers and International Insurer Holding Companies.

(a) An International Insurer shall meet, as applicable, the requirements established in Sections 61.050, 61.060, 61.070, 61.080, 61.090, 61.100, 61.110, 61.120, 61.130, 61.140, 61.160, 61.180, 61.190, 61.200, 61.210, 61.220, and 61.230 of the Insurance Code, including applying for a certificate of authority to operate as an International Insurer, in order to obtain the benefits provided in this Chapter.

(b) An International Insurer Holding Company shall meet the requirements provided in subsections (3) through (8) of Section 61.040 of the Insurance Code to obtain the benefits provided in this Chapter.

(c) Confidentiality.- The information furnished to the Secretary of the DEDC pursuant to this Chapter and the Incentives Regulations, shall be kept confidential, except:

(1) When disclosure of such information is required by law or judicial order; or

(2) Upon a formal petition of a domestic or foreign government agency in the exercise of its supervisory function, when the Secretary of the DEDC deems it to be in the best public interest. In such case, the information shall be delivered under a binding agreement with the DEDC in order to maintain the confidentiality of said information. This exception shall under no circumstances be extended to include information regarding clients of the International Insurer.

(3) The Secretary of the DEDC may also disclose information when such disclosure has the purpose of assisting the Secretary of the DEDC, the Insurance Commissioner, or other authority in the discharge of their regulatory duties.

(d) The Incentives Regulations, in connection with this Section, shall be drafted with the advice and consent of the Insurance Commissioner.

Section 2044.03.- Private Equity Funds and Puerto Rico Private Equity Funds.

(a) A Private Equity Fund is a fund that meets the following requirements:

(1) As a general rule, not later than four (4) years, counting from the date of its organization and at the close of each subsequent Fiscal Year, a minimum of fifteen percent (15%) of the paid-in capital contributed to the Fund by its Accredited Investors, (excluding the capital that the Fund maintains in bank accounts and other cash equivalent investments) invested in one or more of the following:

(i) promissory notes, bonds, Shares, notes (including secured and unsecured loans and including the collateral) or any other securities of similar nature issued by Entities engaged actively in trade or business (Issuing Entity), that, at the time of acquisition are not traded or offered at public stock exchange markets in the United States or in any foreign country, and that have been issued by: (i) a domestic corporation, a domestic limited liability company , or a domestic partnership, or (ii) a foreign entity that derives at least eighty percent (80%) of its gross income for the previous three (3)-year period from sources within Puerto Rico or from income effectively connected or treated as effectively connected to the conduct of a trade or business in Puerto Rico, in accordance with the provisions of the Puerto Rico Internal Revenue Code. For purposes of this subparagraph (i), it shall be understood that an Issuing Entity is engaged actively in trade or business, if such trade or business is conducted by said Issuing Entity or an Entity controlled by the Issuing Entity. An Entity shall be deemed to be a controlled Entity when the Issuing Entity holds fifty percent (50%) or more of the Capital Stock or ownership interest with voting rights of said Entity.

(ii) promissory notes, bonds, notes, or other debt instruments issued by the Government of Puerto Rico, its instrumentalities, agencies, municipalities, or any other political subdivision

(2)  Its Investors are Accredited Investors;

(3)  It employs one or more RIA, at least one which shall:

(i)  Be a Domestic Person or a Foreign Person;

(ii)  Establish and maintain a business office in Puerto Rico;

(iii)  Engage in trade or business in Puerto Rico pursuant to the provisions of the Puerto Rico Internal Revenue Code and registered with the pertinent regulatory entities, including, but not limited to, OCIF, the SEC, and the SBA, as applicable.

An RIA that meets the requirements of this paragraph (3) may subcontract an investment advisor who fails to meet said requirements. However, an RIA who fails to meet the requirements may not subcontract an investment advisor.

