When US corporate taxpayers begin thinking about ways to legally strategize for a lower tax bill, many consider moving operations to Puerto Rico. The island offers the benefits of operating within a U.S. territory while simultaneously allowing companies to cash in on a more generous foreign tax structure. Puerto Rico offers a wide range of industries a wide range of benefits, including a very generous research and development credit—a tax credit worth up to 50% for all qualifying R&D expenses.
In recent years, Puerto Rico’s tax code has been modified and you’ll notice some of the changes impact R&D tax credit claims. In 2019, Puerto Rico introduced Act 60, the Incentives Code, which consolidated several tax incentives under one umbrella, including the R&D tax credit. The Puerto Rico Public Finances Stabilization Act (Act 52) followed in 2022. Act 52 amended Act 60 and added more compliance requirements for taxpayers looking to claim the credit.
What’s New?
Act 52 mandates that every two years, taxpayers must apply for a Certificate of Compliance from the Secretary of the Department of Economic Development and Commerce (DEDC). The certificate must be signed by a Compliance Professional— a Certified Public Accountant (CPA) or lawyer licensed in Puerto Rico— who will essentially validate that a taxpayer has complied with the Department of Economic Development and Commerce (DEDC) regulations. These expenses will still be subject to additional scrutiny by the Secretary when the final claim is made.
Also, thanks to Act 52, taxpayers must claim the R&D tax credit in two parts: The first half can be claimed the year the Certificate of Compliance was issued. Before Act 52, taxpayers could claim it the same year the investment was made.
What’s the Same?
As always, to qualify for Puerto Rico’s R&D tax credits, activities must be “aimed at advancing knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainties.” The knowledge resulting from research and development must help create new products, improve existing products, or create new commercial services/processes.
R&D activities are where solutions are trialed, improved, and projects are ultimately resolved. Taxpayers are expected to document their experimentation methodology, results and evaluation, and conclusions. Given Puerto Rico’s new regulations, it’s best to prepare detailed, contemporaneous reports and expect them to be scrutinized—a small price to pay for a credit worth up to 50% of your qualifying R&D expenses.
