Municipal business tax exemptions

It is the list of exemptions the Municipal Code itself grants from paying the municipal business tax, in Article 7.206. It should not be confused with something different: Article 7.202(c) also allows a municipality to impose lower rates or even exonerate payment by ordinance, to incentivise an industry, sector or geographic area. That is your municipality’s decision; what follows are exemptions the Act grants and that apply everywhere.

The Article 7.206 exemptions are granted for what is done or received, not for who you are. Some depend on a money threshold — five thousand dollars of volume of business, fifty thousand of annual gross income for craft workshops; others depend on an external certification, such as the Housing Department’s for rental housing; and several repeat the same condition: that no part of the net earnings inure to the benefit of any shareholder or private individual.

• For the volume exemption: that the volume of business of the service, sale, financial business, industry or business not exceed five thousand (5,000) dollars (Article 7.206(a)(2)).Verified against the official source
• For craft and plastic-arts workshops: that annual gross income not exceed fifty thousand (50,000) dollars and that they be operated directly by the artisan or artist in the exercise of their trade (Article 7.206(a)(23)).Verified against the official source
• For the sale of agricultural products: that they be sold directly by the farmer, retail or wholesale (Article 7.206(a)(4)).Verified against the official source
• For the non-profit entities in subsections (7) to (12), (15), (16), (18) and (20): that no part of the net earnings inure to the benefit of any shareholder or private individual (Article 7.206(a)).Verified against the official source
• For cooperatives: meeting the requirements of Act 239-2004, with the exemption limited only to income realised or earned by the persons or entities that are members; savings and credit cooperatives fall under Act 255-2002 (Article 7.206(a)(13) and (14)).Verified against the official source
• For the rental housing associations in subsections (21) and (22): that the Puerto Rico Housing Department so certify (Article 7.206(a)).Verified against the official source
• For the voluntary or benefit employee associations in subsection (16): that eighty-five per cent (85%) or more of their income come from amounts collected from members and contributed by their employer for the exclusive purpose of making those payments and covering expenses (Article 7.206(a)(16)).Verified against the official source

• The Puerto Rico Housing Department certification, for the non-profit associations providing rental housing under subsections (21), (22) and (34) (Article 7.206(a)).
• The Department of Economic Development and Commerce certification for the voluntary retailer chains in subsection (32) (Article 7.206(a)(32)).
• The Department of Education accreditation for the institution, college, academy or school teaching the fine arts in subsection (19) (Article 7.206(a)(19)).
• The Municipal Legislature ordinance, where the social-interest housing exemption in subsection (29) is granted in whole or in part (Article 7.206(a)(29)).

1. 1

   Step 1: Five thousand dollars of volume

   It is the most looked-up exemption, so it goes first. Article 7.206(a)(2) exempts from the patente services, sales, financial businesses or any industry or business subject to the patente authorised by the Code when their volume of business does not exceed five thousand dollars. The threshold is “does not exceed”, so exactly five thousand is still inside. Volume of business is computed as Article 7.204 requires, on the accounting year ended in the previous calendar year.

2. 2

   Step 2: Working as an employee is not volume of business

   Article 7.206(a)(3) settles a confusion that keeps recurring: income received or earned from providing services as an employee of an employer, as Act 1-2011, known as the Puerto Rico Internal Revenue Code of 2011, defines it, is exempt. That is: an employee’s salary is not a volume of business subject to the patente, even though the same work done on one’s own account would be.

3. 3

   Step 3: The craft workshop has its own ceiling

   Article 7.206(a)(23) exempts craft workshops and plastic-arts workshops when their annual gross income does not exceed fifty thousand dollars, when they are operated directly by the artisan or artist in the exercise of their trade, even with the participation of more than one artisan or artist, whether the sale is wholesale or retail. Three things in the text are worth keeping: the threshold is annual gross income, not volume of business; the operation must be run directly by the artisan; and the Act expressly allows more than one artisan to work without losing the exemption.

