Puerto Rico enacted, on July 17, 2025, Act 65-2025 (the Act), which amends various sections of Puerto Rico's Internal Revenue Code (PR Code), the General Law of Corporations and Municipal Code, among others. According to its introduction, the Act's purpose is to simplify the tax process for individuals and corporations. Additionally, it aims to unify the employer returns filed with Puerto Rico's Department of Treasury and Department of Labor and Human Resources.

Limited liability companies

Before the Act, limited liability companies (LLCs) could elect to be treated as pass-through entities or disregarded entities for tax years beginning after December 31, 2021. The disregarded entity election, however, was only available to certain LLCs. The Act broadens eligibility for years beginning after December 31, 2023, by allowing single member LLCs to elect being treated as disregarded entities even when the owner is not an individual resident of Puerto Rico.

Modification of engaged-in-a-Puerto-Rico-trade-or-business requirement and clarification of remote worker exception

The determination of whether a foreign entity is engaged in trade or business within Puerto Rico (ETBPR) for income tax purposes is based on the entity's facts and circumstances. The Act modifies the PR Code by stating that an entity selling inventory in Puerto Rico is ETBPR. The amended statute also requires the local activities to be considerable, continuous and regular, taking into account the nature of the business activities of the person in and outside Puerto Rico.

Additionally, the Act amends the remote worker rules. In 2022, Puerto Rico created an exception to the definition of being ETBPR to prevent remote workers in Puerto Rico from creating income tax nexus for their employer, provided the following requirements are met:

• The taxpayer does not have an office or other fixed business location in Puerto Rico during the tax year.
• The taxpayer is not considered a merchant as defined in Section 4010.01(h) of the PR Code.
• The remote worker is not an official, director or majority shareholder of the taxpayer.
• The services performed by the employees are conducted for the benefit of the taxpayer's clients or business and are not linked with Puerto Rico.
• The taxpayer reports the income paid to the remote workers on federal Form W-2 or Form 499R-2/W-2PR.

The Act clarifies that not having an office or fixed business location is not impacted by the remote worker's residence. The Act also clarifies that a remote-worker determination does not affect whether the taxpayer is a merchant under Section 4010.01(h) of the PR Code.

Alternate basic tax applicable to individuals

For tax years beginning after December 31, 2024, the Act allows individuals to deduct bank charges and electronic-processing fees from income subject to alternate basic tax. This deduction depends upon these payments being included in the required informative declarations under Section 1063.16 and Section 1063.15, respectively, of the PR Code. Additionally, the Act eliminates the requirement for taxpayers using the accrual method of accounting or fiscal year-end to include with the income tax return a reconciliation of expenses between the amounts reported in their books and those in the informative returns. Instead, taxpayers should maintain the reconciliation in their records.

Furthermore, for tax years beginning after December 31, 2024, the Act will not impose alternate basic tax on amounts distributed or made available to any participant or beneficiary of an exempt employee trust.

Alternative minimum tax

The Act modifies the calculation for determining the income subject to the alternative minimum tax (AMT). Under the new legislation, taxpayers must exclude from their income the total amount received as dividends from domestic corporations, foreign corporations or corporations covered under an exemption decree in the Incentives Code or any law of a similar nature, up to the amount that has not been included in net income for regular tax purposes.

For tax years beginning after December 31, 2024, the Act allows a deduction for bank charges and processing fees for electronic transactions when calculating the AMT, provided these charges are reported on an informative declaration. Furthermore, the Act eliminates the requirement for taxpayers using the accrual method or fiscal year-end to include with the income tax return a reconciliation of expenses between amounts reported in their books and those in the informative returns. Instead, taxpayers should maintain the reconciliation in their records.

