I. STATEMENT OF MOTIVES
On March 31, 2011, the Department of the Treasury (Department) issued Internal Revenue Informative Bulletin No. 11-08 (Bulletin 11-08) answering questions related to the application of the effectively connected income source rule introduced by Act 154-2010, as amended (the "ECISR")
Among other things, Bulletin 11-08 indicates that corporations subject to the ECISR must use Form 480.20 (Corporation Income Tax Return) to report income under the ECISR2.
The Puerto Rico Internal Revenue Code of 2011, as amended (the "2011 Code"), changed significantly the Puerto Rico tax treatment of partnerships and limited liability companies (LLCs) that are treated as partnerships or disregarded entities for purposes of the U.S. Internal Revenue Code (the "US IRC") or applicable foreign tax statutes. Whereas under the 1994 Code, partnerships and LLCs were, with certain exceptions, treated as taxable entities separate from their partners or members, under the 2011 Code, partnerships and LLCs that are treated as partnerships or disregarded entities for purposes of the US IRC or applicable foreign tax statutes are treated as flow through entities under rules similar to the partnership rules in Subchapter K of the US IRC.
Consequently, taxpayers have requested guidance as to the filing and reporting requirements applicable to partnerships and LLCs that are treated as partnerships or disregarded entities for purposes of the US IRC or applicable foreign tax statutes, and to their partners or members, with respect to any Puerto Rico income tax liability arising under the ECISR. Such requests for guidance generally relate to situations where the entity that is deemed engaged in trade or business in Puerto Rico pursuant to Section 1123(f)(4)(B)(ii) of the 1994 Code (applicable under the 2011 Code by virtue of Section 1035.05 of the 2011 Code) has more than one partner or member which, in turn, is deemed engaged in trade or business within Puerto Rico by virtue of Section 1071.01 of the 2011 Code, or where there is a chain of flow-through entities between such entity and any ultimate owner that is not a flow-through entity. Similar requests for guidance by entities engaged in trade or business in Puerto Rico without regard to Section 1123(f)(4)(B)(ii) of the 1994 Code were addressed in Administrative Determination 12-07, issued by this Department on March 14, 2012.
The purpose of this Administrative Determination is, first, to notify that, in the case of foreign corporations subject to the ECISR that, except for the application of Section 1123(f)(4)(B)(ii) of the 1994 Code, would not otherwise be deemed engaged in trade or business in Puerto Rico, a new form is available to report income under the ECISR, Form 480.20(U). Furthermore, this Administrative Determination provides guidance to partnerships and LLCs that are treated as partnerships or disregarded entities for purposes of the US IRC or applicable foreign tax statutes, and their partners or members, with respect to their filing and reporting requirements for any Puerto Rico income tax liability arising under the ECISR, and allows the filing of composite returns under the circumstances described herein.
II. STATUTORY BASIS
Pursuant to Section 1010.01(a)(3)(A) of the 2011 Code, an LLC that is treated as a partnership or disregarded entity for purposes of the US IRC or applicable foreign tax statutes is treated as a partnership for Puerto Rico income tax purposes. Accordingly, all references in this Administrative Determination to "partnerships" and "partners" apply equally to LLCs that are treated as partnerships or disregarded entities for purposes of the US IRC or applicable foreign tax statutes, and their members.
A. Foreign Partners
Section 1071.01 of the 2011 Code provides that partners in a partnership that is engaged in trade or business in Puerto Rico are deemed engaged in trade or business in Puerto Rico with respect to their distributive share in the partnership's income, gains, losses, deductions or credits. Accordingly, foreign corporations and nonresident individual partners are subject to the regular income tax rates in Subchapters A and B of Chapter 2 of Subtitle A of the 2011 Code with respect to the income treated as effectively connected with the active conduct of a trade or business in Puerto Rico.
Pursuant to Sections 1091.07(b) and 1092.06(b), the Secretary may, subject to such conditions, limitations and exceptions as he may establish, exempt from the requirement to file an income tax return nonresident aliens and foreign corporations that are deemed engaged in trade or business in Puerto Rico solely by reason of Section 1071.01, if their Puerto Rico income tax liability is satisfied through the withholding of income taxes at the source.
B. Partnerships
Section 1061.03 requires that every partnership file a return to report, among others, the income and deductions of the partnership, as well as the name, address and taxpayer identification number ("TIN") of the partners that will participate in the partnership's income and losses for such taxable year. The partnership must also provide to each partner a report with such information as may be necessary for the partners to meet their Puerto Rico income tax responsibilities under the 2011 Code.
Pursuant to Section 1062.07, the partnership is also required to withhold and deposit with the Secretary, on a quarterly basis, 30% (or applicable lower rate) of the estimated amount of each partner's distributive share of the partnership's income or gains. Any unpaid balance at the close of the taxable year must be deposited together with the return required by Section 1061.03(a) or a request for automatic extension of time to file such return.
