(No. 24) (Approved April 11, 2001) AN ACT

Transcription

1 (H.B. 745) (No. 24) (Approved April 11, 2001) AN ACT To amend subsection (a), add a new subsection (b), redesignate subsections (b), (c), (d), and (e) as subsections (c), (d), (e), and (f), respectively, amend subsection (d), and add a new clause (3) to subsection (e) of Section 1014; to amend clause (29) of subsection (b) of Section 1022; to amend clause (2) of subsection (c) of Section 1121; and to amend clause (1) of subsection (g) of Section 1147 of Act No. 120 of October 31, 1994, as amended, known as the Puerto Rico Internal Revenue Code of 1994, in order to reduce the tax rates imposed on long-term capital gains related to the disposition of property located in Puerto Rico, as defined in said Act. STATEMENT OF MOTIVES The Government of the Commonwealth of Puerto Rico, pursuant to its Economic Development Program, is committed to the implementation of a strategic plan to promote investments in Puerto Rico and the development of markets with local capital. The amendments proposed in this Act shall be of great benefit to the economy of Puerto Rico and contribute substantially to the development and improvement of the capital markets in Puerto Rico by promoting the investment of capital on our Island. The reduction of tax rates proposed in this Act has been established in other jurisdictions with very favorable economic results. A reduced capital gains tax rate has been an important factor in the economic policy of Japan since the Second World War. The

2 2 Congress of the United States passed legislation in 1997 reducing the long-term capital gains tax rates. The reduction of the capital gains tax rates will promote greater economic activity by diminishing the reluctance to sell capital assets. This Legislature, aware of the importance of achieving this objective, deems it necessary to approve this measure so as to reduce the tax rates imposed on long-term capital gains generated by properties located in Puerto Rico from twenty percent (20%) to ten percent (10%) in the case of individuals, estates and trusts, and from twenty-five percent (25%) to twelve point five percent (12.5%) in the case of corporations and partnerships. Furthermore, this legislation seeks to specify and identify the property deemed to be property located in Puerto Rico and to modify the special provisions that require withholding the taxes that apply in the case of individuals who are United States citizens not residing in Puerto Rico. BE IT ENACTED BY THE LEGISLATURE OF PUERTO RICO: Section 1. Subsection (a) is hereby amended; a new subsection (b), added; subsections (b), (c), (d), and (e) are redesignated as subsections (c), (d), (e), and (f), respectively; subsection (d) is amended; and a new clause (3), added to subsection (e) of Section 1014 of Act No. 120 of October 31, 1994, as amended, known as the Puerto Rico Internal Revenue Code of 1994, to read as follows: Section Special taxes to individuals, estates, and trusts on net long-term capital gains. (a) Twenty (20) percent tax rate. Except as provided in subsections (b) and (c) of this Section, any individual, estate, or trust shall pay, in lieu of any other taxes imposed by this Subtitle, a tax of twenty (20) percent on the excess amount of any net long-term

3 3 capital gain on any net short-term capital loss, as said terms are defined in Section 1121, or may choose to include said gain as part of its gross income on the income tax return of the year said gain is acknowledged, and pay taxes according to the normal tax rates, whichever is of greater benefit to the taxpayer. (b) Ten (10) percent tax rate. Except as provided in subsection (c) of this Section, any individual, estate, or trust shall pay, in lieu of any other taxes imposed by this Subtitle, a tax of ten (10) percent on the excess amount of any net long-term capital gain on any net short-term capital loss, as said terms are defined in Section 1121, that are derived from the sale or exchange of property located in Puerto Rico, as said terms are defined in clause (3) of subsection (e) of this Section, carried out on or after March 31, 2001, or may choose to include said gain as part of its gross income on the income tax return of the year said gain is acknowledged, and pay taxes according to the normal tax rates, whichever is of greater benefit to the taxpayer. (c)... (d) Determination of net capital gains for the purposes of subsections (a), (b), and (c). In the event the person eligible to avail him/herself of the special rates of twenty (20), ten (10) or seven (7) percent, as the case may be, has generated capital gains from two or more of the categories described in subsections (a), (b), and (c), and has, in turn, incurred capital losses when determining said net capital gains under subsections (a), (b) and (c), said losses shall be applied against the gains in the proportion that each of these gains keeps with the total thereof.

4 4 (e) Definitions. (1)... (2)... (3) Definition of property located in Puerto Rico. For the purposes of subsection (b) of this Section, the term property located in Puerto Rico means and includes only the following: a) All real property located in Puerto Rico. b) Stock certificates issued by domestic corporations, or the shares of a partner in the capital of a domestic partnership. c) Stock certificates and shares in foreign corporations and partnerships, when not less than eighty (80) percent of the gross income of said foreign corporation or partnership for the three (3)-year period ending with the close of the tax year prior to the transaction that gave rise to the long-term capital gains, or for that portion of said period in which the corporation or partnership existed, was derived from sources in Puerto Rico, pursuant to the provisions of this Subtitle. d) Bonds, notes or other debt obligations issued by: (i) The Commonwealth of Puerto Rico; (ii) the municipalities of the Commonwealth of Puerto Rico; or (iii) the authorities or public corporations of both the Commonwealth of Puerto Rico and its municipalities.