4. 4

   Step 4: The farmer who sells their own

   Article 7.206(a)(4) exempts the retail or wholesale sale of agricultural products sold directly by the farmer. The condition is in the adverb: directly. The Act does not extend the exemption to someone reselling what another grew.

5. 5

   Step 5: Government, with a sugar-mill carve-out

   Article 7.206(a)(1) exempts every business or industry carried on by and for any agency, subdivision or instrumentality of the federal or state government and its municipalities. And it immediately adds a carve-out surviving from another era: this exemption shall not extend to the businesses or industries of sugar or molasses mills operated by and for the benefit of the Puerto Rico Sugar Corporation.

6. 6

   Step 6: Non-profit organisations, and their shared condition

   Subsections (6) to (12) and (15) cover labour, agricultural or horticultural organisations; fraternal and benefit societies, orders or associations operating under the lodge system and providing life, sickness or accident benefits to members or dependents; cemetery companies held and run exclusively for members’ benefit or not for profit; corporations, community chests and foundations created and run exclusively for religious, charitable, scientific, literary or educational purposes, or for preventing cruelty to children or animals; commercial leagues, chambers of commerce, real estate boards or boards of trade not organised for profit; civic leagues or organisations operating exclusively to promote social welfare, and local employee associations limited to the employees of a particular person in a particular municipality whose earnings go to charitable, educational or recreational purposes; clubs organised exclusively for pleasure, recreation and other non-profit purposes; and title-holding corporations that turn their income over to an exempt entity. Nearly all repeat the same phrase: no part of whose net earnings inures to the benefit of any shareholder or private individual.

7. 7

   Step 7: Cooperatives, with a written limit

   Article 7.206(a)(13) exempts, subject to the requirements of Act 239-2004, known as the General Cooperative Societies Act of Puerto Rico of 2004, cooperative societies organised and operated under its provisions, “but limited only to income realised or earned by the persons or entities that are members of those cooperatives”. Subsection (14) exempts, subject to Act 255-2002, savings and credit cooperatives organised and operated under it. The difference between the two lies in that limit written into the first.

8. 8

   Step 8: Employee, teacher and retirement funds

   Subsections (16) to (18) and (20) cover voluntary or benefit employee associations providing life, sickness or accident benefit payments, on two conditions: that no part of their net earnings inure to private benefit beyond those payments, and that eighty-five per cent or more of their income come from amounts collected from members and contributed by the employer for that exclusive purpose; purely local teachers’ retirement fund associations, whose income consists exclusively of public taxation, of dues on teachers’ salaries and of investment income; benefit associations whose membership is limited to officers or employees of the Government of Puerto Rico or of the United States serving in Puerto Rico; and any trust forming part of a stock-bonus, pension or profit-sharing plan for the exclusive benefit of employees, provided it qualifies as an exempt entity under the federal Internal Revenue Code.

9. 9

   Step 9: Housing: five subsections and one date

   Subsections (21) and (22) exempt non-profit associations providing rental housing to low- or moderate-income families under sections 221(d)(3) or 236 of the 1974 National Housing Act, and those providing it to people over sixty-two under section 202, in both cases when the Housing Department so certifies. Subsection (29) covers the development of social-interest housing construction or rehabilitation projects under Act 47-1987, and clarifies that municipalities shall have the power to grant that exemption, which may be total or partial as the Municipal Legislature approves by ordinance. Subsections (34) and (35) exempt rental income from properties acquired from the Housing Department or the Public Housing Administration: (34) for those acquired on or after 1 August 2008 for rehabilitation under a mixed-finance programme per 24 C.F.R. 941 subpart F, and (35) for projects financed through New Market Tax Credits under Public Law 106-554, in both cases so long as they keep operating under that regulation.

