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 6: Incentives for Manufacturing and R&D

SUBCHAPTER A – ELIGIBILITY

Section 2061.01.- Businesses Engaged in Manufacture.

(a) It is hereby provided that a business established or to be established in Puerto Rico by a Person may apply to the Secretary of the DEDC for an Incentive Decree when the Person is established in Puerto Rico to engage in the following eligible activities:

(1) Any Industrial Unit that is established permanently for the Commercial Scale Production of any Manufactured Product.

(2) The provisions of paragraph (1) of this subsection notwithstanding, any Industrial Unit that is established permanently for the Commercial Scale Production of a Manufactured Product that is not eligible under paragraph (1) or similar provisions under Prior Incentives Laws, except for the manufacture of boxes and containers made of corrugated cardboard, shall enjoy the benefits provided in this Chapter in connection with Manufactured Products sold abroad, and in turn, shall be subject to the limitations on the determination of Industrial Development Income and to the base period income established in subsections (f) and (g) of Section 2062.01 of this Code.

(3) Any Industrial Unit that would normally be considered as an Eligible Business under this Chapter, but that because of the competition from other jurisdictions due to low production costs, among other factors, it is not financially feasible to conduct the entire manufacturing operation in Puerto Rico, and thus it is required that a portion of the process or elaboration of the product is conducted outside of Puerto Rico. For purposes of this paragraph, the Secretary of the DEDC, upon endorsement from the Secretary of the Treasury, may determine that such Industrial Unit be considered as an Eligible Business under this Chapter in consideration of the nature of its facilities, the investment in the property, machinery and equipment, the number of jobs to be created in Puerto Rico, the payroll amount, and any other criteria or factors that so warrant it.

(4) Any bona fide office, business, or establishment with its equipment and machinery, with the capacity and expertise necessary to render a service at commercial scale, provided that it complies with one of the following modalities:

(i) The rendering in Puerto Rico of Fundamental Services to Business Clusters.

(ii) The rendering in Puerto Rico of Key Supplier Services, as such term is defined in this Code.

(5)  Property Devoted to Industrial Development.

(6)  Animal breeding for experimental use in scientific research and medical laboratories, and similar uses.

(7) Any business engaged in scientific or industrial research and development in order to develop new products, or to develop new industrial services or processes through basic or applied experimentation.

(i) For purposes of this Chapter, the term “research and development” means any activity aimed at advancing knowledge or capability in a field of science or technology, through the resolution of scientific or technological uncertainties. The new knowledge resulting from research and development must be useful for the creation of new products, and their improvement, or the creation of new services or processes of commercial value.

(ii) For purposes of the Tax Credits provided in Sections 3030.01 and 3000.02, respectively, of this Code, research and development for continuous improvement as well as research and development processes carried out by a contract research organization for the benefit of a third party are excluded.

(8) Any of the recycling activities defined hereinafter:

(i) Partial Recycling Activities.- Recycling activities that carry out at least two or more of the following processes: collection, distribution, reconditioning, compaction, shredding, pulverization or other physical or chemical process that transforms articles of recyclable materials or recyclable materials as defined in Section 2(O) of Act No. 70-1992, as amended, known as the “Puerto Rico Solid Waste Reduction and Recycling Act,” and recovered in Puerto Rico, as raw material, aggregates for product manufacturing, that prepare the material or product for its local sale or use or export, and that locally sell or use or export the processed material or product for its future use or recycling.

(ii) Total Recycling Activities.- The transformation of recyclable material that has been primarily recovered in Puerto Rico into commercial articles, provided that said activity contributes to the objective of promoting the recycling industry in Puerto Rico.

(9) Vertical farming that integrates added value processes such as the hydroponics process, as well as the intensive growing of mollusks, crustaceans, fish or other aquatic organisms through the aquaculture process, the milk pasteurization process and the Agricultural Biotechnology processes provided that these operations are conducted pursuant to the norms and practices approved by the Department of Agriculture, as well as any other agro-industrial or livestock operation, including those operations solely engaged in the packaging, packing, preservation, classification, or processing of agricultural products.

(10) Value added activities pertaining to the operation of the Port of the Americas, the port located in the former Roosevelt Roads Base, and the Mayagüez, Yabucoa, San Juan, and Guayama ports and any other port designated by the Secretary of the DEDC through regulations or other official communication such as: storage, consolidation of merchandise and dispatch thereof, repacking of consolidated parcels for shipment from said ports, the completion of semi-processed products for delivery to regional markets and any other business or service activity related to the administration or management of finished, semi-processed, or manufactured goods or products that are associated with, are part of, or move through said ports.

(11) Development of licensed or patented software that can be reproduced at a commercial scale, and has the following features: (i) The user interacts with the software to carry out specific valuable tasks; (ii) the business models may include, (A) the distribution, whether physical, online or through the cloud or as part of a blockchain, and (B) the income earned from the licensing, program subscriptions, and/or services fees.

(i) The following tasks are not deemed eligible:

(A) Online content publishing companies and their search devices.

(B) Companies that render services using technology, and have no human resources to develop new products.

(C) Companies whose primary income is generated from advertising and marketing Puerto Rico’s market.

(D) The software has no methodology to carry out a valuable task.

(E) Software entailing games of chance whose income is generated from bets.

