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In this issue: On its Internal Revenue Informative Bulletin No. 18-24, the Treasury Department (TD) informs that beginning on January 1, 2019 the 7% withholding for rendered services increases to 10%.  In addition, Law 257-2018 states that for the years starting after December 31, 2018, the exemption on withholdings will be up to the first $500.  The Internal Revenue Circular Letter 18-15 establishes the procedure for requesting and issue of the Total or Partial Exemption Certificate.

According to what is established by law, any person, natural or legal, who starts a new business, may request a total exemption from the 10% withholding.  The TD defines “new business” as a person or entity that begins a services activity in or outside Puerto Rico, and whose business lies within the first (1) year of operations, this ruling substitutes the three (3) year exemption period established before the approval of the law.  The TD stresses that the fact a business was incorporated for the first time does not mean it will be automatically considered a new business to be eligible for the exemption.

Eligibility Requisites for the 10% Exemption

Any service provider must comply with the following:

Corporations

  1. If the entity was organized or incorporated in Puerto Rico, it must present the Certificate of Organization or Incorporation that shows the date on which it was organized or incorporated.
  2. If the entity was organized outside Puerto Rico, it must present copy of the Certificate of Incorporation of the state or country where it was incorporated; copy of the income tax returns filed in that country; and copy of the Certificate for Doing Business in Puerto Rico issued by the State Department.
  3. It must be registered at the Internal Revenue Unified System (SURI) and must have received the Merchant Registration Certificate.
  4. It must have registered the employer’s identification number at the TD.
  5. It cannot have rendered any type of service in or outside Puerto Rico previous to the beginning of the services activity on the Island; or if the activity lies within the first (1) year of operations.
  6. The rendering of the services was not carried out by an affiliate entity during the first year (1) of operations.
  7. The person in charge had not rendered the services that he is now providing in name of the affiliate corporation or entity. The TD may require the person to present copies of the last three (3) income tax returns.

Individuals

  1. The Individual must be registered to do business in Puerto Rico; have completed his registration at SURI and obtained his Merchant Registration Certificate.
  2. He must have registered the employer’s identification number at the TD.
  3. He cannot have rendered any type of service in or outside Puerto Rico previous to the beginning of the services activity on the Island; or if the activity lies within the first (1) year of operations.
  4. The rendering of services cannot have been previously provided by a related person during the previous three (3) years of the date for which he is requesting the exemption.
  5. The individual must submit copies of the last three (3) income tax returns filed at the country on which he resided; and copy of the three (3) income tax returns of the related person.
  6. The individual will only be able to claim the exemption when he becomes self-employed for the first time.

 

Obligations of the entities that receive the services

Any person that makes payments for services must deduct and withhold the income tax due by the individual or entity. The payer may require the 10% Total Exemption Certificate from the service provider; or the 4% partial exemption for a withholding of 6%.

The following examples may define these rulings:

Example 1: Individual “B” has been providing consulting services as an independent contractor at the Dominican Republic since 2012.  “B” settles in Puerto Rico on December 2018 to provide services to businesses in Puerto Rico.  According to the rulings established in this Administrative Determination, “B” cannot benefit from the 10% withholding exemption as he has been rendering services on his own at another jurisdiction outside Puerto Rico previous to settling on the Island.

Example 2: Company “F” was incorporated in Puerto Rico during October 2018 to provide strategic services to businesses.  “F” was incorporated by a group of individuals that have not previously rendered services.  According to this Administrative Determination, “F” may benefit from the 10% withholding exemption for the first (1) year of operations of its business.

Example 3: Corporation “G” renders consulting services outside Puerto Rico since 2013.  “G” decides to expand its consulting services to Puerto Rico through new subsidiary “H”, which is incorporated in Puerto Rico and is duly registered as a merchant.  “H” is not considered a “new business” as it is has been already rendering services outside Puerto Rico.  Thus, “H” is not eligible for the 10% withholding exemption.

How to request the Exemption

Any individual, corporation or partnership must fill out form Model SC 2678 or Model SC 2680 and present it at any Taxpayer Service Center or through SURI along with the documents required in the forms.

For additional information on how to request the exemption, please refer to our bulletin titled AUTOMATIC ISSUE OF THE WITHHOLDING EXEMPTION.

Process on how to access and print the Automatic Exemption, the New Business Exemption or the 2019 Exemption

From 2019, all exemptions, including the New Business Automatic Exemption, will be issued through SURI.  To obtain and print your Exemption, access your SURI account, click the Mail tab, select the option See Mail and select the link Partial Exemption Certificate or Total Exemption Certificate.

Any person that wishes to confirm the validity of an Exemption may access SURI’s main page: https://suri.hacienda.pr.gov .  Press the option Validate a certificate or license; select the Withholding at Source Exemption Certificate for Rendered Services in Puerto Rico; and fill out the information to validate the document.

Doctors that have a Decree under the Incentives Law for Physicians—Law No. 14

Any Physician that obtained the Qualified Doctor Certificate and has a Decree under the Incentives Law for the Retention and Return of Doctors, Law 14 of February 21, 2017, will be subject to a fixed rate of 4% of the eligible earned income for offering Medical Professional Services during the period covered by the Decree.

The eligible income earned by a Qualified Doctor that owns a Decree under Law 14 will NOT be subject to the income tax withholding at source.

Therefore, instead of a Withholding Exemption Certificate, the physician must submit a sworn statement and the following information to the payer of services:

(I)     Complete Name

(II)    Physical and postal address

(III)   Social Security Number

(IV)   Decree Number

(V)    A statement that proves that the payment constitutes Eligible Income under Law 14 and the Decree; and that, therefore, he is not subject to the withholding at source for income tax on salaries or payment for rendered services.

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