This page was intentionally left in blank. 2 Table of Contents Chapter 1: An Introduction to Puerto Rico .................................................... 8 1. Historical Overview .......................................................................................................... 8 2. Geography ....................................................................................................................... 8 3. Government Systems ...................................................................................................... 8 4. Demographics.................................................................................................................. 9 5. Language ......................................................................................................................... 9 6. Currency and Monetary Policy ...................................................................................... 10 7. Macroeconomic Overview and Key Indicators ............................................................ 10 A. Gross Domestic Product (GDP) ........................................................................... 10 B. Work Force ............................................................................................................ 11 C. External Trade ....................................................................................................... 11 D. Retail Sales.............................................................................................................11 E. Consumer Price Index (CPI) ................................................................................. 11 F. Competitiveness .................................................................................................... 12 8. Infrastructure .................................................................................................................. 13 A. Puerto Rico Ground Transportation ..................................................................... 13 B. Airports ................................................................................................................. 14 C. Seaports ................................................................................................................ 16 D. Electric Power ....................................................................................................... 16 E. Water ...................................................................................................................... 17 F. Communications .................................................................................................... 18 G. Convention Center ............................................................................................... 19 9. Education System .......................................................................................................... 20 10. Science, Technology and Research ........................................................................... 21 Chapter 2: Establishing a Business in Puerto Rico ................................... 22 1. Business Entities ............................................................................................................ 22 A. Sole Proprietorship ............................................................................................... 22 B. Partnerships .......................................................................................................... 22 C. Corporations ......................................................................................................... 25 D. Limited Liability Company ................................................................................... 28 E. Business Trusts .................................................................................................... 28 F. Joint Ventures ........................................................................................................ 29 G. Cooperatives ....................................................................................................... 29 H. International Banking Entities (IBE) ..................................................................... 29 I. Insurance Companies ........................................................................................... 29 J. Real Estate Investment Trusts ............................................................................. 30 K. Registered Investment Company ....................................................................... 31 L. Special Employee-Owned Corporation .............................................................. 32 M. Public-Private Partnerships ................................................................................ 33 2. Basic Requirements & Procedures for Starting a Business ......................................... 33 A. Requesting and Registering an Employer Identification Number ..................... 33 B. Merchant’s Registration Certificate .................................................................... 34 C. Compulsory Business Registry .......................................................................... 34 D. Municipal License Taxes ..................................................................................... 34 E. Bidders Registry .................................................................................................. 34 F. Accounting Books ................................................................................................ 35 3 G. Audited Financial Statements ............................................................................ 35 H. Internal Revenue Licenses .................................................................................. 35 I. Municipal Revenue Collection Center (CRIM) ..................................................... 35 J. Construction and Use Permits ............................................................................ 36 K. Sanitary License .................................................................................................. 36 L. Fire Department Inspection ................................................................................. 36 M. Emergency Generator Operation Permit ........................................................... 36 Chapter 3: Tax Systems ................................................................................. 37 1. The U.S. Tax System ..................................................................................................... 37 A. Individuals Residing in Puerto Rico .................................................................... 37 B. Puerto Rico Corporations ................................................................................... 37 C. United States Corporations ................................................................................ 37 2. The Puerto Rico Tax System ......................................................................................... 38 A. Individual Income Taxes....................................................................................... 38 B. Business Taxes ..................................................................................................... 39 C. Gross Income .................................................................................................... 42 D. Dividend Income ................................................................................................. 43 E. Interest Income ................................................................................................... 43 F. Business Expenses .............................................................................................. 43 G. Loss Carryovers .................................................................................................. 48 H. Tax Credits .......................................................................................................... 49 I. Tax Rates and Calculation of Taxable Income ..................................................... 50 J. Assessment and Filing ........................................................................................ 52 K. Funding the Corporation .................................................................................... 52 L. Reorganizations in General ................................................................................. 52 M. Foreign Entities Doing Business in Puerto Rico ............................................... 53 N. Other Reporting Requirements .......................................................................... 55 O. Tax Withholding .................................................................................................. 56 P. Municipal License Tax ......................................................................................... 58 Q. Property Taxes .................................................................................................... 58 R. Excise Tax ............................................................................................................ 59 S. Sales and Use Tax ............................................................................................... 60 T. Gift Tax ................................................................................................................. 61 U. Estate Tax ............................................................................................................ 62 V. Payroll Taxes .......................................................................................................