This is an unofficial translation of Determinación Administrativa 15-22 (“Administrative Determination 15-22”) from the Secretary of Treasury of Puerto Rico. For the official source, please visit Determinación Administrative 15-22: Reglas para la imputación de salarios a accionistas o socios, que a su vez sean empleados de una compañía con decreto de exención contributiva bajo la Ley 20-2012, Ley 273-2012 o Ley 399-2004
Administrative Determination No.. 15-22
Rules for the allocation of salaries to shareholders or partners, which in turn are employed by a company with tax exemption decree under Act 20-2012, Law Law 273-2012 or 399-2004.
Any member or shareholder, which in turn is employed by a company with tax exemption decree under Act 20-2012, Law Law 273-2012 or 399-2004
Administrative Determination No. DA. 15-22 Internal Revenue 15/10/2015
Act 20 of 17 January 2012, known as the “Act to Promote Export of Services” (“Act 20-2012”), Act. No. 273 of September 25, 2012, known as the “Law International Financial Centre Regulatory” (“Act 273-2012”) and Act. No. 399 of September 22, 2004, known as the “Law of Insurers and Reinsurers of Puerto Rico International Insurance” (“Act 399-2004”), all as amended (hereinafter the “Law of Export Services”) offer tax incentives to certain eligible businesses that export certain services. These three (3) laws are part of a group incentives whose public policy is aimed at making Puerto Rico into an international service center. Under this policy, a reduced tax rate is offered to encourage foreign service providers to establish operations in Puerto Rico, creating new job opportunities for our local population.
The provision of services for export has been characterized, among other things, the fragmented and complex type of compensation, which may consist of basic salary, commission and hundreds profit sharing, among others. Moreover, some of the officers who received taxable compensation for their services, are themselves shareholders or partners of such businesses, which also receive distributions of dividends or distributions of income exempt from taxation. It is therefore important to establish the parameters used by the Secretary, if necessary, for the imputation of wages to shareholders or partners, which in turn are employees of companies that provide services under tax exemption decrees issued under the Laws Export Services (hereinafter “Companies Export Services”).
- Provisions Applicable Law
Section 1062.01 of the Internal Revenue Code of Puerto Rico of 2011, as amended (hereinafter the “Code”) defines the term “wages” as any remuneration for services rendered by an employee to his employer, and any remuneration for pension for services rendered including the cash value of any remuneration paid in any medium other than cash, subject to certain exceptions provided under the provisions of that section.
Section 1040.09 of the Code authorizes the Secretary of the Treasury (hereinafter “Secretary”) to impute income to certain taxpayers from interest, dividends, compensation or any other reason or nature, transaction, industry or business, when it deems necessary to prevent evasion of taxes or clearly to reflect the income of any such organization, industry or business.
This Administrative Determination aims to establish the parameters used by the Secretary for the allocation of salaries to an Officer-Owner for services rendered to an Export Company Eligible Services.
For purposes of this Administrative Determination the following terms shall have the meanings indicated:
- Official-Owner – means anyone shareholder or partner holding at the end of the taxable year an ownership interest in an export services company and meets the following requirements:
- devotes no less than eighty (80) percent of their time to the eligible activity under the laws of Export Services;
- is a resident of Puerto Rico, as such term is defined in Section 1010.01 (a) (30) of the Code, applicable during the taxable year,
- Eligible Export Company Services – means that all services Export Company that meets the following requirements:
- More than eighty percent (80%) of all gross income of the Company Export Services and controlled corporations or related entities, as such terms group defined in Sections 1010.04 and 1010.05 of the Code, is derived from the providing export services for eligible covered under an exemption decree under any statute Export Services;
- Export Company Services and controlled corporations or their related entities group as such terms are defined in Sections 1010.04 and 1010.05 of the Code, have not carried out a trade or business or activity for the production of income in Puerto Rico previous the date of filing of the application for tax exemption (“New Business”).
For purposes of this requirement, it is not considered a New Business an acquired or transferred business carrying out a trade or business or activity for the production of income in Puerto Rico prior to the date of filing of the application tax exemption.
For purposes of this definition, are included as related entities societies and other excluded members dedicated to the exercise of a trade or business for the production of income in Puerto Rico, which applied the rules of group of related entities, a member would be considered part of that group.
All Official-Owner must receive a reasonable annual salary that clearly reflects its income from services rendered to the Export Services Company which maintains an ownership interest at the end of the taxable year.
For purposes of the provisions of Section 1040.09 of the Code, the annual salary will be capped at $350,000. Therefore, in cases where an officer-Owner accrues a lower annual salary of $350,000 for services rendered to the Export Services Company, the Secretary, in his discretion, can evaluate the reasonableness of such income compared to the services provided by the Officer-owner, and may charge additional wages up to $ 350,000 per year, in order to clearly reflect the income of the Official-Owner.
The evaluation will be based on the facts and circumstances of each case considering, but not limited to the economic reality of the Export Services Company, the functions performed by the Officer-Owner within the organizational hierarchy of that Company and the wage trend market in comparable positions.
All decree issued under the laws of Export Services in effect on the date of this administrative determination that meet the requirements set forth herein shall apply subject to the provisions of this administrative determination.
The provisions of this Administrative Determination are effective immediately.
For additional information regarding the provisions of this Administrative Determination, you can call (787) 722-0216, Option 8.
Juan C. Gomez Zaragoza
Porto Capital does not assume any responsibility on the translation of this Administrative Determination, nor we assume responsibility to update this information.
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