Puerto Rico Treasury Department Issues Regulations for Controlled Groups of Corporations and Related Entities
The Puerto Rico Treasury Department has released regulations to provide guidance on the application of the new rules for controlled groups of corporations and related entities included in the Internal Revenue Code for a New Puerto Rico. The regulations also provide guidelines on how to compute the regular tax and surtax in the case of a group of related entities, the requirement to submit audited financial statements and to clarify which corporations are not considered part of a controlled group of corporations.
Controlled Group and Related Entities Defined1 Under Article 1010.04-1 of the regulations, controlled group of corporations is defined as a parent subsidiary controlled group (with 80 percent ownership), a brother-sister controlled group and a combined group. Furthermore, pursuant to Article 1010.05(a)-1 of the regulations, group of related entities is defined as a controlled group of corporations. However, for these purposes, a parent subsidiary controlled group is one or more chain of corporations related through stock ownership with a common parent corporation in which the parent corporation owns at least 50 percent of one member of the group and all members of the group are owned, at least 50 percent, by other members of the group. In addition, the regulations provide various examples on how to determine which corporations are members of a brother-sister controlled group. The regulations also provide guidance for those situations in which one corporation may be considered a component member of more than one controlled group.
Computation of Normal Tax and Surtax
As a general rule, Section 1022.01 of the Code imposes a normal tax and surtax on all regular corporations. The normal tax for corporations (20 percent) is computed on the net income subject to normal tax. However, the surtax of 5 or 10 percent for corporations is computed on the net income subject to surtax (the normal tax net income minus the surtax deduction of $750,000 provided by the Code).
It is important to note that flow-through entities such as special partnerships, corporations of individuals, partnerships and limited liability companies treated as partnerships are not included in the definition of regular corporations. Therefore, they are not subject to the normal tax and surtax and are not included as members of any controlled group.