(12) The research, development, manufacture, transportation, launching, and operation from Puerto Rico of satellites and service development centers for the processing and storage of data, excluding telephone, and radio and television broadcasting operations.

(13) The licensing of Intangible Property developed or acquired by the Exempt Business holding a Decree granted under this Code.

(14) General vessel maintenance, repair, and overhaul, as well as the parts and components thereof.

(15) The development of videogames that may be reproduced on a commercial scale.

(b) Except as provided in Subtitle F of this Code on renegotiations and conversions, any applicant receiving tax benefits or incentives under any other special law of the Government of Puerto Rico similar to those provided in this Code, as determined by the Secretary of the DEDC, shall not be deemed to be an Eligible Business under this Chapter with respect to the activity for which he enjoys said tax benefits or incentives.

SUBCHAPTER B – TAX BENEFITS

Section 2062.01.- Income Tax.

(a) Flat Income Tax Rate.- The Exempt Businesses holding a Decree under this Chapter shall be subject to a flat income tax rate on their Industrial Development Income for the entire exemption period from the date of commencement of operations, in lieu of any other income tax, if any, as provided in the Puerto Rico Internal Revenue Code.

(1) In General.- The Exempt Businesses holding a Decree granted under this Chapter shall be subject to a preferential flat income tax rate of four percent (4%) on their Industrial Development Income, excluding Eligible Investment Income which shall be subject to the provisions of subsection (c) of this Section.

(2) Alternate Tax.- The Exempt Businesses whose royalty payments for the use or privilege to use Intangible Property in Puerto Rico, made to Foreign Persons not engaged in trade or business in Puerto Rico, that are subject to the income tax rate provided in paragraph (2) of subsection (b) of this Section, shall be subject to a flat income tax rate of eight percent (8%) on their Industrial Development Income, excluding Eligible Investment Income which shall be subject to the provisions of subsection (c) of this Section.

(b) Royalties and License Fees.- The provisions of the Puerto Rico Internal Revenue Code notwithstanding, in the case of payments made by Exempt Businesses holding a Decree granted under this Chapter to Foreign Persons not engaged in trade or business in Puerto Rico, for the use or the privilege to use in Puerto Rico Intangible Property relative to the operation declared exempt under this Chapter, and provided that said payments are deemed to be totally derived from sources within Puerto Rico, the following rules shall be observed:

(1) In General.- A twelve percent (12%) tax shall be imposed, collected, and paid, in lieu of the tax imposed by the Puerto Rico Internal Revenue Code, on the amount of such payments, received or implicitly received by any Foreign Person not engaged in trade or business in Puerto Rico, derived exclusively from sources within Puerto Rico, in the case of Exempt Businesses that are subject to the income tax provided in paragraph (1) of subsection (a) of this Section.

(2) Alternate Tax.- The Secretary of the DEDC may authorize that the payments described in subsection (b) of this Section be subject to a two percent (2%) tax rate in lieu of the rate imposed in paragraph (1) above.

(i.) The alternate tax imposed in this paragraph (2) shall be established prior to the effective term of the Decree, and shall be irrevocable during the effective term of said Decree, and be documented as part of the terms and conditions agreed on in the Decree.

(3) Any Exempt Business that is required to make payments to Foreign Persons for the use or privilege to use in Puerto Rico Intangible Property relative to the operation declared exempt under this Chapter, shall deduct and withhold at the source a tax equal to that which is imposed in paragraphs (1) and (2) of this subsection, as the case may be.

(c) Taxes on Eligible Investment Income.- An Exempt Business holding a Decree granted under this Chapter shall enjoy a full exemption on the Eligible Investment Income. The expiration, renegotiation, or conversion of the Decree or other Grant of the investing or issuing Entity, as the case may be, shall not prevent the income earned from the investment from being treated as Eligible Investment Income under this Code during the remaining period of the investment.

(d) Sale or Exchange of Stocks or Assets.

(1) The proceeds from the sale, exchange, or other disposition of Stocks from Entities, which are or have been Exempt Businesses; shares in joint ventures and similar entities constituted by various corporations, partnerships, individuals or a combination thereof, which are or have been Exempt Businesses under this Chapter, and Stocks from Entities that are in any way the owners of the entities described above, shall be subject to the provisions of paragraph (2) of this subsection when conducting said sale, exchange, or other disposition, and any subsequent distribution of said proceeds, be it as a dividend or as a distribution in liquidation, shall be exempt from the payment of additional taxes.

(2) Sale or Exchange of Stocks or Assets.-

(i) In the case of sales or exchanges of Stocks during the exemption period, the gain on the sale or exchange of Stocks from Entities, or substantially all assets of a Exempt Business holding a Decree granted under this Chapter, made during its exemption period and which would have been subject to income tax under the Puerto Rico Internal Revenue Code, shall be subject to a four percent (4%) tax on the amount of the gain realized, if any, in lieu of any other tax imposed by said Puerto Rico Internal Revenue Code. Any loss in the sale or exchange of said Stocks or assets shall be recognized pursuant to the provisions of the Puerto Rico Internal Revenue Code.

(ii) After the Date of Expiration of the Exemption Period.- Gains on a sale or exchange conducted after the date of expiration of the exemption, shall be subject to the tax provided for in subparagraph (i) above, but only up to the amount of the value of the Stocks or substantially all the assets in the books of the corporation on the date of expiration of the exemption period, reduced by the amount of the exempt distributions received from said Stocks after said date, minus the base of said Stocks or substantially all assets. Any remainder of the gains or any loss, if any, shall be recognized pursuant to the provisions of the Puerto Rico Internal Revenue Code in effect on the date of the sale or exchange.