(4) shall operate as a diversified investment entity, therefore, not later than four (4) years from the date of its organization and at the end of each subsequent Fiscal Year, not more than fifty percent (50%) of its paid-in capital shall be invested in a single business; provided, however, that the fluctuations in the value of the fund’s investments or the sale, liquidation, or other disposition of any of the Fund’s Assets pursuant to its investment strategy or objective shall not be taken into account for determining if the Fund meets this requirement. To determine the fifty percent (50%) investment limit in a single business, a group of Affiliates, as defined in subparagraph (i) of this paragraph, shall be deemed to be a business. Therefore, the amounts invested in one or more entities within a group of Affiliates, as defined in subparagraph (i) of this paragraph, shall be aggregated to determine if the fund has achieved the purpose of investing not more than fifty percent (50%) of its capital in a single business. The foregoing limitation does not prevent a fund from investing more than fifty percent (50%) of its capital in entities operating in the same trade or engaged in the same type of business. Neither does it prevent a fund from acquiring all or a majority of the ownership interests of an Entity in which it has invested or is investing its capital, thus, an Entity shall not be deemed to be converted into an Affiliate, as such term is defined in subparagraph (i) of this paragraph, for purposes of such diversification requirement when all or a majority of its ownership interests are acquired by a fund;

(i) For purposes of this paragraph (4), the term “Affiliate” means, with respect to an Entity, any other person or Entity excluding the fund which directly or indirectly through one or various third parties controls, is controlled by, or is under common control with said Entity. The term “control” means to possess or own directly or indirectly fifty percent (50%) or more of the capital Stock or the ownership interests with voting rights of said Entity.

(5) shall have a minimum capital of ten million dollars ($10,000,000), including legal commitments of capital contributions duly documented even if not yet received, within twenty-four (24) months from the fund’s first issuance of ownership interests and subsequently;

(6) shall appoint at least one of its Investors or limited partners to one advisory board where matters of interest and concerns regarding the Fund shall be discussed and evaluated by said class;

(7) in case of a foreign partnership or foreign limited liability company, its General or Managing Partner or RIA shall be engaged in a trade or business in Puerto Rico and derive at least eighty percent (80%) of its gross income from sources within Puerto Rico or from income effectively connected or treated as effectively connected with the conduct of a trade or a business in Puerto Rico, in accordance with the provisions of the Puerto Rico Internal Revenue Code.

(b) A Private Equity Fund shall be deemed to be a Puerto Rico Private Equity Fund provided that it complies with paragraphs (2) through (7) of subsection (a) of this Section as well as meets the following eligibility requirements:

(1) Not later than four (4) years, counting from the date of its organization and at the end of each subsequent Fiscal Year, maintains a minimum of sixty percent (60%) of the paid-in capital contributed to the fund by its Accredited Investors (excluding the capital that the fund maintains in bank accounts and other cash equivalent investments) invested in one of the following:

(i) promissory notes, bonds, Shares, notes (including secured and unsecured loans and including the collateral) or any other securities of similar nature issued by Entities engaged actively in trade or business (Issuing Entity), that, at the time of acquisition are not traded or offered at public stock exchange markets in the United States or in any foreign country, and that have been issued by (A) a domestic corporation, a domestic limited liability company, or a domestic partnership, or (B) a foreign entity that derives at least eighty percent (80%) of its gross income for the previous three (3) year period from sources within Puerto Rico or from income effectively connected or treated as effectively connected to the conduct of a trade or a business in Puerto Rico, in accordance with the provisions of the Puerto Rico Internal Revenue Code. For purposes of this subparagraph (i), it shall be understood that an Issuing Entity is engaged actively in trade or business, if such trade or business is conducted by said Issuing Entity or an Entity controlled by the Issuing Entity. An Entity shall be deemed to be a controlled Entity when the Issuing Entity holds fifty percent (50%) or more of the capital Stock or ownership interest with voting rights of said Entity.

(ii) promissory notes, bonds, notes, or other debt instruments issued by the Government of Puerto Rico, its instrumentalities, agencies, municipalities, or any other political subdivision;

(iii) exempt investment trusts under Section 1112.02 of the Puerto Rico Internal Revenue Code;

(iv) promissory notes, bonds, Shares, notes (including secured and unsecured loans and including the collateral) or any other securities of similar nature issued by entities engaged, directly or indirectly, in an active trade or business outside of Puerto Rico, that at the time of acquisition are not traded or offered at public stock exchange markets in the United States or in any foreign country; provided, that the operations of the Entity are transferred to Puerto Rico within six (6) months from the date of the acquisition of the promissory notes, bonds, Shares, or notes (including secured and unsecured loans and including the collateral) or any other securities of similar nature, plus any additional period authorized by the Secretary of the Treasury if there is reasonable cause for the extension, and during the period of twelve (12) calendar months commencing the first day of the calendar month following the calendar month during which the operations are transferred to Puerto Rico and each subsequent twelve (12)-month period, derives at least eighty percent (80%) of its gross income from sources within Puerto Rico or from income effectively connected or treated as effectively connected to the conduct of a trade or a business in Puerto Rico, in accordance with the provisions of the Puerto Rico Internal Revenue Code.