5 5 e) Bonds, notes or other debt obligations of an individual resident of Puerto Rico, or a domestic corporation or partnership; or secured with real property located in Puerto Rico. f) Bonds, notes and other debt obligations of foreign corporations or partnerships when not less than eighty (80) percent of the gross income of the foreign corporation or partnership for the three (3)-year period ending with the close of the tax year prior to the transaction that gave rise to the long-term capital gains, or for that portion of said period in which the corporation or partnership existed, was derived from sources in Puerto Rico, pursuant to the provisions of this Subtitle. (f)... Section 2. Clause (29) of subsection (b) of Section 1022 of Act No. 120 of October 31, 1994, as amended, is hereby amended to read as follows: Section Gross Income. (a)... (b) Exclusions from gross income. The following items shall not be included in the gross income and shall be exempted from taxation under this Subtitle: (1)... (29) Net capital gains. The net long-term capital gain subject to the tax of twenty (20), ten (10), or seven (7) percent provided in Section 1014.

6 6 Section 3. Clause (2) of subsection (c) of Section 1121 of Act No. 120 of October 31, 1994, as amended, is hereby amended to read as follows: Section Capital Gains and Losses. (a)... (c) Alternative Tax in the Case of Corporations and Partnerships. If the net long-term capital gains of any corporation or partnership for any tax year exceed the net short-term capital losses, a tax shall be levied, collected and paid in lieu of the tax imposed by Sections 1015, 1016, 1017, 1201(b)(1) and 1207(a), to be determined as follows, if, and only if said tax were less than the tax imposed by said Sections: (1)... (2) An amount shall then be determined, to be equal to: (A) twelve point five (12.5) percent of said excess in the case of property located in Puerto Rico, as said term is defined in Section 1014(e)(3), or (B) twenty five (25) percent of said excess in the case of any other property not described in subclause (A) of this clause (2). (3)... Section 4. Clause (1) of subsection (g) of Section 1147 of Act No. 120 of October 31, 1994, as amended, is hereby amended to read as follows: Section Withholding at source of the tax in the case of nonresident individuals. (a)...

7 7 (g) Special rule in cases of sale of property by nonresident persons. (1) Obligation to withhold. Notwithstanding any other provisions of this Subtitle, a person who acquires real property or shares from any nonresident person (if the profit made in the transaction constitutes income from Puerto Rican sources) shall deduct and withhold twenty-five (25) percent of the payments he/she makes to the nonresident person during the current tax year or in subsequent tax years as part of the purchase price of said property. Such withholding shall be of the same nature, and be declared and paid to the Secretary in the same manner and subject to the same conditions provided in the other subsections of this Section. When the recipient is an individual who is a United States citizen, the withholding provided herein shall be of ten (10) percent if the acquired property constitutes property located in Puerto Rico, as said term is defined in Section 1014(e)(3), or of twenty (20) percent when the property does not constitute property located in Puerto Rico, pursuant to Section 1014 (e)(3). For the purposes of this clause, the term purchase price when referring to real property, means the total amount of the payments that the purchaser is bound to make, reduced by: (A)... (B)... (C)...

8 8 No other reduction shall be allowed on the sales price for the purposes of this clause. If the seller acquired real property through bequest, legacy, inheritance or gift, the sales price shall only be reduced by the expenses described in subclauses (B) and (C). (2)... (h)... (j)[sic]... Section 5. This Act shall take effect immediately after its approval, but its provisions shall be applicable with respect to transactions conducted in tax years beginning after March 31, 2001.

9 9 August 5, 2002 Elba Rosa Rodríguez-Fuentes, Esq., Director of the Office of Legislative Services of the Legislature of Puerto Rico, hereby certifies to the Secretary of State that she has duly compared the English and Spanish texts of Act No. 24 (H.B. 745) of the 1 st Session of the 14 th Legislature of Puerto Rico, entitled: AN ACT to amend subsection (a), add a new subsection (b), redesignate subsections (b), (c), (d), and (e) as subsections (c), (d), (e), and (f), respectively, amend subsection (d), and add a new clause (3) to subsection (e) of Section 1014; to amend clause (29) of subsection (b) of Section 1022; to amend clause (2) of subsection (c) of Section 1121; and to amend clause (1) of subsection (g) of Section 1147 of Act No. 120 of October 31, 1994, as amended, known as the Puerto Rico Internal Revenue Code of 1994,, etc., and finds the same are complete, true and correct versions of each other. Elba Rosa Rodríguez-Fuentes