(iii) Exempt Exchanges.- The exchanges of Stocks which do not result in taxable events for being exempted reorganizations shall be treated pursuant to the provisions of the Puerto Rico Internal Revenue Code in effect on the date of the exchange.

(iv) Determination of Bases in the Sale or Exchange of Stocks.- In the sale or exchange, the base of the Stocks or assets of Exempt Businesses under this Chapter shall be determined pursuant to the applicable provisions of the Puerto Rico Internal Revenue Code in effect at the time of the sale or exchange, increased by the amount of the Industrial Development Income accrued under this Chapter.

(v) For purposes of this paragraph (2), the term “substantially all assets” shall mean those assets of the Exempt Business which represent not less than eighty percent (80%) of the value in the books of the Exempt Business at the time of the sale.

(vi) The Secretary of the DEDC, in consultation with the Secretary of the Treasury, shall render effective the provisions of this subsection (b) in the Incentives Regulations.

(e) Liquidation.-

(1) General Rule.- No income taxes shall be imposed or collected from the assignor or the assignee in relation to the total liquidation of an Exempt Business holding a Decree granted under this Chapter, on or before the expiration of its Decree, provided the following requirements are met:

(i) Any property distributed in the liquidation was received by the assignee pursuant to a liquidation plan on or before the date of expiration of the Decree; and

(ii) the distribution in liquidation by the assignor, whether all at once or from time to time, was made by the assignor to cancel or totally redeem its capital stock.

The base of the assignee on the property received in liquidation shall be equal to the adjusted base of said Exempt Business on said property immediately before the liquidation. Furthermore, and for purposes of this Section, a corporation or partnership participating in a partnership that is an Exempt Business shall be deemed to be, in turn, an Exempt Business.

(2) Liquidation by Assignors with Revoked Decrees.- If the Decree of the assignor were revoked prior to its expiration date pursuant to the provisions of Section 6020.09 of Subtitle F of this Code in relation to allowable revocations, the surplus accrued over Industrial Development Income on the date the revocation becomes effective, may be transferred to the assignee at any later time, subject to the provisions of paragraph (1) of this subsection. In cases of mandatory revocations, the surplus accrued shall be subject to the taxation in accordance with the Internal Revenue Code.

(3) Liquidations after the Expiration of the Decree.- After the Decree of the assignor has expired, the assignor may transfer to the assignee the surplus accrued over Industrial Development Income earned during the effective term of the Decree, subject to the provisions of paragraph (1) of this subsection.

(4) Liquidation of Assignors with Exempt and Nonexempt Activities.- In the event that the assignor carries out exempt and nonexempt activities, the assignor may transfer to the assignee the surplus over the Industrial Development Income accrued under this Chapter and the Property Devoted to Industrial Development under this Chapter as part of its total liquidation, subject to the provisions in paragraph (1) of this subsection. The accrued surplus over sources other than Industrial Development Income and the property that is not devoted to industrial development, shall be distributed pursuant to the provisions of the Puerto Rico Internal Revenue Code.

(f) Businesses Ineligible under Prior Incentives Laws.-

(1) During the first four (4) years of effectiveness of this Code, in the case of Exempt Businesses under paragraph (2) of subsection (a) of Section 2061.01 of this Code engaged in the production of Manufactured Products to be sold abroad, which have not been eligible for an Incentive Decree under this Chapter or under Prior Incentives Laws, the flat income tax rates provided in this Section shall be partially applicable to the Industrial Development Income, as provided below:

(i) Twenty-five percent (25%) of the Industrial Development Income generated during the first Taxable Year of the Exempt Business shall be subject to the applicable flat income tax rate as provided in this Section, and the remaining seventy-five percent (75%) of the Industrial Development Income shall be subject to the payment of taxes pursuant to the applicable rules and rates under the Puerto Rico Internal Revenue Code.

(ii) Fifty percent (50%) of the Industrial Development Income generated during the second Taxable Year of the Exempt Business shall be subject to the applicable flat income tax rate provided for in this Section, and the remaining fifty percent (50%) of the Industrial Development Income shall be subject to the payment of taxes pursuant to the applicable rules and rates under the Puerto Rico Internal Revenue Code.

(iii) Seventy-five percent (75%) of the Industrial Development Income generated during the third Taxable Year of the Exempt Business shall be subject to the applicable flat income tax rate provided for in this Section, and the remaining twenty-five percent (25%) of the Industrial Development Income shall be subject to the payment of taxes pursuant to the applicable rules and rates under the Puerto Rico Internal Revenue Code.

(iv) For the fourth Taxable Year of the Exempt Business, the total amount of the Industrial Development Income shall be subject to the applicable flat income tax rate, as provided for in this Section.

(g) Limitation on Benefits.-

(1) In the event that as of the date of the application for incentives, pursuant to the provisions of this Code, an Eligible Business is engaged in the activity for which the benefits of this Chapter are granted, the Eligible Business may enjoy a flat tax rate on Industrial Development Income as provided for in this Section, only pertaining to the increase in the net income of said activity that generated over the average net income for the last three (3) Taxable Years prior to the filing date of the application, which is hereby denominated “base period income”, for purposes of this paragraph.

