Extension of Preferential Rate Tax Prepayment Period and Establishment of a Tax Amnesty Program

The Governor of Puerto Rico has signed Act No. 44 (the “Act”) into law. The Act extends the period during which taxpayers may elect to prepay their taxes on certain types of unrealized income and gains at preferential tax rates that are lower than the actual tax rates that would normally apply under the Puerto Rico Internal Revenue Code of 2011, as amended (the “Preferential Rate Tax Prepayment Period”). The Act also establishes an incentives plan for the payment of certain past due taxes (the “Tax Amnesty Program”).

PREFERENTIAL RATE TAX PREPAYMENT PERIOD

The main types of unrealized income and gains covered by the Preferential Rate Tax Prepayment Period are as follows:

Sale or Increase in Value of Long Term Capital Assets
Individuals, estates, and trusts will be allowed until April 30, 2015 to elect to pay a 8% tax on the gains realized on long term capital assets sold between July 1, 2014 and April 30, 2015 or to elect to prepay a 8% tax on the increase in value of long term capital assets, without requiring the actual sale of the long term capital asset to realize the gain. Partnerships, Special Partnerships, and Corporation of Individuals may elect to pay or prepay the 8% tax on their long term capital assets, in which case, the preferential tax rate would apply to its members, partners, or shareholders that are individuals, estates, or trusts.

Corporations will be allowed until April 30, 2015 to elect to pay a 12% tax on the gains realized on long term capital assets sold between July 1, 2014 and April 30, 2015 or to elect to prepay a 12% tax on the increase in value of long term capital assets, without requiring the actual sale of the long term capital asset to realize the gain. Partnerships and Special Partnerships may elect to pay or prepay the 12% tax on their long term capital assets, in which case, the preferential tax rate would apply to its members, partners, or shareholders that are taxed as corporations.

Individual Retirement Accounts (“IRA”) and Educational IRAs
Any individual that owns or is the beneficiary of an IRA or an Educational IRA will be allowed until April 30, 2015 to elect to prepay a 8% tax on all or a portion of the accumulated and undistributed balance of an IRA or Educational IRA. The preferential 8% tax will not apply to IRA contributions for the 2015 tax year.

Dividend Distributions and Implicit Dividend Distributions
Dividend distributions declared by corporations between January 1, 2015 and April 30, 2015 will be subject to a preferential tax rate of 5%, and dividends distributed between May 1, 2015 and June 30, 2015 will be subject to a preferential tax rate of 8%. The preferential tax rates will apply in lieu of any other tax provided by the Code. Corporations may designate all or a portion of its accumulated earnings and profits as an “Implicit Distribution”, in which case it will benefit from the preferential tax rates without being required to actually declare and pay a dividend.

The Tax Amnesty Program will apply to the following situations:

    1. Certain Tax Liabilities Assessed or Pending Assessment as of December 31, 2014 – Taxpayers that pay the principal balance in full on or before June 30, 2015 will be eligible for the abatement of any interest, penalties, and surcharges related to such tax debts. This benefit is only available for tax debts that are related to (i) income taxes not related to years beginning after December 31, 2013; (ii) estate and gift taxes; (iii) excise taxes; (iv) sales and use taxes for months ending prior to July 1, 2014; (v) withholding tax obligations for months ending prior to January 1, 2015; and (vii) taxes computed under certain tax incentives acts;
    2. Voluntary Disclosure – Taxpayers with unreported income accumulated on or before December 31, 2013 or that claimed excess deductions on their tax returns for any period ending on or before December 31, 2013 may elect to file a special tax return disclosing the amounts and corresponding periods of the unreported income or excess deductions. Taxpayers making the voluntary disclosure will allowed until June 30, 2015 to pay a 20% on the disclosed amounts, without the imposition of any interest, penalties, and surcharges;
    3. Debts Solely Related to Interest, Penalties, and/or Surcharges – In the case of eligible tax debts for which no principal amount is due, the taxpayer will be allowed until June 30, 2015 to pay 25% of the assessed amount in cancellation of the debt.

All payments under the Tax Amnesty Program will be deemed to be voluntary and final payments, and no claims for refunds or credits will be allowed with regards to such payments. Taxpayers must be in compliance with all of their tax obligations for periods beginning after December 31, 2014. Taxpayers undergoing tax audits or administrative or judicial review of a tax debt may elect to benefit from the Tax Amnesty Program with regards to such debts or years under audit or review. Taxpayers with a payment plan may renegotiate the payment of the remaining balance in accordance to the provisions of the Tax Amnesty Program.

This document has been prepared for information purposes only and is not intended as, and should not be relied upon as legal advice. If you have any questions or comments about the matters discussed in this notice, wish to obtain more information related thereto, or about its possible effect(s) on policy or operational matters, please contact us.