Optional tax for the performance of services

The optional tax is a reduced flat rate for companies and individuals with substantial income from services. For tax years beginning after December 31, 2018, and before January 1, 2020, corporations could choose to pay the optional tax for the performance of services, even if they had a balance to pay with their income tax returns, provided the balance was paid no later than the due date for filing the return, excluding extensions. The Act expands the exception within the optional tax election, to tax years beginning after December 31, 2021.

Limitation on the use of the cash-basis accounting method

The Act increases the gross income limit for using the cash-basis accounting method from $3 million to $10 million, based on a three-year average for tax years beginning after December 31, 2024. If a corporation used the accrual method before January 1, 2025, and subsequently qualifies to use the cash-basis method of accounting after December 31, 2024, it may adopt the cash-basis method without requesting an administrative determination or revenue ruling from the Secretary of the Puerto Rico Treasury Department (PRTD).

Conduit entity returns

The Act changes the due date for conduit entity returns from March 15 to March 31 for calendar-year taxpayers. For taxpayers following a fiscal year-end, the due date will be the last day of the third month following the close of the tax year. These same due dates will apply to reports to partners, composite returns and grantor trust returns.

For tax years beginning after December 31, 2024, the due date for filing combined pass-through entity returns is also March 31 or the last day of the third month after the close of the fiscal year.

Audited financial statements

The definition of "volume of business" (VOB) for a group of related entities has been updated to eliminate the requirement to submit audited financial statements when an individual member's VOB is equal to or greater than $1 million but less than $3 million. Additionally, the requirement for members of a controlled group with a VOB of less than $1 million is clarified to not require the submission of an Agreed Procedures Report.

Corporation and partnership information

Dissolution or liquidation

The PR Code requires an entity to file with the PRTD Secretary a declaration that includes the terms of the plan to dissolve or liquidate within 30 days of adopting the plan to dissolve or liquidate. For tax years beginning after December 31, 2023, the Act specifies that the entity will not be required to file a declaration if the dissolution or liquidation results from a change in tax treatment as defined in the PR Code. Instead, the entity must include the plan information in the request to change its tax treatment.

Liquidation distributions

The PR Code requires all entities to file a declaration for their liquidation distributions. The declaration must include information about the shareholders, members or partners receiving the distributions on or before February 28 of the following year, or by any date established by the PRTD Secretary. For tax years beginning after December 31, 2024, the Act will no longer require the entity to file the declaration if the dissolution or liquidation is caused by a change in tax treatment as defined in the PR Code. Instead, the entity will include this information with its request to change its tax treatment.

Informative returns

The PR Code requires entities processing electronic payments to report annually the total payments processed and credited to merchants for transactions made since January 1, 2019. They also must include payments made with credit or debit cards and through networks. The Act expands the reporting requirement to payments for activities within a network or medium for tax years beginning after December 31, 2024. The term "payments for activities within a network or medium" is defined as transactions that benefit a participating merchant through activities on various platforms (like websites or social networks) that generate income, which is then paid to the merchant by a bank or payment processor.

Branch profit tax (BPT)

The PR Code subjects every foreign corporation engaged in a trade or business in Puerto Rico to a tax equal to 10% of the "dividend equivalent amount" for the tax year. Industrial development income and other types of exempt income are not subject to the BPT. The Act clarifies that income generated from activities under the Puerto Rico Incentives Code of 2019, export services, and film industry tax exemption decrees, among others, are also not subject to BPT.

Amended returns

The Act clarifies that amended returns or declarations will not be accepted if the taxpayer is under audit or investigation, or if the filed return has already been audited and the tax debt assessed.

Codification of estimated-tax-underpayment-penalty calculation for certain entities

For entities with a tax decree under Act 135-1997, Section 3A of Act 73-2008 or Section 2062.01(a)(3) and (b)(4) of Act 60-2019, the Act codifies previously issued administrative guidance establishing that the estimated tax for those entities is the lesser of:

• 90% of the tax for the tax year

or

• The greater of the following: (i) the total tax determined from the income tax return of the previous year, including the tax paid under Act 154-2010, or (ii) an amount equal to the tax calculated based on applicable rates and laws using data from the prior year's corporate return

Corporate annual report

Starting with tax year 2025, the Act will no longer require domestic and foreign corporations to file an annual report with the Puerto Rico Department of State. Even though the filing of a report will no longer be required, the corresponding annual charges still apply and must be paid to the Puerto Rico Department of State.