(c) In the case of Private Equity Funds and Puerto Rico Private Equity Funds, any Entity that meets the eligibility requirements provided in this Chapter may request to be treated as a Private Equity Fund or a Puerto Rico Private Equity Fund by filing a Decree application in accordance with Section 2043.01; provided that, in the case of a series limited liability company, said limited liability company may elect to be treated as a single fund, regardless of the number of series, if the fund meets said eligibility requirements; alternatively, one or various series of said limited liability company may elect to be treated individually or jointly as a fund, if said eligibility requirements are met, in which case the aforementioned Decree application shall be filed not later than on the last day of the third (3rd) month as of the date such series was formed.

(d) None of the provisions of this Chapter applicable to the funds shall be interpreted as a limitation to the tax treatment that the Accredited Investors, General or Managing Partners, an RIA, or a PE-Firm might obtain under any other incentive under this Code, provided that they meet the requirements and follow the processes established in this Code.

(e) The fulfillment of the requirements of subsections (a) or (b) of this Section, as applicable, shall be determined for each Taxable Year of the fund. For purposes of determining the percentage of investment in an asset, the initial cost thereof shall be taken into consideration. Failure to meet the eligibility requirements shall prevent the Entity from qualifying as a Private Equity Fund or a Puerto Rico Private Equity Fund during the year in which it failed to meet the requirements and, therefore, the Entity shall be subject to taxation, as applicable, under the provisions of the Puerto Rico Internal Revenue Code, the “Municipal License Tax Act,” and the “Municipal Property Tax Act.” If the Entity is disqualified for a particular Taxable Year for noncompliance with the provisions of this Code, it shall request the Secretary of the DEDC, subject to the requirements prescribed in the Incentives Regulations, a circular letter, an administrative determination, or any other similar general communication, to be treated again as a Private Equity Fund or a Puerto Rico Private Equity Fund for taxable years following the disqualification year.

(f) The Funds shall be exempt from compliance with the provisions of the “Investment Companies Act of Puerto Rico” and the “Puerto Rico Investment Companies Act of 2013.”

(g) Disclosure of Information.

(1) Any offer to participate or invest in a Fund shall be registered in or notified to OCIF and comply with all of the provisions of the Securities Act of the United States and Puerto Rico, as applicable with respect to disclosure and including registration, if necessary.

(2) Every Fund shall:

(i) Inform its investors of its operating results quarterly (unaudited) and annually as audited by a Certified Public Accountants firm duly licensed in Puerto Rico in order for the Investor to verify that the Fund is operating in accordance with the policies, practices, and agreements established during its organization. The audited annual report shall include: the calculated Internal Rate of Return (IRR), an Itemization of Commissions and Expenses of the Partnership, a Summary of Capital Calls, a Debt Summary, and a Letter from the Managing Partner to the Investors.

(ii) The disclosure of the fund shall include:

(A) An explanation of the risks and opportunities in the fund as well as material events including, but not limited to: fraud, material breach of the fiduciary duty, material breach of the agreement, bad faith, and gross negligence.

(B) The Certification of Compliance of the fund duly sworn by the chief executive officer with the provisions of this Code.

(iii) Call a General Annual Meeting of Partners where the General Partner shares information regarding the operation of the fund with its Investors or Limited Partners.

(iv) OCIF shall be empowered examine and inspect Private Equity Funds or Puerto Rico Private Equity Funds to ensure that they informed their operations and financial results accurately, comply with their fiduciary duty to their Investors, and meet the requirements of this Code. The Fund shall pay the cost prescribed by OCIF through regulations to conduct such examinations and inspections. In the event of noncompliance, OCIF may take actions as are necessary including the liquidation of the fund and cessation of additional offerings of its securities.

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