10. 10

    Step 10: Income the Act takes out of the computation

    Several subsections exempt not a business but a class of income. (25) exempts interest on obligations of the Government of Puerto Rico, its instrumentalities and municipalities, and on obligations of the United States Government and its instrumentalities and political subdivisions. (26) exempts gains realised from transactions exempt from income tax under Act 1-2011. (27) and (28) cover income not attributable to Puerto Rico operations of corporations exempt under Act 8 of 1987 and earlier industrial incentive laws, per Sections 936 and 482 of the federal Internal Revenue Code, and the income described in Article 2(j) of that same Act 8. And (36) exempts income from the forgiveness of a loan under the CARES Act Paycheck Protection Program.

11. 11

    Step 11: The exemption that exists only to avoid paying twice

    Article 7.206(a)(32) exempts all volume of business generated through the purchase and resale — transfer — of goods to the voluntary chains of retailers and services that constitute the retail entity, organised under Act 77 of 1964, known as the Puerto Rico Antitrust Act, and duly certified by the Department of Economic Development and Commerce. And it explains its own reason: this exemption exists solely to avoid double taxation for municipal patentes, because the member retailer will be taxed on that income when it sells at retail.

12. 12

    Step 12: Foreign trade zones, fine arts, banking and timeshares

    Subsection (31) exempts exclusively the income derived from export activity generated by firms located in a Foreign Trade Zone established under the Foreign-Trade Zones Act of 1934, including income from products used in manufacturing, mixing or packing carried out inside the zone, and expressly excludes companies dealing in the purchase and sale of crude oil and its derivatives. (19) exempts, subject to Act 148 of 1948, any institution, college, academy or school accredited by the Department of Education for teaching the fine arts. (24) exempts international banking entities authorised under Act 52 of 1989. And (30) exempts associations of timeshare or vacation club right-holders organised under Act 204-2016, regardless of whether those rights are contractual in nature or constitute a special kind of property.

13. 13

    Step 13: And one that surprises: tuna

    Article 7.206(a)(33) exempts every plant or industry dedicated to tuna processing when it has three hundred or more employees in the same physical facility. It is a single-industry exemption with an employment threshold, and it is reported here because it is on the list exactly as it stands.

14. 14

    Step 14: Do not confuse exemption with a reduced rate

    These thirty-six exemptions are granted by the Act and apply in every municipality. Separately, Article 7.202(c) authorises a municipality to impose and collect rates below the maximums where it wishes to incentivise a business within an industry, commercial sector or geographic area, and even to exonerate payment to incentivise new investment, rehabilitate operating activities and develop new activities, always prospectively and uniformly for businesses of the same nature within each industry and sector. That second route depends on your municipality’s ordinance, not on this article.

Before the municipality where the business is located, and specifically before its Finance Director, who administers the patente. Several of these exemptions depend on a certification from another body: the Puerto Rico Housing Department for the rental housing ones, the Department of Economic Development and Commerce for the voluntary retailer chains, and the Department of Education for fine arts schools. And the social-interest housing exemption in subsection (29) depends on an ordinance approved by the Municipal Legislature.

• Reading the threshold as “under five thousand”: the Act says it must not exceed five thousand.
• Applying the fifty-thousand ceiling to any business: it is only for craft and plastic-arts workshops, and on annual gross income.
• Believing the workshop loses the exemption if more than one artisan works there: the Act expressly allows it.
• Thinking an employee’s salary counts as volume of business: subsection (3) exempts it.
• Reselling agricultural products and claiming the farmer’s exemption: they must be sold directly by the farmer.
• Assuming being non-profit is enough: nearly all those subsections require that no part of net earnings inure to a shareholder or private individual.
• Taking the cooperative exemption as total: it is limited to income realised or earned by those who are members.
• Claiming the rental housing exemptions without the Housing Department certification.
• Mistaking the subsection (29) exemption for automatic: municipalities have the power to grant it, in whole or in part, by ordinance.
• Confusing these statutory exemptions with the lower rates or exonerations a municipality may grant under Article 7.202(c).
• Assuming a Foreign Trade Zone business is wholly exempt: the exemption covers exclusively income derived from export activity, and excludes the purchase and sale of crude oil and its derivatives.

These are the government pages this guide is based on.

• Municipios de Puerto Rico

  Municipios

  bvirtualogp.pr.gov