(2) For purposes of determining the base period, the production and sale of any predecessor business of the applicant business, shall be taken into account. For such purposes, “predecessor business” shall include any business related to the applicant business, even if not previously exempted, and without considering whether it was operating under another legal name or under other owners.

(3) The income attributable to the base period shall be subject to the income tax rates provided in the Puerto Rico Internal Revenue Code.

(4) The base period income shall be adjusted, reducing said amount by twenty-five percent (25%) annually, until it is reduced to zero (0) by the fourth Taxable Year in which the terms of the Decree of the Exempt Business under this Code apply. For such purposes, those years for which the Exempt Business has made an election under Section 2011.05 of this Code, shall be taken into consideration.

(h) Credit for Investments in Technology Transfers.-

(1) Exempt Businesses holding a Decree under this Chapter and subject to the income tax rate provided in paragraph (1) of subsection (a) of this Section may take a credit against the income tax attributable to the net income of its Industrial Development Income, equal to the rate provided in paragraph (1) of subsection (b) of this Section with regard to the payments made to Foreign Persons not engaged in trade or business in Puerto Rico, for the use or privilege to use in Puerto Rico Intangible Property in its operation declared exempt under this Chapter, provided that the income on account of such payments is fully derived from sources within Puerto Rico.

(2) In the case of Exempt Businesses that are subject to the alternate tax provided in paragraph (2) of subsection (a) of this Section, the percentage applicable for purposes of paragraph (1) above shall be that which is provided in paragraph (2) of subsection (b) of this Section.

(3) The tax credit established in this paragraph shall be nontransferable, but may be carried over until exhausted. However, said carryover shall never exceed a period of eight (8) taxable years, counted from the close of the Taxable Year in which the credit was originated. This carryover shall never result in a lesser tax than that provided in paragraph (3) of subsection (g) of this Section. This credit shall be non-refundable.

(i) Application of Credit and Minimum Tax.- The application of the credit established in subsection (h) of this Section shall be subject to the following rules:

(1) Tentative Tax.- The Exempt Business shall initially compute its tax obligation according to the flat income tax rate provided in paragraphs (1) and (2) of subsection (a) of this Section, as the case may be.

(2) Application of Credits.- The total of the sum of tax credits granted under subsection (h) of this Section, subject to the limitations that apply to such credit and claimed by the Exempt Business, shall be reduced from the tax obligation computed in paragraph (1) of this subsection (i).

(3) Minimum Tax.- The tax assessed over Industrial Development Income computed after having applied the credits pursuant to paragraph (2) of this subsection, shall never be less than that amount which, after having been added to the amounts deposited under subsection (b) of this Section with respect to the taxable year, results in:

i. One percent (1%) of the Industrial Development Income of the Exempt Business, in the case of Exempt Businesses which generate an average gross income, including the gross income of members within their controlled group, or of the group of related entities, as such terms are defined in Sections 1010.04 and 1010.05 of the Internal Revenue Code, of less than ten million dollars ($10,000,000.00) during the three (3) previous taxable years.

ii. Three percent (3%) of the Industrial Development Income of the Exempt Business in the case of local investment businesses; for purposes of this subsection, a local investment business means any Exempt Business of which at least fifty percent (50%) belongs directly to Resident Individuals of Puerto Rico.

iii. For all other cases, the flat income tax rates provided in paragraphs (1) and (2) of subsection (a) of this Section, as the case may be, multiplied by the net income attributable to Industrial Development Income, excluding Eligible Investment Income.

(4) An Exempt Business holding a decree granted under this Chapter shall pay whichever amount is greater between paragraph (2) and paragraph (3) of this subsection.

(5) In the cases described in subparagraphs (i) and (ii) of paragraph (3) of this subsection, the minimum tax provided therein shall cease to apply, and subparagraph (ii) or (iii), as the case may be, shall be applicable, for Taxable Years in which the Exempt Business fails to comply with the provisions of paragraph (i) or (ii), as the case may be.

Section 2062.02.- Real and Personal Property Taxes.

(a) In General.-

(1) The personal property of an Exempt Business holding a Decree granted under this Chapter, which has been used in the development, organization, construction, establishment, or operation of the activity covered under the Decree, shall enjoy a seventy-five percent (75%) exemption on municipal and state taxes on personal property during the exemption period.

(2) The real property of the Exempt Business holding a decree granted under this Chapter, which has been used in its development, organization, construction, establishment, or operation, shall enjoy a seventy-five percent (75 %) exemption on municipal and state property taxes during the exemption period.

(b) Construction Period.- The real property of a Exempt Business holding a Decree granted under this Chapter shall have a seventy-five percent (75%) exemption during the period authorized under the Decree to carry out the construction or establishment of said Exempt Business, and during the first Fiscal Year of the Government in which the Exempt Business would have been subject to property taxes for having been in operation as of January 1st prior to the beginning of said Fiscal Year, were it not for the exemption provided herein. Likewise, the real property of said Exempt Business which is directly related to any expansion of the Exempt Business shall be fully exempt from property taxes during the period authorized under the Decree for carrying out the expansion. Once the total exemption period established in this subsection expires, the partial exemption provided in this Section shall begin to apply.

(c) Eligible Investments shall be fully exempt from property taxes.

