Act No. 1 of January 31, 2011 establishes a new Puerto Rico Internal Revenue Code ("2011 Code") and repeals the Puerto Rico Internal Revenue Code of 1994, as amended ("1994 Code") almost in its entirety. Section 1081.01 of the 2011 Code (former Section 1165) contains new rules governing retirement plans intended to be qualified in Puerto Rico, many of which track similar provisions in the U.S. Internal Revenue Code of 1986, as amended ("US Code").
Section 1081.01 is generally effective January 1, 2011, although some provisions will be effective for taxable years beginning on or after January 1, 2012.
Among the most significant changes are the following:
Qualification Requirements – Section 1081.01(a) (former Section 1165(a)): ABP Test – Special Rule – The 2011 Code contains special rules for meeting the Average Benefit Percentage Test in the case of mergers and acquisitions which are similar to those in US Code Section 410(b)(6)(C). Annual Benefit and Contribution Limits (415 Limitations) – For taxable years beginning on or after January 1, 2012, new annual benefit and contribution limits are imposed for defined contribution and defined benefit plans. Although this new provision is similar to US Code Sections 415(b) and (c), the 2011 Code does not provide for cost of living adjustments. Annual Compensation Limits – For taxable years beginning on or after January 1, 2012, a new annual compensation limit is imposed. Although this new provision is similar to US Code Section 401(a)(17), the 2011 Code does not provide for cost of living adjustments, except for plans that are qualified under the 2011 Code and the US Code ("Dual Qualified Plans"), in which case the plan must comply with US Code limits. Determination Letters – For taxable years beginning on or after January 1, 2012, retirement plans intended to be qualified under the 2011 Code must request and obtain a favorable determination letter as to the qualified status of the plan. The request must be filed no later than the plan sponsor's deadline (including any extension) to file its income tax return with the Puerto Rico Treasury Department ("PR Treasury") for the year in which the plan began to cover Puerto Rico residents. Controlled Group / Affiliated Group Provisions – For purposes of the qualification requirements of Section 1081.01(a) and the cash or deferred provisions of Section 1081.01(d) (including non-discrimination provisions), the employees of all corporations...