Ill. DETERMINATIONS
A. Individuals and Foreign Corporations
As previously mentioned, foreign corporations subject to the ECISR that, except for the application of Section 1123(f)(4)(B)(ii) of the 1994 Code, would not otherwise be deemed engaged in trade or business in Puerto Rico, must report their income under the ECISR in Form 480.20(U), available in our Internet Page, www.hacienda. gobierno.pr., under "Returns of Taxable Corporations", and compute the tax thereon in Part I of said Form.
In addition, and as indicated in Question 5 of Bulletin 11-08, all corporations subject to the ECISR must comply with the estimated tax payments requirements of Section 1061.23 of the 2011 Code. The estimated tax payments under the ECISR are to be made together with Form 480.37, or using "Colecturía Virtual" at www.hacienda.gobierno.pr.
Finally, taxpayers that, even in the absence of Section 1123(f)(4)(B)(ii) of the 1994 Code, would be subject to taxation in PR and are also subject to the ECISR3 must complete and include Schedule U (Net Income Attributable to Puerto Rico Sources pursuant to Section 1123(f) of the Code) with their corresponding income tax return. Schedule U is available in our Internet Page under "Schedules".
B. Partnerships and Their Partners
1. General Rule
Partnerships (including LLCs that are treated as partnerships or disregarded entities for purposes of the US IRC or applicable foreign tax statutes) that are subject to the ECISR and which, except for the application of Section 1123(f)(4)(B)(ii) of the 1994 Code, would not be otherwise deemed engaged in trade or business in Puerto Rico (referred to herein as "Act 154 Resident Partnerships), must report their income under the ECISR in Form 480.20(U). The Act 154 Resident Partnership does not need to complete Part I of Form 480.20(U), but must report its partners' distributive share of such income, and the Puerto Rico income tax deposited with respect thereto, in Part II of the Form. Form 480.20(U) must be filed with the Secretary on or before the 15th day of the sixth month following the close of the partnership's taxable year, or extended due date.
Every partnership that is required to file Form 480.20(U) must also complete and remit to each of its partners the informative return (Form 480.6 S (Spanish) or 480.60 S (English)), required under Section 1061.03(b) of the 2011 Code. The informative return must be provided to each such partner on or before the 15th day of the sixth month following the close of the partnership's taxable year, or extended due date.
In addition, all partnerships subject to the ECISR (Act 154 Resident Partnerships as well as partnerships that, even in the absence of Section 1123(f)(4)(B)(ii) of the 1994 Code, would be treated as engaged in trade or business in Puerto Rico) must comply with the estimated tax payments requirements of Section 1062.07(b) of the 2011 Code. The estimated tax payments with respect to the income under the ECISR are to be made together with Form 480.37, or using "Colecturía Virtual" at www.hacienda.gobiemo.pr.
2. Composite Returns
Certain jurisdictions whose tax treatment of pass-through entities and their owners is similar to that under the 2011 Code allow that nonresident owners meet their filing and reporting requirements through the filing of composite returns, generally filed by the entity on its owners behalf. This mechanism reduces the number of substantially identical returns that the jurisdiction must process, while also reducing compliance costs to those who invest within the jurisdiction through such entities. Hence, as stated in AD 12-07, this Department has determined to allow the filing of composite returns in the case of Act 154 Resident Partnerships, subject to the following terms and conditions:
a. Composite returns under this Administrative Determination are only available to partners of partnerships, and LLCs (1) that are treated as partnerships or disregarded entities for purposes of the US IRC or applicable foreign tax statutes, (2) that are subject to the ECISR and (3) which, except for the application of Section 1123(f)(4)(B)(ii) of the 1994 Code, would not be otherwise deemed engaged in trade or business in Puerto Rico (that is, Act 154 Resident Partnerships).
b. Both corporate and individual partners may opt to participate in the composite return. The election must be made on an annual basis, by submitting to the Act 154 Resident Partnership a sworn statement, in Schedule I (CU), stating, among other things:
i. The partner's name, address, TIN and other information therein requested;
ii. That the partner is a partner or member in the Act 154 Resident Partnership;
iii. That the partner was not a resident of Puerto Rico and, except for the application of Section 1123(f)(4)(B)(ii) of the 1994 Code, would not otherwise be deemed to be engaged, in trade or business within Puerto Rico at any time during the taxable year for which the election to file a composite return is made;
iv. The partner's share in the Act 154 Resident Partnership's income, gains and losses;
v. That the partner does not derive other income from Puerto Rico sources and that the Act 154 Resident Partnership is the partner's sole source of income subject to Puerto Rico income taxation; and
vi. That the partner agrees to be included in the composite return and, if the return reflects an overpayment of tax, that any refund resulting therefrom shall be reimbursed directly to the Act 154 Resident Partnership
c. All qualifying partners agree to single composite filing: - If the following requirements are met: (1) the Act 154 Resident Partnership has deposited with the Secretary, in accordance with Section 1062.07, an amount at least equal to the net taxable income computed under the ECISR determined by the Act 154 Resident Partnership multiplied by 30%, and (2) all the partners qualify therefor and agree there to by marking the appropriate box in question 8 of Schedule I (CU), the Act 154 Resident Partnership may file with the Secretary, on or before the 15th day of the sixth month following the close of the Act 154 Resident Partnership's taxable year (or extended due date, if an extension request was filed by the Act 154 Resident Partnership on behalf of its partners), its Form 480.20-U, and mark the box "All Partners Return".