(d) Optional Self-Assessment Method.-

(1) An Exempt Business, under this Chapter, may use the self- assessment method provided for in this paragraph in order to determine the classification and the real property tax on property which has not been assessed by virtue of the Act No. 83-1991. In such cases, the Exempt Business shall comply with the procedures established in Act No. 83-1991, provided that it has fulfilled the notice requirements established in said Act or in the Decree.

(2) The self-assessment method provided for in this paragraph may be used exclusively for property which is effectively deemed to be real property by reason of the use and location to which it is devoted to and for being used in the development, organization, construction, establishment, or operation of the eligible activity. The method established herein may not be used to appraise land or structures, including real property permanently affixed to a structure and which exclusively serves said structure, such as lighting equipment.

(3) The assessed value of the property classified as real property by the Exempt Business, to be assessed under this paragraph, shall be equal to thirty- five percent (35%) of the depreciated value in the books of the Exempt Business. The assessed value shall not be less than that determined by the percentage of the cost, computed on the basis of the useful life of the property, as provided below:

Useful life Cost

2-5 years 25%

6-10 years 17%

11-15 years 15%

16 years or more 10%

(4) The Exempt Business shall also enjoy the exemption established in subsection (a) of this Section on the value assessed pursuant to the provisions of paragraph (3) of this subsection. The provisions of the “Municipal Property Tax Act,” shall apply in terms of the rate, date, and method of payment of this tax as if it were a tax assessed under said Act.

(5) Any Exempt Business that has opted to use the self-assessment method provided in this subsection, shall file a self-assessed real property tax return not later than May 15 of every year, in which it shall identify the property that shall be deemed to be real property, and shall determine its real property tax obligation for the Fiscal Year of the Government, pursuant to the provisions of paragraph (3) of this subsection. Once the Exempt Business adopts the assessment method provided in this subsection, it shall file and pay on the date the first return is to be filed, in addition to the tax corresponding to the current Fiscal Year, the tax corresponding to the previous four (4) fiscal years, or to the number of years it has been operating, whichever is less. The Exempt Business may make the payment corresponding to its tax obligation for the previous four (4) fiscal years, or the corresponding number of years, as provided above, in two (2) installments. The first of such payments shall be made when filing the corresponding tax return and the second payment shall be made within six (6) months following the filing date of the first tax return under the option of this method. Within ten (10) business days as of the date on which the Exempt Business files the tax return provided in this paragraph, CRIM shall notify the concerned municipalities of the decision of the Exempt Business to avail itself of the optional self-assessment method.

(6) Once the property classified and assessed under the optional method provided in this subsection is classified and assessed by CRIM pursuant to the provisions of the “Municipal Property Tax Act,” and after having exhausted the review procedures established under said Act, the value of the property of the Exempt Business shall be that which is established by CRIM in lieu of the value determined under the self-assessment method provided for in this subsection. In such cases, the Exempt Business shall comply with the procedures established in the “Municipal Property Tax Act.” The classification and assessment made by CRIM pursuant to the aforementioned act shall only have a prospective effect for all legal purposes, for which reason no determination of deficiency shall be made with respect to the method used or the classification of the property as real property for the years in which the optional self-assessment method was used.

Section 2062.03.- Municipal License Fees and Other Municipal Taxes.

(a) The Exempt Businesses holding a Decree granted under this Chapter shall enjoy a fifty-percent (50%) exemption on municipal license fees, municipal excise taxes and other municipal taxes imposed by any municipal ordinance, during the periods provided for in Section 2011.04 of this Code.

(b) The Exempt Business holding a Decree granted under this Chapter shall enjoy total exemption from municipal taxes or municipal license fees applicable to the volume of business of said Exempt Business during the semester of the Fiscal Year of the Government during which the Exempt Business starts operations in any municipality, pursuant to the provisions of the “Municipal License Tax Act.” Furthermore, the Exempt Business holding a Decree granted under this Chapter shall be fully exempt from municipal taxes or license fees on the volume of business attributable to said municipality during the two (2) semesters of the Fiscal Year or the fiscal years of the Government following the semester in which it commenced operations in said municipality.

(c) Exempt Businesses holding a Decree granted under this Chapter and their contractors and subcontractors shall be fully exempt from any tax, levy, fee, license, excise tax, rate, or tariff imposed by any municipal ordinance on the construction of works to be used by said Exempt Business within a municipality, without it being understood that said taxes include the municipal license fee imposed on the volume of business of the contractor or subcontractor of the Exempt Business, during the term authorized under the tax exemption Decree.

(d) The Eligible Investment Income, as said term is defined in subsection (a), paragraph (3) of Section 1020.06 of this Code, shall be fully exempt from municipal license fees, municipal excise taxes, and other municipal taxes.

(e) Any Exempt Business, under this Chapter or under Prior Incentives Laws, may waive the five-percent (5%) discount benefit for advance payment provided for in Section 11 of the “Municipal License Tax Act,” and pay the total amount of its municipal license fee on the date provided for in said Act. In the case of Exempt Businesses that opt to make the advance payment and waive the discount, the statute of limitations for the assessment and collection of the license fee imposed under the “Municipal License Tax Act” shall be three (3) years as of the date on which the Volume of Business Declaration is filed, in lieu of the terms provided for in subsections (a) and (b) of Section 19 of the “Municipal License Tax Act.”

