Continuing our series on Puerto Rico’s Act 60 and the different tax incentives available to individuals and businesses, this article will explore the Act’s tourism tax incentive.
Chapter 5 of Act 60 establishes a targeted tax regime for qualifying tourism businesses. The primary benefit is a reduced Puerto Rico income tax rate, but eligibility depends on the business’s activities and its tourism grant. Under the Act, a new or existing business may qualify if it engages in an eligible tourism activity and is not already covered by a grant or concession under prior tourism incentive laws. A business operating under an earlier incentive may generally apply for a new grant only after surrendering its existing grant or concession. A tourism decree runs for an initial term of 15 years and, upon request, may generally be renewed for one additional 15-year term, giving qualifying businesses up to 30 years of preferential treatment.
Eligible activities include ownership or operation of hotels, condohotels, paradores, guest houses, qualified bed-and-breakfast facilities, timeshare and vacation-club businesses, thematic parks, qualifying golf courses, tourist marinas, nautical tourism and more. The Secretary of the Department of Economic Development and Commerce may recognize additional tourism activities when necessary or convenient for Puerto Rico’s tourism development.
Qualifying tourism businesses may receive the following tax benefits:
- 4% fixed Puerto Rico income-tax rate on income derived from its qualifying tourism activities.
- 100% Puerto Rico income-tax exemption for distributions to shareholders, partners, or members from the exempt business’s tourism-related earnings and profits.
- 50% exemption from municipal license taxes, a 75% exemption from property taxes, and a 75% exemption from municipal construction excise taxes.
- 100% exemption on qualifying fuel and use-and-consumption taxes for articles used in tourism activities.
- 100% exemption for certain interest, charges, and fees on financing used for development, construction, rehabilitation, improvement, or related debt.
- 90% exemption from specified fees and charges on public deeds and private instruments.
- A tourism investment tax credit equal to 30% of the exempt business’s eligible tourism investment (or, under an alternative schedule, 40%), which may be used against income tax. The credit is transferable: it may be sold, assigned, or pledged as loan collateral (commonly to fund construction financing), subject to DDEC approval of the transfer, generally within 60 days of a request.
The reduced rate applies only to income from the granted tourism activities, not necessarily to all income earned by the company. The business should maintain records that distinguish exempt or preferential tourism income, nonqualifying income, related expenses, investments supporting credits, and property used in eligible operations. Domestic companies remain subject to Puerto Rico taxation on worldwide income, while nonresident companies are generally taxed on Puerto Rico-source income or income effectively connected with a Puerto Rico trade or business.
Chapter 5 can significantly reduce both income and local taxes, but the benefits are grant-based and activity-specific. Careful qualification, segregation of income and expenses, credit administration, financial reporting, estimated payments, and timely returns are essential. If interested in this tax incentive, it is advisable to consult a tax professional to ensure proper compliance.
