Biz Legal Hub

Corporations

Under Puerto Rico law, there are three types of corporations: (i) Domestic Corporation, (ii) Foreign Corporation, and (iii) Professional Service Corporation.

Domestic Corporation: A domestic corporation is a legal entity incorporated under the General Corporation Act of Puerto Rico (the ‘GCA’). The GCA provides a flexible framework for the creation and operation of business entities and grants wide powers to incorporate various types of businesses. Foreign Corporation: A foreign corporation is a legal entity organized under the laws of a jurisdiction other than Puerto Rico. A foreign corporation may operate in Puerto Rico as long as it complies with certain registration requirements set forth in the GCA. Professional Service Corporation: A professional service corporation is a legal entity organized to provide professional services (i.e., licensed professionals such as attorneys, accountants, engineers, physicians, etc.) and is subject to specific licensing requirements.

Limited Liability Companies

A limited liability company (‘LLC’) is a hybrid business entity that combines some of the features of both corporations and partnerships. It provides pass-through federal taxation to its members, as well as limited liability protection for the members’ personal assets. LLCs in Puerto Rico are governed by the Puerto Rico Limited Liability Company Act.

Limited Liability Partnerships

A limited liability partnership (‘LLP’) is a partnership in which some or all partners have limited liabilities. It exhibits features of both partnerships and corporations. In a LLP, one partner is not responsible or liable for another partner’s misconduct or negligence.

Civil Partnerships

A civil partnership is created by agreement of two or more persons, known as partners, to contribute assets, money, or industry to a common fund with the intention of dividing the profits among themselves. Civil partnerships are governed by the Puerto Rico Civil Code.

Regardless of the business form, the following general requirements apply to businesses operating in Puerto Rico:

• All businesses must register with the Puerto Rico Department of State.

• All businesses must obtain a ‘Merchant’s Registration Certificate’ from the Puerto Rico Department of Treasury (Hacienda).

• All businesses that engage in certain types of regulated activities must obtain the relevant license from the applicable regulatory agency (e.g., Health Department, Financial Institutions Commission, Office of the Commissioner of Insurance).

• All businesses must register with the Puerto Rico Department of Labor and Human Resources and comply with applicable labor laws.

• All businesses must register with the Puerto Rico Municipal Revenue Collection Center (CRIM) in the municipality where they operate and pay municipal license fees.

• All businesses that have employees must register with the Puerto Rico State Insurance Fund Corporation (CFSE) for workmen’s compensation coverage.

Export Services & Manufacturing (EIA)

The Puerto Rico Export Services Act and the Industrial Incentives Act (‘EIA’) provide tax benefits to eligible businesses engaged in manufacturing and export services activities. The main tax benefits available to eligible businesses are:

• A 4% fixed income tax rate of their net income (derived from the eligible industry);

• 0–1% fixed income tax rate for novel or pioneer activity, as defined by the EIA;

• 90% exemption from property taxes;

• 60–90% exemption from municipal license tax, depending on the location and size of the business;

• 100% exemption from sales and use tax for certain material and/or equipment;

• Tax credits and/or deductions for equipment, investment, job creation, and reduction of electricity cost.

Eligible businesses are required to file an application with the Office of Industrial Tax Exemption, ascribed to the Department of Economic Development and Commerce of the Commonwealth of Puerto Rico, to obtain the benefits of the EIA. Once the tax grant is awarded, businesses are subject to reporting duties and the payment of annual fees.

Act 60-2019: Puerto Rico Incentives Code

Act 60-2019, known as the Puerto Rico Incentives Code (the ‘Incentives Code’), codified the tax incentives formerly granted under Acts 20 and 22, as well as many other tax incentives laws, to encourage long-term economic activity in Puerto Rico. The Incentives Code adopted a streamlined legal and administrative framework for the application, assessment, and grant of incentives by the Government of Puerto Rico.

The Incentives Code provides unique opportunities to make Puerto Rico a prime destination for international services, including consulting, electronic data processing services, health services, and education services, among others.

To enjoy the benefits granted under the Incentives Code, an eligible business or individual investor must apply for and obtain a tax exemption decree from the Puerto Rico Department of Economic Development and Commerce. Such decree is a binding contract with the Government of Puerto Rico not subject to subsequent legislative changes.

As a territory of the United States, Puerto Rico is governed by US immigration law. All foreign employees require work permits and/or residency permits issued by the United States Citizen and Immigration Services (USCIS), ascribed to the Department of Homeland Security.

The Commonwealth of Puerto Rico law provides extensive and protectionist labor legislation. There is special legislation for areas such as, but not limited to: unemployment and disability insurance, workmen’s compensation insurance, unjustified termination indemnity, discrimination, vacation, and sick leave, wages, Christmas bonuses, maternity and paternity leave, among others.

Depending on the nature of the business, a company may also be required to obtain licenses particular to its industry (e.g. health-care providers are regulated by the Department of Health of the Commonwealth of Puerto Rico, insurance providers by the Office of the Commissioner of Insurance, banking or financial institutions by the Financial Institutions Commission).

Puerto Rico is protected under the US legal framework for intellectual property protection:

• Patents — Inventions and innovations are protected under US patent law administered by the United States Patent and Trademark Office (USPTO).

• Trademarks — Brand names, logos, and trade dress are protected under US trademark law, also administered by the USPTO.

• Copyright — Original creative works are protected under US copyright law administered by the US Copyright Office.

Because Puerto Rico operates under the US intellectual property framework, businesses operating in Puerto Rico benefit from the same robust protections available to businesses in any US state.

The Constitution of the Commonwealth of Puerto Rico establishes the framework for the Labor Laws of Puerto Rico, through its Articles 15, 16, 17, and 18. The Constitution provides the minimum range of protection that can be granted to employees. These provisions cannot be modified by a written employment contract unless it grants workers further favorable conditions than the ones that are set as a minimum by the Constitution and related laws.

Act No. 180-1999, as amended, known as the Minimum Wage, Vacation and Sick Leave Act, statutorily incorporates, as a substantive right, the automatic and immediate application of the Federal Minimum Wage to all workers in industries in Puerto Rico covered by the Fair Labor Standards Act (FLSA). However, certain dispositions of the FLSA only apply to those employees who work in industries covered by the FLSA. As such, not all employees in Puerto Rico are covered by the FLSA.

Contact EDGE Legal for further information on applicable labor statutes and how they affect your business.