Section 2062.04.- State Excise Taxes and Sales and Use Tax.

(a) In addition to any other exemption from excise taxes or from the sales and use tax granted under Subtitles C and D, respectively, of the Puerto Rico Internal Revenue Code, the following articles directly or indirectly introduced or acquired by a Exempt Business holding a Decree granted under this Chapter shall be fully exempt from said taxes for the duration of the exemption.

(1) Any raw material to be used in Puerto Rico to manufacture finished products, except for hydraulic concrete, crude oil, partially manufactured products, finished oil products, and any other hydrocarbon mixture. Provided, however, that natural or propane gas used in distributed electric power and/or thermal energy generation shall be deemed to be raw material for purposes of this Code. For purposes of this subsection and the applicable provisions of Subtitles C and D of the Puerto Rico Internal Revenue Code, the term “raw material” shall include:

(i) Any product in its natural form, derived from agriculture or from extractive industries;

(ii) Any byproduct, residual product, or partially manufactured or finished product; and

(iii) Sugar in bulk or in units of fifty (50) pounds or more, to be used exclusively in the manufacturing of products.

(2) The machinery, equipment, and accessories thereof used exclusively in the manufacturing process or in the construction or repair of vessels, inside or outside the premises of a manufacturing plant, machinery, trucks, or forklifts used exclusively and permanently to transport the raw material within the circuit of the Exempt Business, machinery, equipment, and accessories used to carry out the manufacturing process, or which the Exempt Business is required to acquire under federal or state law or regulations, for the operation of an Industrial Unit. The foregoing notwithstanding, the exemption shall not cover the machinery, devices, equipment, or vehicles used in whole or in part in the administrative or commercial phase of the Exempt Business, except when these are also used in at least ninety percent (90%) of the manufacturing process, or in the construction or repair of vessels, in which case, these shall be deemed to be used exclusively in said manufacturing process.

(3) Any machinery and equipment that an Exempt Business holding a Decree granted under this Chapter has directly or indirectly acquired and is compelled to use in order to meet environmental, safety, and health requirements, shall be fully exempt from state excise taxes, and the sales and use tax.

(4) The machinery, materials, equipment, parts, and accessories used (i) in laboratories of an experimental or referential nature including, but not limited to, those used for any science and technology research and development activity, and (ii) in technology and Renewable Energy research projects within the Puerto Rico Science, Technology, and Research District established under Act No. 214- 2004, as amended.

(5) The machinery, equipment, parts, and accessories used in the preliminary regional exploration phase geared toward the mineralogical development of Puerto Rico, and the dry docks or shipyards for the construction or repair of ships.

(6) The fuel used by the Exempt Business, under this Chapter, to generate electric power and/or thermal energy for its own use or for use by its Affiliates.

(7) Chemical materials used by an Exempt Business in the treatment of used waters.

(b) Exceptions.- The following use and consumption articles used by the Exempt Business holding a Decree granted under this Chapter, regardless of the area or premises where they are located or their use, shall not be deemed to be raw material, machinery, or equipment for purposes of paragraphs (1), (2), (3), and (4) of subsection (a) of this Section;

(1)  Any construction material and prefabricated structures;

(2)  any electrical material and water pipes affixed to the structures;

(3)  the lubricants, fats, waxes, and paints not relative to the manufacturing process;

(4) the lighting posts and lighting fixtures installed in parking areas; and

(5) treatment plants and electric substations.

Section 2062.05.- Tax Exemption Periods.

(a) Exemption.- An Exempt Business holding a Decree issued under this Chapter shall enjoy a tax exemption for a period of fifteen (15) years.

(b) Provisions Applicable to Business Tax Exemptions on Property Devoted to Industrial Development.-

(1) The period during which a Property Devoted to Industrial Development belonged to any political subdivision, agency, or instrumentality of the Government shall not be deducted from the period referred to in subsection (a) of this Section. In such cases, the property shall be deemed, for purposes of this Code, as not having been previously devoted to industrial development.

(2) When the Exempt Business holding a Decree granted under this Chapter is Property Devoted to Industrial Development, the period referred to in subsection (a) of this Section shall not cover those periods in which the Property Devoted to Industrial Development is in the market for leasing by an Exempt Business, or is not occupied, or is leased to a non-exempt business, except as provided below. Said periods shall be computed based on the total period during which the property was at the disposal of an Exempt Business, provided that the total number of years does not exceed the number of years provided in the aforementioned subsection (a) of this Section, and the Exempt Business that qualifies as Property Devoted to Industrial Development notifies the Secretary of the DEDC, in writing, of the date on which the property is leased for the first time to an Exempt Business, and the date on which it becomes vacant and is re-occupied by another Exempt Business. If the exemption of an Exempt Business holding a Decree as Property Devoted to Industrial Development expires while said property is being used under a lease by an Exempt Business engaged in manufacturing, said Exempt Business of Property Devoted to Industrial Development may enjoy a fifty-percent (50%) exemption on property taxes while the Exempt Business engaged in manufacturing continues to use said property under lease.

(3) When the Exempt Business holding a Decree granted under this Chapter is Property Devoted to Industrial Development, the period referred to in subsection (a) of this Section shall continue its normal course, even if the exemption Decree of the Exempt Business using the aforementioned property, as a result of the expiration of its normal period or due to the revocation of its Decree, lapses before the exemption period of the Property Devoted to Industrial Development, unless, in the event of revocation, it is proven that at the time in which said property was made available to the Exempt Business, the property owners were aware of the facts which caused the later revocation of the Decree.