i. The Act 154 Resident Partnership shall complete Parts II through IX of such return, but not Part I.
ii. The tax liability of the partners shall be the net taxable income under the ECISR determined by the Act 154 Resident Partnership multiplied by 30%.
iii. The Act 154 Resident Partnership must include with the return the original signed copies of the Schedule I (CU) submitted by its partners.
iv. The return filed by the Act 154 Resident Partnership, together with the sworn statement submitted by each partner in Schedule I(CU), shall constitute, for all purposes of the Code, the partnership's and each partner's Puerto Rico income tax return.
d. If not all partners agree to or qualify for a single composite filing:
i. Individual Partners- In the case of individual partners (be they U.S. citizens or not), the Act 154 Resident Partnership shall file with the Secretary, on or before June 15 of the year following the close of the partnership's taxable year (or extended due date, if an extension request was filed), a Composite Return - Individual Partners and Members of Partnerships and Limited Liability Companies, Form 482(C) (Spanish) or 482.0(C) (English), available in our Internet Page, www.hacienda.gobierno.pr., under "Returns of Flow-Through Entities". The Act 154 Resident Partnership shall include in Part II, line 1 and Part V, lines 1(G) and 13 of such return the portion of the income computed under the ECISR reported in the partnership's Form 480.20(U) that is attributable to all the individual partners who have opted to be included in the composite return.
(1) The Act 154 Resident Partnership can claim, on behalf of its partners, the personal exemptions (including exemption for dependents) available to partners who are U.S. citizens as reported to the partnership in Schedule I (CU). The Act 154 Resident Partnership cannot claim personal exemptions with respect to partners who are not U.S. citizens, pursuant to Section 1091.04.
(2) The tax liability of the individual partners included in the composite return shall be determined in the aggregate. In as much as, pursuant to Section 1021.01(a), the first bracket of net income is not subject to tax (because the tax rate is 0%), to determine the aggregate income tax liability of said partners, the Act 154 Resident Partnership shall deduct from the combined net income of the individual partners included in the composite return the amount resulting from multiplying the number of individual partners included in the composite return by the amount of said bracket. Any excess shall be taxed at the maximum tax rate provided in Section 1021.01(a) of the 2011 Code for the taxable year 4 .
(3) The Act 154 Resident Partnership must include with the composite return the original signed copies of the Schedule I (CU) submitted by its partners.
(4) The composite return filed by the Act 154 Resident Partnership, together with the sworn statement submitted by each partner in Schedule I (CU), shall constitute, for all purposes of the Code, the partners' Puerto Rico income tax return.
ii. Corporate partners - In the case of corporate partners, the Act 154 Resident Partnership shall file with the Secretary, on or before June 15 of the year following the close of the partnership's taxable year (or extended due date, if an extension request was filed) a Form 480.20-U, marked "Composite Corporation Return". The Act 154 Resident Partnership shall include in Part I, line 1 of such return the portion of the income computed under the ECISR reported in the partnership's Form 480.20(U) that is attributable to all the corporate partners that have opted to be included in the composite return.
(1) The Act 154 Resident Partnership can claim, on behalf of its corporate partners, any portion of surtax deduction allocated to such corporate partners pursuant to Section 1022.02(e) of the 2011 Code.
(2) The tax liability of the corporate partners included in the composite return shall be determined in the aggregate.
(3) The Act 154 Resident Partnership must include with the composite return the original signed copies of the Schedule I (CU) submitted by its partners.
(4) The composite return filed by the Act 154 Resident Partnership, together with the sworn statement submitted by each partner in Schedule I (CU), shall constitute, for all purposes of the Code, the partners Puerto Rico income tax return.
e. Partners that elect not to be included in a composite return or that are precluded from doing so because they derive other Puerto Rico source income or because even in the absence of Section 1123(f)(4)(B)(ii) of the 1994 Code, they would be treated as engaged in trade or business in Puerto Rico under the 2011 Code or, in the case of individuals, have resided in Puerto Rico at any time during the taxable year concerned, must file a separate Puerto Rico income tax return under the Code.