Personal property tax return

The Act amends the municipal code to reinstate the requirement to include audited financial statements with taxpayers' personal property tax returns.

The Act no longer requires the personal property tax return to include supplementary information for tax years starting after January 1, 2023.

Volume of business declaration

The Act requires taxpayers to file the VOB declaration on or before five business days after April 15 of each tax year. The Act provides that for businesses covered by a tax exemption decree and required to file an income tax return under Section 1061.16(e) of the PR Code, the VOB declaration must be filed within five business days of June 15 of each tax year.

Consolidation of forms filed by employers

To consolidate the quarterly and annual returns filed by employers for taxes related to salaries paid to employees, the Act requires the Secretary of the Puerto Rico Department of Labor and Human Resources to enter into a collaborative agreement with the PRTD Secretary. This agreement will allow employers to submit the forms currently filed through the Employer Service Portal of the Department of Labor and Human Resources within the PRTD's Unified Internal Revenue System (SURI for its acronym in Spanish). The agreement should be effective on or before July 1, 2026.

Puerto Rico governmental agency exchange of information

Government agencies, including the Department of Transportation and Public Works, the Department of Natural and Environmental Resources and the Tourism Company, will share information with the PRTD. This includes data on registered vehicles, vessels and residential properties subject to the room occupancy tax. All information must be handled confidentially and must comply with the transmission format set by the PRTD.

Other provisions

Other changes made by the Act include:

• Correcting certain citation inconsistencies related to the sale of an interest in a partnership, which previously caused confusion in the way this provision of the PR Code is interpreted
• Adding a provision within the definition of LLC to allow foreign entities to be considered LLCs under certain circumstances
• Requiring exempt annual reports for companies operating under a tax incentive grant to be included with the electronic filing of the income tax return for tax years starting after December 31, 2024
• Modifying the reporting requirements for some exempt businesses

Implications

Puerto Rico's recent tax legislation aims to streamline tax processes, simplifying procedures for taxpayers and potentially reducing administrative burdens while enhancing compliance.

One notable change is the expanded definition of what constitutes a trade or business in Puerto Rico, along with a clarification to the remote worker requirements.

The Act also provides greater flexibility in tax elections, allowing entities to elect to be treated as disregarded entities regardless of the residency status of the sole owner, effective after December 31, 2024. Modifications to the AMT calculations, including new exclusions for dividends, may lower tax liabilities for certain taxpayers.

Reporting

In terms of reporting requirements, the Act reduces the burden on individuals by eliminating the requirement to prepare an expense reconciliation for informative returns. However, taxpayers must still maintain reconciliations between their accounting records and declarations.

The legislation also raises the gross income limit for using the cash accounting method, allowing more businesses to adopt this simplified reporting approach. Changes to the due dates for conduit entity returns and related filings enhance compliance timelines for businesses, while the new due date for filing the VOB declaration for entities with tax decrees streamlines reporting processes.

Efforts to consolidate tax forms related to employee salaries are expected to improve efficiency in reporting and compliance for employers. Moreover, the removal of the annual corporation report requirement from 2025 onwards will reduce administrative tasks for corporations, although the annual fees will still need to be paid.

Lastly, the mandated codification of an exchange of information among Puerto Rico government agencies likely indicates that the PRTD aims to reconstruct the tax profiles of taxpayers. This initiative will help identify tax compliance issues and enable more targeted enforcement efforts, ultimately fostering what is hopefully a fairer and more transparent tax system.

Taxpayers should consider reviewing these changes and determining their impact on tax planning and compliance strategies.