(c) Establishment of Operations in other Municipalities.- An Exempt Business holding a Decree granted under this Chapter may establish additional industrial units as part of the operations covered by an exemption Decree in effect, in the same municipality where the principal office is located, or in any other municipality of Puerto Rico, with no need to request a new exemption Decree, provided that it notifies the Incentives Office within thirty (30) days from the commencement of operations of the additional Industrial Unit. The additional Industrial Unit shall enjoy the exemptions and benefits provided for in this Chapter for the remainder of the exemption period under the Decree in effect.

(d) Interruption of the Exemption Period.- When an Exempt Business holding a Decree granted under this Chapter has ceased operations and subsequently wishes to resume operations, the time during which it was not operating shall not be deducted from its corresponding exemption period and said business shall enjoy the remainder of its exemption period, while its tax exemption Decree is in effect, provided that the Secretary of the DEDC determines that said operations ceased due to justified causes and that the reopening of said Exempt Business would serve the best social and economic interests of Puerto Rico.

(e) Setting the Date of Commencement of Operations and of the Exemption Periods.-

(1) The Exempt Business holding a Decree under this Chapter may choose the date of commencement of operations for purposes of Section 2062.01 of this Chapter by filing a sworn statement with the Incentives Office, stating the unconditional acceptance of the Decree made to the Exempt Business under this Code. For purposes of Section 2062.01 of this Code, the date of commencement of operations may be the date of the first payroll for training or production of the Exempt Business holding a Decree granted under this Chapter, or on the date of commencement of the project’s construction or any other date within a period of two (2) years following the date of the first payroll.

(2) The Exempt Business holding a Decree granted under this Chapter may defer the application of the flat tax rate provided for in Section 2062.01 of this Code for a period not to exceed two (2) years from the date of commencement of operations as established under paragraph (1) of subsection (e) of this Section. During the deferral period, said Exempt Business shall be subject to the applicable tax rate under Subtitle A of the Puerto Rico Internal Revenue Code.

(3) The exemption period provided in subsection (b) of Section 2062.02 of this Chapter for real and personal property tax exemption, shall begin on January 1st of the fiscal year in which the Exempt Business commences the activities covered under the Decree, but never before January 1st of the year in which an application is filed to avail itself of the benefits of this Chapter.

(4) In the case of Exempt Businesses holding a Decree granted under this Chapter and which have been operating on a commercial scale before applying for the benefits of this Chapter, the date of commencement of operations, for purposes of the flat income tax rate provided in subsection (a) of Section 2062.01 of this Code shall be the date on which said application is filed with the Incentives Office, but the commencement date may be deferred for a period not to exceed two (2) years as of said date.

(5) The Exempt Business holding a Decree granted under this Chapter shall commence commercial-scale operations within a term of one (1) year as of the signature date of the Decree. Such term may be deferred at the request of said business when there is a justified cause therefor, but no time extensions shall be granted to delay the date of commencement of operations for a term exceeding five (5) years from the approval date of the Decree.

Section 2062.06.- Special Deduction for Investment in Buildings, Structures, Machinery, and Equipment.-

(a) Any Exempt Business holding a Decree granted under this Chapter shall be provided with the option to deduct in the taxable year during which these were incurred, in lieu of any capitalization of expenses required under the Puerto Rico Internal Revenue Code, the total expenses incurred after the effective date of this Code for the purchase, acquisition, or construction of buildings, structures, machinery, and equipment, provided that said buildings, structures, machinery, and equipment:

1. have not been previously used or depreciated by any other business or person in Puerto Rico; and

2. are used to manufacture the products or to render the services for which the benefits provided under this Chapter were granted.

(b) The deduction provided for in this Section shall not be in addition to any other deduction provided for by law, but rather, merely an acceleration of the deduction of the aforementioned expenses. Provided, that in the case of machinery and equipment previously used outside of Puerto Rico, but not previously used or depreciated in Puerto Rico, the investment in said machinery and equipment shall qualify for the special deduction provided for in this subsection (b) only if said machinery and equipment still has left, as of the date of its acquisition by the Exempt Business, at least fifty percent (50%) of its useful life, determined pursuant to the Puerto Rico Internal Revenue Code.

(c) The Exempt Business holding a Decree granted under this Chapter may deduct, within the Taxable Year in which these are incurred, the total amount of expenses incurred after the effective date of this Code, in remodeling or repairing buildings, structures, machinery, and equipment, in lieu of any capitalization of expenses required under the Puerto Rico Internal Revenue Code, in the event that said buildings, structures, machinery, and equipment have been acquired or built before or after the effective date of this Code, as well as when they have or have not been used or depreciated by another business or person prior to the acquisition thereof by the Exempt Business holding a Decree granted under this Chapter or under Previous Tax Incentives Laws.

(d) The amount of the Investment in Manufacture for the special deduction provided for in this Section in excess of the Industrial Development Income of the Exempt Business holding a Decree granted under this Chapter during the year the investment was made, may be claimed as a deduction in subsequent Taxable Years until said excess is exhausted. No deduction shall be allowed under this subsection in relation to that portion of the investment pertaining to buildings, structures, machinery, and equipment over which the Exempt Business receives or has received Tax Credit pursuant to Subtitle C of this Code.

(e) The Exempt Business may also claim the special deduction provided in this Section during any year in which it elects the flexible tax exemption benefit provided for in Section 2011.04 of this Code.

SUBCHAPTER C – REQUIREMENTS FOR GRANTING EXEMPTIONS

Section 2063.01.- Requirements for Decree Applications.

(f)[sic] Any person who has established or plans to establish an Eligible

Business in Puerto Rico under this Chapter may apply for the benefits of this Code by filing an application with the Secretary of the DEDC pursuant to the provisions of Subtitle F of this Code.

(g)[sic] Any person may apply for the benefits of this Chapter provided that said person meets the eligibility requirements of Subchapter A of this Chapter as well as any other criteria that the Secretary of the DEDC prescribes through regulations, administrative order, circular letter, or any other general communication, including as an evaluation criteria the Eligible Business’ contribution to the economic development of Puerto Rico.

SUBCHAPTER D – SPECIAL PROVISIONS

Section 2064.01.- Successor Manufacturing Business.

(a) A Successor Manufacturing Business may avail itself of the provisions of this Chapter, provided:

(1) The Predecessor Exempt Manufacturing Business has not ceased operations for over six (6) consecutive months before the Successor Manufacturing Business files the application for exemption, or during the exemption period of the Successor Manufacturing Business, unless such an action is due to Extraordinary Circumstances.

(2) The Predecessor Exempt Manufacturing Business maintains its annual average employment for the three (3) Taxable Years which end with the close of its Taxable Year prior to the filing of the application for exemption by the Successor Manufacturing Business, or the applicable part of such period while the decree granted to the Successor Manufacturing Business under this Section is in effect, unless said average cannot be maintained due to Extraordinary Circumstances.

(3) The number of jobs of the Successor Manufacturing Business, after its first year of operations, exceeds twenty-five percent (25%) of the annual average employment of the predecessor business referred to in paragraph (2) above.

(4) The Successor Manufacturing Business does not use physical facilities, including land, buildings, machinery, equipment, inventory, supplies, trademarks, patents, and marketing outlets with a value of fifty thousand dollars ($50,000) or more, and have been previously used by a Predecessor Exempt Manufacturing Business. The above shall not apply to additions to Property Devoted to Industrial Development, even when such additions constitute physical facilities with a value of fifty thousand dollars ($50,000) or more and are being or have been used by the main unit or the Predecessor Exempt Manufacturing Business. The foregoing notwithstanding, the Secretary of the DEDC may determine, with the previous recommendation of the agencies that render tax exemption reports, that the use of physical facilities or the acquisition of any Industrial Unit of a Predecessor Exempt Manufacturing Business which is or was operating, serves the best economic and social interests of Puerto Rico, in view of the nature of such facilities, the total number of jobs, the payroll total, the investment, the location of the project, or other factors which in his judgment warrant such a determination.

(b) Exceptions.- The provisions of subsection (a) of this Section notwithstanding, the above conditions shall be deemed to have been met, provided that:

(1) The Successor Manufacturing Business assigns to the Predecessor Exempt Manufacturing Business, such portion of its annual employment as necessary for the Predecessor Exempt Manufacturing Business to maintain, or match the annual employment that said Predecessor Exempt Manufacturing Business should maintain. The assignment provided herein shall not be covered by the Decree of the Successor Business, but the latter shall enjoy, with respect to the portion thus assigned, the benefits provided for in this Chapter, if any, which the Predecessor Exempt Manufacturing Business would enjoy thereon, as if it had been its own annual production. If the exemption period of the Predecessor Exempt Manufacturing Business has expired, the Successor Business shall pay the corresponding taxes on the portion of its annual production assigned thereto by the Predecessor Exempt Manufacturing Business;

(2) The Successor Business reports not covered by its Decree, for property tax purposes, such portion of its facilities as necessary for the investment in the physical facilities of the Predecessor Exempt Manufacturing Business to be maintained or to be equal to the total investment in physical facilities as of the close of the Fiscal Year of such a Predecessor Exempt Manufacturing Business, prior to the filing date of the tax exemption application of the Successor Manufacturing Business, minus the depreciation thereof and minus any reduction in the investment in physical facilities that has occurred as of the date on which the provisions of this paragraph are applied, upon authorization for the use thereof under the provisions of paragraph (4) of subsection (a) of this Section. In cases in which the exemption period of the Predecessor Exempt Manufacturing Business has not elapsed, the Successor Manufacturing Business shall enjoy the benefits provided in this Chapter which would have been enjoyed by the Predecessor Exempt Manufacturing Business, with respect to the portion of its investment in said physical facilities which, for purposes of this paragraph, has been reported as not covered by its Decree, if the aforementioned facilities had been used in the production of its Industrial Development Income;

(3) The Secretary of the DEDC determines that the operation of the Successor Manufacturing Business serves the best economic and social interests of Puerto Rico, in view of the nature of the physical facilities, the number of jobs, the total payroll, the investment, the location of the project, or any other factors which in his judgment warrant such a determination, including the financial situation of the Exempt Business in particular, and totally or partially exempts it from compliance with the provisions of subsection (a) of this Section, and may condition the operations thereof, as convenient and necessary in benefit of the best interests of Puerto Rico.

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